This article was written for and first featured in Acquisition International Magazine.
It has been a long time coming but the new framework is in place to facilitate acquisition and ownership of English law firms by non lawyers. For centuries, the provision of certain legal services in England and Wales has been restricted to lawyers in businesses owned by lawyers. The restriction on the service provision remains but the requirement for lawyer ownership has gone.
M&A activity in the UK legal sector is not new. Before the liberalisation of the lawyer ownership regime, law firms were bought and sold for capital sums. The new regime offers new transaction opportunities in the legal sector and there have been a number of deals done since January 2012, when the procedures for applying for regulatory approval were put in place. The sums paid in these recent deals are significantly larger than before although it is too early in this new market to establish any valuation guidelines.
The deals so far announced give a good indication of what part of the legal market is likely to be most active in the short term. Russell Jones & Walker were acquired by Australian law firm, Slater & Gordon for £53m. Slater & Gordon is listed on the Australian stock exchange and is known for its personal injury litigation practice. About 60% of Russell Jones & Walker’s revenue is from personal injury litigation. As yet, no established firm in the UK has announced its intention to seek a listing. At the smaller end of the market, In-Deed is an AIM listed company which has stated its intention to acquire consumer facing law firms. It raised £4.5m in 2011 and indicated that more funds could become available.
Another source of M&A activity is the private equity market. The Legal Services Act has taken a few years to become a practical reality and in that time various private equity investors made known their interest in exploring the sector. For some this process has resulted in a decision that the sector is not the right place to invest and that allied sectors, such as law firm business process outsourcing represent a better opportunity. Not so for Duke Street which is set to acquire a majority stake in Parabis Group. Parabis provides personal injury litigation services through law firms Plexus Law and Cogent Law.
The deal will give Parabis a war chest of around £50m to fund acquisitions with up to five acquisitions being planned for 2012. The ongoing funding will be from a syndicate of banks. Parabis is not a traditional law firm in the sense that the group offers non legal services and which might make it more attractive to investors used to following a buy and build model. The planned acquisitions include law firms aimed at the insurance market so further activity in this part of the market should be expected.
Palamon Capital has acquired a majority stake in Quality Solicitors. Quality Solicitors is a brand marketing company for a network of around 150 small law firms. The investment is thought to be upwards of £10m. This kind of investment could have been made before the new regime came into place. The threat of new entrants into the UK legal market has resulted in small firms considering new approaches in line with a network model, of which Quality Solicitors is currently the most high profile. This new willingness of law firms to operate differently will continue to create acquisition opportunities.
Adding legal services as part of an integrated service offering will be a further growth area. In one of the earliest announced deals, UK listed company Quindell Portfolio, acquired personal injury law firm, Silverbeck Rymer at a value of £19m. The interest in personal injury law firms will remain high. The government intends to introduce a ban on the payment of referral fees for personal injury cases in April 2013. Currently law firms can pay a referral fee for the allocation to them of a personal injury case. For those claims management companies which derive significant income from referral fees, there is one obvious solution to the loss of this revenue: buy the law firm.
All the deals referred to are all subject to the approval of the principal regulator, the Solicitors Regulation Authority. At the moment the liberalisation of law firm ownership is a limited development. The American Bar Association is currently considering non lawyer ownership but seems to have ruled out law firms being able to list. With the English legal market said to be worth around £25bn, that will be sufficient to generate much more transactional activity.