December 20, 2022 Legal Intelligencer Article

By: Max Mitchell, Bureau Chief, Legal Intelligencer

Over the past six months, at least five small firms in the mid-Atlantic region have been swallowed up by midsize and large firms. Industry leaders and consultants are expecting to see a similar pace of absorptions in the coming year as uncertainty and economic pressures continue fueling a trend towards consolidation.

Since July, midsize firms Lamb McErlane, Saxton & Stump and Javerbaum Wurgaft Hicks Kahn Wikstrom & Sinins each merged with a significantly smaller firm, as did large firms White and Williams and Marshall Dennehey Warner Coleman & Goggin.

The reasons stated for the mergers ranged from dominant firm leaders looking to wind down their administrative burdens, difficulty with staffing and talent, desires by the larger firms to expand into new practice areas and an effort to increase efficiencies.

Observers say the recent consolidations are part of a broader trend that has been building for several years, but one they expect will only increase given the post-pandemic environment where costs and novel challenges for firm management are on the rise.

According to Mary Young, a consultant with the Zeughauser Group, the forces driving interest from smaller firm leaders are also coupling with the pressure for growth felt by midsize and large firms leaders. And the looming uncertainty for 2023 could exacerbate things further, she said.

“The notion of there being a potential downturn will increase the interest in some firms getting stronger,” Young said. “It’s about being a stronger, better version of yourself…. Some will see opportunity when things are slower.”

Firm leaders and observers said it is difficult to determine whether the actual number of combinations are on the rise, but, they said, interest does seem to be increasing, fueled in large part by the growing belief that firms need to scale up to be successful.

“We’d found that firms that are a little bigger certainly can invest more money in things that are even more necessary right now,” Young said, giving finance and pricing staff, as well as data security overhead as examples. “Talent has gotten more expensive too, and to compete for talent you need more revenue and better margins.”

Some firm leaders have even questioned the long-term viability of small firms given the economic pressures these days.

After Javerbaum Wurgaft’s merger announcement earlier this month, firm leader Eric Kahn told the New Jersey Law Journal that the link-up continues the firm’s move away from the small boutique model based on their inefficiency. Along with expanding the personal injury firm’s practice area to now include matrimonial work, Kahn said the firm’s size—set to be 87 attorneys post-merger—allows it to employ a human resources manager, a marketing manager and an IT staff, as well as maintain a higher level of legal malpractice insurance, a lower cost per lawyer.

“You’re not going to see a lot of small firms anymore. I think it’s too expensive to manage some of these cases, and we have the resources to do it, and we’re attracting the talent,” Kahn told the paper, echoing a sentiment expressed by other firm leaders.

Alevistar’s Brian Levinson said he has also noticed that smaller firms are particularly grappling with these issues. The staffing shortage and the broader talent war is affecting firms across the board, Levinson said, but small firms maybe feeling it more severely.

“It’s harder for them to absorb a staffing issue,” Levinson said. “It used to be you could run an ad, or if that doesn’t work, reach out to a recruiter, but now even calling a recruiter it’s not automatic.”

Mathieu Shapiro, managing partner at Obermayer Rebmann Maxwell & Hippel, said there’s been a lot of uncertainty coming out of the pandemic, and that has been a factor in the conversations he’s had with small firm leaders over the past few years.

“They are having trouble finding good help, and they are feeling very cautious about their lease obligations, especially as we figure out what’s a permanent change from the pandemic and what isn’t,” Shapiro said. “Space needs for some of them may be a more acute problem than it is for us. We will always have a robust administrative presence in terms of marketing, IT and billing. It’s not a question for us. But for some of those smaller firms, how you do those and what space you need is less clear.”

Along with the economic pressures, observers also pointed to a wave of Baby Boomer firm founders, many of whom remained the biggest source of clients, who are now looking to retire. Moving in with another firm is a way of ensuring that the other lawyers can continue working.

In 2022, the suburban Philadelphia firm Lamb McErlane added five attorneys and three offices through two mergers with small firms.

Joel Frank, the firm’s managing partner, said a primary driver behind both link-ups was the desire by the older, more established firm leaders to refocus their efforts from administrative tasks onto either litigation cases, or bringing in business.

“There was some built-in succession planning too,” Frank said, noting that both firm leaders were the primary originators of business for the firms. “They want to make sure the people less experienced than them to be able to continue on. They were looking out for their people.”

Frank said the moves also increased efficiencies and allowed the lawyers to keep more business in-house—both due to the increased manpower at the larger firm and the wider range of practice expertise. Costs for liability insurance and data security could also be reduced by linking up with a larger firm, but Frank said that was not a primary driver.

Although the region has seen the trend most acutely with small firms being absorbed, Zeughauser Group’s Young said the pattern also holds true with the very big firms gobbling up midsize firms, and, based on the trends in recent years, she expects that will continue as well.

However, she said, the midsize firms currently appear to have an advantage with when it comes to attracting some of the younger talent.

“A lot of people want to work at a smaller firm, so there’s a magnet for talent,” she said. “Small firm culture can be different… They have that as a selling point.”

Read the article online on Law.com/Legal Intelligencer.