Law firms worry that M&A slowdown will hit profitability

Declining M&A activity and downward pressure on fees will hit profitability at the UK’s top law firms, lawyers have predicted. However, new opportunities in London’s booming fintech sector will help to offset these risks.

According to a new report by Thomson Reuters Legal, almost one quarter (24 per cent) of the finance directors (FDs) at the UK’s ‘top 100’ law firms fear that an M&A slowdown will place their profits at risk, down from with 8 per cent last year. Almost three quarters (72 per cent) of lawyers worried that downward pressure on fees will remain a major threat to the profitability of their firms, while cost over-runs on fixed fee work is the next biggest concern, with 40 per cent citing this as a ‘high risk’ to profit margins.

Among the same group of financial directors, 48 per cent said that they were anticipating an influx of regulatory and compliance work this year, while 28 per cent predicted that technology would be the fastest-growing sector of the year, singling out London’s growing fintech community as a particularly bright spot.

“The technology industry in particular has seen massive investment in recent years which has propelled growth in the UK and we expect this trend to continue into the long-term,” said Samantha Steer, director, large law segment for Thomson Reuters UK&I Legal. “London-based fintech start-ups have seen high levels of private equity investment flooding in which has helped to stimulate corporate activity whilst also cementing the city’s position as a leading fintech hub.”

Steer added that the buoyancy in M&A transaction volumes last year was a key driver of profitability for law firms. However, in the first quarter of 2016, global M&A activity was down 18 per cent on the previous year. Law firms are now worried that business confidence will be eroded due to post-Brexit headwinds, the ongoing oil price slump and the slowing Chinese economy.

“Further growth was in question even before the Brexit vote and will be even more so now,” added Steer. “M&A transactions are a vital source of work for law firms, both in themselves and because they generate a significant amount of workflow across a range of other practice areas. If fears that corporate finance activity is weakening are realised that could rattle the sector.”

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