Domestic Firms Look to Re-Position Themselves in Australia via Merger

As the Hildebrandt Institute prepares to release its Q3 2012 MergerWatch figures at the end of this month, we have begun looking at markets that have experienced  a relative uplift in merger activity. As we reported last month, consolidation of the UK market continues at pace, and Australia, has also emerged as a hotspot in recent years.

One of the most dramatic changes to have occurred following the global financial crisis has been the rapid change in the legal landscape in Australia. The increased economic activity and transactional workflows into and out of the Australian market have substantially increased the attractiveness of this market to international firms. Concomitant with this, large national firms have sharpened their international focus in order to compete more effectively for complex and increasingly international inbound and outbound transactional mandates.

Much of the news surrounding merger activity in the market to date has focused on the international tie-ups which have seen six of the 10 largest Australian firms now formally affiliated with an international law firm. Furthermore, two other Top 10 firms have been the target of significant poaching by international firms as they entered the market.

Now that the top-end of the market has segmented and globalized, the merger activity invoked has somewhat abated. One additional tie-up has been announced in 2012 – Herbert Smith’s merger with Freehills – with a targeted launch date of October 1. In addition, Middletons, Australia’s 12^th ranked firm is currently in merger discussions with the U.S.’s K&L Gates.

Increased Activity in Domestic Market

One of the impacts of this internationalization has been the perceived exit of these now ‘internationally-focused’ firms from certain practice areas and types of work, such as those that are predominantly domestic in nature without cross-border or multi-national elements, those which are price sensitive or those which pose conflicts for the wider international business.

This has provided an opportunity for middle market firms, operating outside of the highest-value work, to fill this space. What has ensued is a number of domestically-focused tie-ups in 2012, as firms reposition themselves to build critical mass, strength-in-depth and broader geographic coverage in order to compete more effectively for this work. In an article published this week by The Lawyer, Juan Martinez, the managing partner of HWL Ebsworth, Australia’s 11^th largest firm, explained:

“Most of the large Australian national firms have linked up with global firms…In that process these firms have made strategic decisions to vacate certain areas of practice – mainly domestically focused [work].”

* By Announcement date; Source: Hildebrandt Institute’s MergerWatch

A total of 16 domestic deals have been announced since 2010, including 7 so far this year, almost double that of 2011, with one quarter still to go. Domestic M&A activity has focused on two main areas:

1. Small acquisitions to add expertise in the home city or to build a regional presence
2. Mid-sized acquisitions to expand geographic footprints, critical mass and strength-in-depth nationally

Smaller Bolt-ons

Small acquisitions (acquiring a firm of 15 lawyers or less) have focused mainly in two areas: (i) firms looking to build on expertise in its principal market or (ii) firms expanding their geographic footprint into new regions via the addition of small firms.

Examples of the former include the recent growth of the property department by Western Sydney’s Coleman Greig, via the acquisition of two small, local property practices in 2012.

Leading personal injury (PI) claimant firm, Slater & Gordon provides the best example of the second type of acquisition activity. The firm has continued to build a regional presence and footprint nationwide, adding small PI-focused firms in Hobart, inner-city Sydney (Redfern) and the outer suburbs of Brisbane (Redcliffe) over the past few years. In addition, Slater & Gordon has also made its first international move this year, acquiring the UK’s specialist claimant practice, Russell Jones & Walker*.

Medium-sized Acquisitions

Mid-sized acquisitions (of between 25 to 50 lawyers in size) have focused on building national networks.  Outside of one ‘merger of equals’, which saw two 40-lawyer, local Canberra firms (Bradley Allen and Williams Love & Nicol) combine governmental law strengths in the Australian capital, all other mid-sized mergers have concentrated on building critical mass and deeper expertise in commercial centers such as Brisbane, Melbourne and Perth. Examples include:

• Acquisition of 25-lawyer Flower and Hart by 300-lawyer, Melbourne-based Middletons in March to enter the Brisbane legal market

• Acquisition of Brisbane-based boutique, Macrossans Lawyers, by Sydney’s TressCox Lawyers, which is due to go live October 1^st 2012, and which will double the size of the firm’s existing Brisbane office

• Acquisition of mid-sized insurance firm Monahan + Rowell by long-established Sydney-based commercial firm, Colin Biggers & Paisley completed June 1^st 2012 to move into the Melbourne market for the first time

• Acquisition of 30-lawyer Perth-based energy & resources boutique, Blakiston & Crabb by Sydney’s Gilbert + Tobin in 2011

Mid-market firms are likely to continue to look for ways to capitalize on the opportunities, and react to the challenges, that the current Australian market creates. This will lead to greater levels of competition and segmentation in the market and inevitably consolidation. It is likely that merger activity within domestic Australian firms will continue in the short-term as the mid-tier carries on nationalizing and re-focusing their strategies on core areas of strength.

Stay tuned for a full MergerWatch report on the third quarter U.S. and international merger activities in early October.

Posted by Tricia Pelton