As M&A practices in Big Law take a breather this year, other law firm groups are slowing down too. Areas such as tax, employee benefits and executive compensation, antitrust and other ancillary practices are all feeling the effects.
That generally means fewer billed hours in these ancillary practices; less resources budgeted for the groups for the rest of the year; more time these lawyers spend in seminars, conferences and other nonbillable activities; and fewer lawyers hired in the groups, according to law firm leaders and recruiters.
Overall, global deal value for the first half of the year is down 21%, while volume is down 17%, according to financial data company Refinitiv.
The results of this M&A slowdown are firmwide: Three Am Law 100 firm leaders, who declined to be named, said the effects of a corporate slowdown are already being felt.
“Corporate is off, tax is off, they are all off,” one leader said. “That is typical [when corporate is down]. And from what I hear from other firms, they are off as well. Everything that ties into deal work is off.”
The law firm leader said this was expected, and the firm budgeted 100 fewer hours per corporate attorney this year compared with last and put some reserves in their budget for this year. ”Corporate activity is definitely having an impact [on other practices],” said the firm leader.
Hiring is also down in the firm’s corporate practice and the other practices that tie into it, the firm leader added.
Stephanie Biderman, at recruiting firm Major, Lindsey & Africa, has observed hiring caution across the industry.
“The market is definitely not what it was at the peak of 2021, but most firms are still hiring strategically in all of these practice areas, including M&A, but have a higher bar/threshold than last year,” Biderman said in an email, adding that if M&A continues to remain slower later this year, “I expect the ancillary corporate practices would also be down [in hiring] and the counter-cyclical practices would likely increase.”
Another second law firm leader agreed that the slowdown in M&A was affecting other practices. But while M&A activity is slower, the firm leader didn’t see layoffs or attorneys switching practices just yet. ”I think most people think the markets will eventually bounce back, and the slowdown isn’t structural.”
A third law firm leader said that, while corporate activity was down until around April, things have already started picking back up. While the ancillary practices may have a “little more time on their hands,” it isn’t something the firm leader is concerned about.
“Those people (in the ancillary practices) have a little fewer hours, but they will do other things. Thought leadership, seminars, time to tidy things up,” said the third firm leader. As for hiring, the leader said that regardless of whether corporate activity is boom or bust, the firm tries to keep a sufficiently deep bench in its various practices.
A Special Relationship
Law firm transactional practices have taken up a larger proportion of law firm work in recent years. According to a Thomson Reuters Peer Monitor report earlier this year, real estate, corporate, M&A and tax practices by the end of last year accounted for 37% of the total hours tracked, a proportional increase of 2.6 percentage points in just one year’s time and 5 points since 2015.
Firms that lean heavily on corporate transactions, like most of the Am Law 100, could see a significant profit dip this year. “If you take 10% off the top, it all comes out of profit,” said Keith Wetmore, managing director of Major, Lindsey & Africa’s San Francisco office.
With Big Law becoming more dependent on corporate practices lately, a fall in M&A work can leave law firms more vulnerable firmwide to changes in the deal market.
“Often one of these adjacent practices is not busy enough to stand on its own, so it’s heavily reliant on this spin-off work—a fact that relationship partners of large matters ceaselessly remind their colleagues at compensation time,” Tim Corcoran, veteran legal consultant, said via email.
Bruce MacEwen, president of legal consulting firm Adam Smith Esq., said he doubted that clients would go to a law firm based solely on its “feeder practices,” and when M&A and corporate practices aren’t busy, “there are a lot of people that aren’t busy.”
The model of cross-pollinating work and referring work to other practices often depends on a core M&A or litigation practice.
“Despite cultural and compensation disincentives impeding collaboration and cross-selling, many law firms thrive because of an ecosystem of adjacent services,” Corcoran said. “High-stakes transactions or litigation tend to involve a variety of ancillary efforts, so large matters may generate simultaneous billings in multiple other practices.”
It isn’t a fully one-sided dynamic though. While corporate may kick off work to more practice areas than other groups, sometimes those other groups are the reason a firm got a corporate matter in the first place.
“These high-stakes matters are often won in large part because the firm has these other capabilities,” Corcoran said. “Partners capable of managing high-stakes, complex matters, even at prestigious, brand-name firms, who lack colleagues with expertise in these adjacent areas regularly lose out to competing firms offering a more robust suite of services.”
Corcoran also said that, while firms may be tempted to financially reward their corporate departments for that work, they would be remiss to let the ancillary practices fall into disrepair because of those efforts.
“Too frequently, firm management who fail to grasp the complementary nature of their ecosystems will over-reward partners leading high stakes matters and force out partners with expertise in adjacent practices,” he said. “Clients may note the smaller bench strength and narrower expertise and shift their work elsewhere.”
In interviews, practice leaders at several firms have said that while M&A activity is noticeably slower than last year, that was expected, and to some degree, welcome, given the workload of 2021.
“The hours were off the charts in a lot of corporate practices last year,” said Wetmore. “They are now coming back to Earth. While that has a big financial effect, from a morale and retention standpoint, it is actually an improvement.”