By Shirley McIntosh, partner at Baker Tilly

A wave of law firm mergers in Scotland is ample evidence that Scottish law firms – like their counterparts in England and Wales – are gearing up for the ABS era.

Since the 2004 Clementi review of legal services in England and Wales, there has been much talk of this revolution, leading to non-lawyers owning, controlling and investing in law firms.

The Legal Services Act in 2007 got the ball rolling in England and Wales, enabling the setting up of Alternative Business Structures (ABS), although it took about four years to actually start having any effect.

The Legal Services (Scotland) Act 2010, which allows for up to 49% ownership of Scottish legal practices by non-lawyers, draws up similar enabling legislation north of the border.

Preparing for change
The shake-up of the legal industry being brought about by ABS means that Scottish law firms are becoming much more active in positioning themselves for the new environment – and a rise in the number of mergers involving Scottish law firms is one of the most visible responses.

Examples of this approach can be seen in a series of cross-border mergers: between corporate and technology specialists MBM Commercial and Stuart Malcolm LLP in October 2011, a union of commercial law specialists Anderson Fyfe and Bristol-based TLT Solicitors announced in May 2012 and the tie-up of Biggart Baillie with DWF announced in June 2012.

The most recent merger to be announced is between national firm Shoosmiths and Edinburgh’s Archibald Campbell & Harley, which will give Shoosmiths its first office in Scotland as well as a boost to its work in real estate, retail, litigation and recoveries for lenders.

Threat to local firms
Traditional local law firms, whose client bases are mainly individuals with basic legal requirements such as wills, executries and conveyancing, could be particularly concerned about the ABS changes.

The Co-operative Group was by far the largest of the first three organisations granted an ABS licence by the Solicitors Regulation Authority – and it is thought by many that they could succeed in winning over local client bases with their commitment to fixed price services. In addition, Co-op, and any other large players who also decide to jump into the ABS waters (Tesco has so far decided to watch from the shore), will also have the benefit of a strong, trusted brand.

As such, local practices – and possibly also various mid-market firms which are also feeling the heat – may decide to consolidate in order to avoid being wiped out as a result of the ABS regulatory changes.

Strategic acquisition
Many of the tie-ups taking place in Scotland allow practices to expand into different areas of law or extend already strong practices to a wider audience, and a number of the top 30 Scottish firms are taking advantage of this strategy.

Morisons LLP acquired Macrae, Flett and Rennie in September 2011 and merged with Bonar Mackenzie just three months later, This allowed Morisons to strengthen its practice in key areas, building on the smaller firms’ strengths including commercial property, employment law and small business partnerships.

Another strategic merger was between Tods Murray’s and Fyfe Ireland in January 2012, combining the two long standing Private Client firms with well-established client bases and giving them a stronger platform for further expansion through consolidation.

Taking the niche approach
Although the initial impulse may be to group together to increase clout and reduce exposure to the threats of the ABS era, the other approach firms are taking is to go down the specialised, niche practice route.

In the grocery market over the last decade or so, there has been a significant backlash against the hegemony of supermarkets, as seen by the growth of local organic food suppliers and farmers’ markets.

Similarly, some law firms may be able to survive and prosper in the face of ‘Tesco law’ by the same similar tactics: trumpeting their local credentials and promoting quality, independence and healthy competition.

MTM Family Law in Glasgow, for example, was recently set up by three specialist family lawyers previously with HBJ Gateley, to do just that. They believe that “being a small, boutique family law firm … operating in a niche field brings benefits” to their clients, thanks in part of the absence of “corporate pressures and targets”.

Territorial ambitions
But the changing economic and legal climate means that many firms simply cannot afford to rely on their traditional business models. As well as merging to expand into other legal fields or increase the client base, another strategy behind the wave of mergers is geographical expansion.

The merger between Lindsays and Shield & Kyd, announced in May 2012, will see Lindsays expanding out of its traditional heartland in the central belt and borders area into Tayside, through the Shield & Kyd offices in Dundee and Arbroath.

Meanwhile, Blackadders, which maintains a strong presence in Dundee and Tayside, has decided to test the waters in the Scottish capital through its merger with Edinburgh firm McKay Norwell.

Broadening international horizons
The effect of globalisation means that many corporate clients have come to expect legal services to be delivered wherever their offices are in the world. One of the largest mergers involving a Scottish firm can be seen as a direct response to this: the link-up between McGrigors and Pinsent Masons, giving the former an improved international reach under the Pinsent Masons brand. As well as getting access to new markets, going global can enhance the international experience of staff by allowing them to take advantage of overseas placements.

Although mergers and acquisitions have been changing the face of the legal sector for many years, the current economic and regulatory climate seems to have caused a surge in consolidation by Scottish firms attempting to weather the storm, and this trend looks set to continue. How successful the merger strategy will be still remains to be seen.