As Dark Coulds Gather, How Will Law Firms Respond?

 "When it comes to epidemics, people tend to fight the last war." - Ed Yong, The Atlantic, May 19, 2022.

The same dynamic could take hold in the law-firm sector if there is a significant and sustained falloff in demand in transactional and litigation.

In transactional the red flags include the decline in global and US mergers and acquisitions.

Recently, though, law firm Paul Weiss in its official report on M&A activity presented some positive developments. They include:

  • Yes, since March, the deal count continued to decline. That had been by 14%. However, in April for the first time in 2022, there had been increases in total deal value. Actually, aggregate deal value increased by 33% in the US and 39% globally in April versus March.
  • In the US, both strategic and sponsor deals followed the broader decline trend - 18% and 4%, respectively - according to count. However, they increased in total deal value - 45% and 20%, respectively.
  • As for the global picture, sponsor deals more than doubled in aggregate value, increasing by 105%. But strategic deals only had an uptick of 1%.

However, given the new progressive majority at the FTC - US Senate confirmed Alvaro Bedoya - the more aggressive scrutiny/enforcement could deter dealmaking during the rest of 2022 and beyond. Obviously, law firms too heavily concentrated in M&A could be in trouble. In addition, as the Thomson Reuters Law Firm Financial Index documents, expenses have surged, especially in associate compensation.

That combination of lower demand and higher expenses can trigger the massive termination of lawyers which dominated The Great Recession. That's how many law firms "fought that PPP war" during the worst of financial times. In 2009, the official Reduction-in-Force count (that is, not including stealth layoffs) was 6,000 for lawyers put out on the street. In addition, there had been snatched-back job offers to new JD graduates. Those were left stranded in a marketplace which wasn't hiring junior talent. 

Could law firms come up with other ways of managing manpower during a downturn? For example, what about piloting job-sharing and sabbaticals with a percentage of the pay and benefits intact?

As for litigation, that was recovering. Was. There is increasing talk of a global and US recession. In a recession corporations tend to put on-hold "elective" litigation. The base line for the litigation recovery itself was low. Recall how litigation funder Burford Capital had a $56.42 million net loss in 2021. With the return of COVID courts could again be shut down and legal actions put on-hold.

If litigation demand stagnates, law firms have the option of wildly swinging the ax or creating ways lawyers can remain employed in some way. 

The question is: Will the tradition-bound legal sector simply handle any coming financial challenges as it had during the carnage of 2009? Or has it learned something about reimagining the management-labor contract?

Connect with Editor-in-Chief Jane Genova at janegenova374@gmail.com. Now and then she does freelance assignments for law firms, defense and plaintiff. Those include Paul Weiss.

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