Would a merger between SME Law firms work in SA?
Many may not know this, but my first job out of University was in a Mergers team as an analyst. It’s a market that I find infinitely interesting and in the law, it doesn’t often happen in the sector I think it should - the SME market.
Splintered Market.
It’s well documented that South Africa has one of the lowest lawyer to law firm ratios in the world. 2:1. What does that tell us about the market?
It’s obscenely splintered.
There are many reasons for this, and there are many positives and (many more) negatives that come from this, but this is not the article to discuss this.
In this piece we are exploring if mergers could be an option for this incredibly fractured market.
The upside is obvious - so we are going to focus on the negative - and focus specifically on why mergers between law firms in South Africa might be problematic or ineffective.
This can help you if you want to explore this, as the below will form a “watchlist” for the pitfalls you might come across.
1. Economic Instability and Market Volatility
South Africa's economy has been facing significant challenges in recent years, creating a difficult environment for law firm mergers.
The country has struggled with sluggish economic growth, high unemployment rates, and frequent currency fluctuations, all of which impact the legal services market.
The volatile economic situation makes long-term planning and investment decisions, which are crucial for successful mergers, extremely challenging.
Law firms considering mergers must contend with unpredictable revenue streams and client demands that can change rapidly with economic shifts.
South Africa's credit rating has been downgraded to junk status by major rating agencies, reflecting concerns about the country's economic management and fiscal stability.
This downgrade has led to increased borrowing costs and reduced foreign investment, impacting many law firms' client bases, particularly those serving international clients or working on cross-border transactions.
The country has also experienced periods of recession, with GDP growth often lagging behind other emerging markets. This economic stagnation has led to reduced corporate activity, fewer mergers and acquisitions, and less demand for high-end legal services.
Law firms that merge in this environment may find themselves overstaffed and struggling to maintain profitability.
Moreover, South Africa's energy crisis, characterised by frequent load shedding (planned power outages), has severely impacted businesses across the country.
Law firms are not immune to these disruptions, which can lead to reduced productivity, increased operational costs, and client dissatisfaction.
Mergers between firms may compound these challenges, as larger, combined entities may struggle even more to maintain operations during power outages.
The economic disparities within South Africa also present challenges for law firm mergers. While major urban centres like Johannesburg and Cape Town have relatively developed legal markets, many other regions of the country face significant economic hardships.
Mergers between firms from different economic zones within South Africa may lead to internal tensions over resource allocation and profitability expectations.
2. Political Uncertainty and Regulatory Challenges
Despite the recent election which brought in a new dawn and SA’s first ever coalition government, which many hope will bring in a period of growth, South Africa's political landscape has been characterised by instability and uncertainty in recent years, creating a challenging environment for business operations, including law firms.
The frequent changes in government leadership, policy direction, and regulatory frameworks make it difficult for merged law firms to develop long-term strategies.
The ongoing debates around land expropriation without compensation have created uncertainty in property law, a key practice area for many South African firms.
VIP members get ALL our research and job mandates