Deloitte acquires Kemp Little as Big Four continue closing in on UK law firms
By Leonardo Antonelli, Vice President at the King's Mergers and Acquisitions Society
With its acquisition of Kemp Little, Deloitte is the most recent of the Big Four to continue expansion into the legal services sector in the UK. Whilst their advance against UK law firms is promising, they yet have to work on their approach.
That there is an overlap between accounting, consulting and legal services is nothing new. Accountancy firms have, for obvious reasons, always been well-versed in tax law, and have been hiring tax lawyers to that effect. Conversely, consulting firms act as somewhat of a counter-part to commercial law firms, offering business (as opposed to legal) advice on many of the same practice areas such as M&A, litigation and restructuring.
After the four big audit firms (Deloitte, Ernst & Young (EY), KPMG and PricewaterhouseCoopers (PwC)) closed in on consulting firms throughout the 1990s and early 2000s, they have now been trying the same strategy with the legal industry.
Deloitte marks the last of its competitors endeavouring to expand their legal department. PwC has the biggest law department of them with 3,000 lawyers and even a wholly-owned subsidiary law firm ‘ILC Law’, located in Washington DC. In an attempt to keep up, EY has acquired the UK alternative legal services provider Riverside Law in 2018, whilst KPMG has reorganised its legal department to focus on supporting in-house counsels. Whilst Deloitte has made efforts to keep up with the others globally, as for example setting up a Hong-Kong branch of 25 lawyers in November 2019 and acquiring the international operations of the US immigration firm Berry Appleman & Leiden, there have been no such developments to expand in the UK legal market.
Whilst the details of the deal remain undisclosed, its most important aspect from a legal point of view is labour retention. As Richard Houston added, Deloitte is looking to make use of the target’s “depth of talent, […] from solicitors to technology specialists”. The deal represents the continuing vertical integration of legal staff, in this case, Kemp Little’s, into Deloitte’s. It is crucial that the target’s employees do not resign from their new positions, and therefore in the buyer’s best interest to disincentivise that from happening. In M&A deals, this is normally done through labour retention schemes, which consist of the buyer offering bonuses to those newly added employees who stay with them for a certain period of time after the transaction. Moreover, resignation can also be discouraged through non-competes, legal agreements by which a former employee may not, within an agreed-upon period of time, work for any competitor of the previous employer. A problem that could arise in this regard is the willingness of Kemp Little’s employees to stay on. Considering that working for Deloitte’s legal team is similar to working in a big commercial law firm and thus very different to working in a small to mid-sized one, lawyers could find themselves thrown in a position they obviously chose not to pursue. This exerts pressure on the legal mechanisms of labour retention, and Deloitte must ensure they function well if they want to achieve the intended outcome.
Kemp Little is a boutique firm(1) in London with a heavy focus on fintech and TMT(2). Their expertise in M&A is also noteworthy, generally covering deals below £50 million. The relatively young firm, founded in 1997, recorded £16.5 million in revenue and £6.5 million in profits in 2019, under the operation of 105 fee-earners(3). Of those, 57 lawyers and 29 partners will be added to Deloitte’s UK legal division by way of the acquisition, which previously comprised 8 partners and approximately 85 lawyers. This only makes up a small portion compared to Deloitte’s global fleet of 2,500 lawyers, showing why there was a need for expansion in the UK.
The deal was a response to “clear market demand”, Richard Houston, chief executive of Deloitte North and South Europe, explained. Deloitte is adjusting to the trend of clients wanting to be advised on accountancy, consulting and legal matters at the same address. The present deal helps the audit firm improve its ‘all-inclusive’ professional service. This notion of serving the client in every facet of their business is key to understanding why Deloitte chose to acquire exactly Kemp Little as opposed to another boutique firm in London. Since the firm divested its business into consulting in 2013, it represented the perfect opportunity for Deloitte to improve both its legal and consulting services with the same transaction.
The implications of the transaction are certainly positive for the buyer. Their perhaps biggest take away is the seller’s proficiency in technology, which would place Deloitte in an optimal position for long-term development. This would allow for legal advice to expand into highly emerging tech markets, such as FinTech, legal tech and gaming, which, considering that Deloitte already advises clients on these issues from an entrepreneurial perspective, will surely be profitable. The UnitedLex are a perfect example of how well an inclusive approach to legal solutions can perform and certainly served as an inspiration to Deloitte. The US-based firm has enhanced its consulting services with tech-driven legal and compliance knowledge. As a result, they secured a $500 million funding arrangement with CVC. If Deloitte manages to utilise the innovative tools the acquisition has granted it, the result could be promising.
A menace to top law firms?
However, healthy scepticism is advised in connection to such developments. Whilst an inclusive approach does seem to be more efficient, the numbers do not tell the same story. Despite the fact that the Big Four are top 10 law firms by lawyers employed, they fall short in terms of revenue. Audit firms are not losing hope, however, since, as Nick Roome, head of legal at KPMG, put it, “credibility takes time to build”. Thus, as time progresses, so the argument goes, more and more clients will entrust their legal business to their audit firms.
Yet, the difference between top commercial law firms and the Big Four may perhaps be more profound than that. Legally, the Big Four are precluded from competing with the top law firms and targeting the most important clients. This is because the former audit most of the latter firms, meaning that any such growth strategy would lead to a conflict of interest. This leaves audit firms to chase mid rather than high-tier clients, and law firms in a very comfortable position.
Finally, it must be remembered that, according to global managing director of legal Piet Hein Meeter, “building another law firm is not” what Deloitte is seeking to achieve, but merely responding to “client need”. Statements like these are no consolation to law firms, however, 69% of which view the Big Four as a ‘major threat’. One would therefore be unwise to prematurely dismiss the Big Four’s importance on the legal market.
 Boutique firms are firms that specialise in one practice area. Whilst they are usually smaller firms, the term should be applied regardless of size.
 Technology, media and telecommunications.
 Any employee that generates income for the firm. Includes all certified lawyers and sometimes paralegals.
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