Merger deals thin on the ground as only 21% of surveyed firms say they will consider one

The number of international law firms in London looking for a tie-up has fallen to its lowest level in five years, as firms batten down the hatches in their City outposts during the downturn.

Only 21% of non-UK headquartered firms in London said they would consider a merger with a UK firm according to Legal Week's annual survey of international law firms in London. The result marks a sharp decline from last year when 45% of firms said they would consider a UK deal.

The survey, based on information from 72 leading international firms in London relating to their last financial year, also saw the number of firms rejecting a tie-up outright rising from 26% last year to 53% this year.

Reed Smith Europe and Middle East managing partner Roger Parker said: "At some stage there will have to be a natural consolidation of the legal services market. Whether there will be a string of mergers soon or not, there will certainly be spin-off teams and breakaway groups."

The survey also found that despite falling work levels and high operating costs making London an expensive outpost, there has been a 17% increase in non-partner headcount over the last year.

Mayer Brown and White & Case are among a group of firms to have made significant investments in their London practices since 2008, with both seeing sizable headcount increases. However, both have launched redundancy consultations since the end of their financial year. Other firms significantly boosting headcount include Skadden Arps Slate Meagher & Flom and K&L Gates.

However, falling local profitability looks set to impact on London growth plans, with the number of firms earmarking growth over the coming 18 months falling from 86% in 2008 to 75% in 2009.

Baker & McKenzie London managing partner Gary Senior said: "For some of the more recent entrants and some of the smaller firms, London can be a loss-making enterprise. It is an important jurisdiction but many firms have a short-term view which will affect their current investment levels."

Around half of the firms looking to expand are considering growth of up to 10%, while an additional 35% earmarked an increase of 10% to 20%.

Paul Weiss Rifkind Wharton & Garrison London office head Mark Bergman said: "As an international firm you have to open in London not just for the sake of UK companies, but to improve your international spread."