Confidence and deal activity points the right way

Two pieces of research this week give as good an indication as any of the mood and fortunes of commercial law firms as they face up to 2010, somewhat anxiously but also thoroughly glad to be seeing the back of a brutal 2009. Those are our quarterly business confidence poll and figures from our M&A research provider, Mergermarket, on activity levels within the transactional practices that drive the UK's largest law firms.

And there is reason for cheer on both fronts. For one, business confidence has risen substantially since our last survey in October, with more than four out of five partners now expecting revenue to grow at their own firm over the next 12 months. That is sharply up on the lows touched in early 2009, when less than a quarter of partners expected income growth in the year ahead and 37% expected the top line to shrink. This improvement has taken its time coming as confidence at law firms has, so far, been a very lagging indicator. Having barely moved in the initial wake of the credit crunch in 2007, it buckled badly with the collapse of Bear Stearns in March the following year. The insolvency of Lehman Brothers six months later hammered what was left of the bull out of most partners. And while confidence had very modestly recovered since the lows recorded in April 2009, it has been only over the last three months that the upswing has achieved much momentum.

Mergermarket's year-end stats, likewise, offer hope that the global economy and legal services market is now past the worst. Deal activity globally and in Europe was, as expected, substantially down on 2008, matching roughly the level of activity last seen in 2003. But Q4 of the calendar year did, as hoped, provide a broadly spread, if relatively modest, revival in activity. With expectations of more fundraising and private equity work in 2010, the best guess for the coming months is that there will be further revival in activity levels, particularly in the second half of the year.

Mergermarket's research also confirms that the big story for corporate advisers of the last decade is the rise and rise of Asia. While the US and Europe are back to the levels of activity seen in the deal lump after the tech boom ended, the value and volume of underlying transactional work in the Asia Pacific region has exploded. In 2003 there were 714 deals announced in Asia with a combined value of just over $100bn (£62.5bn). According to Mergermarket that had risen to 2,208 deals last year with a combined deal value of $419.3bn (£262bn), nearly equalling the record year of 2007. True, the recovery the legal industry is facing will be slow and grinding, but that remains a considerably better outlook than many imagined until very recently.

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