Gerard Starkey looks at the background to the failure of Cobbetts – and how DWF picked up the pieces

From the moment Cobbetts last week confirmed plans to call in the administrators, it took little more than 24 hours for DWF to announce its intention to acquire the financially stricken firm in a pre-pack deal.

The speed of the deal came as a surprise to many, despite the foundations set 12 months earlier by failed merger talks between the pair – a breakdown the firms attributed at the time to "continuing market uncertainty".

But, with the UK economy teetering on the brink of a triple-dip recession, market conditions have hardly improved – so what has changed?

One former DWF partner told Legal Week he believed the real reason for the talks failing last year was resistance within DWF's partnership to taking on Cobbetts' £10m of debts, after the firm's 2010-11 accounts revealed the extent to which it was indebted to Lloyds TSB.

However, a year later, DWF's pre-pack deal should enable the firm to take on the profitable elements of Cobbetts' business without all the financial baggage thought to have scuppered last year's merger.

Four hundred and nineteen Cobbetts employees and partners will transfer to DWF after KPMG confirmed this week (6 February) that it had been appointed as administrator.

Walker Morris has taken on a 27-strong finance litigation team, while DWF's acquisition of Cobbetts also does not include Cobbetts' debt recovery team, Incasso, which has around 50 employees. In a statement, the firm said that it is "supporting those involved, including assisting in the day-to-day management of client affairs for the immediate future, whilst the long term direction of the business can be determined."

Last month Cobbetts signed a debenture with Lloyds TSB, effectively securing all its debt and future debt to the bank. This move is understood to put Lloyds first in line for any money recouped by a sale of the firm.

One former partner at DWF believes the two law firms and the bank could have been in negotiations over a tie-up for months.

"The fact that Lloyds took a debenture just weeks before suggests to me that this was a carefully orchestrated plan being carried out over a number of months. DWF would have needed time to seek internal approval from partners and the board, not to mention arranging the financing for a deal – there's no element of opportunism in this deal," the partner told Legal Week.

The process of transferring Cobbetts staff across to DWF is expected to start imminently.

According to Cobbetts, the final straw that led to last week's announcement was poor trading results during the final months of 2012.

However, it was well-known that the Manchester-based firm had been struggling for some time, with revenues falling almost 25% from a pre-recession high of £59.3m in 2007-08 to £45.2m last year.

Being a well-respected, lower mid-tier Manchester firm specialising in real estate and corporate, Cobbetts grasped the nettle during the boom time of the early 2000s and undertook a growth strategy aimed at competing with the developing national firms.

A senior partner at a northwest firm said: "Around 2003 Cobbetts decided to spread its wings but it all became rather problematic. It carried out a spree of acquisitions that never really took off and the [new office] deals also knocked it."

In 2003, Cobbetts added to its sole Manchester base with offices in London and Birmingham following tie-ups with Fox Brooks Marshall and Lee Crowder respectively. In 2004, the firm added Leeds capability after acquiring Walker Charlesworth & Foster.

But, despite a cull of 15% of its partnership in 2006, when the credit crunch arrived in 2007 Cobbetts found itself overly exposed to the faltering UK real estate market and burdened with debt accumulated during the mergers and the relocations to new premises in Leeds, Birmingham and Manchester.

"Cobbetts has always had a heavy real estate presence and real estate has been struggling in recent times – it goes to show the importance of having a balanced practice," said one Manchester-based partner.

Three redundancy rounds followed in as many months during 2008, affecting around 70 staff, half of whom were fee earners, in its three offices outside London.

In addition, the firm's transactional teams and support services staff were asked to work a four-day week for a 12-month period from May 2009, a move that saved thefirm £1.9m.

However, the DWF deal may not necessarily bring an end to the woe for all its near 500-strong staff. With DWF also present in the four cities in which Cobbetts resides, a duplication of roles is to be expected.

On announcing the Cobbetts agreement, DWF managing partner Andrew Leaitherland (pictured, top) said: "We will do all we can to make the integration as smooth as possible; however, as you'd expect in a move of this size, there are some areas of overlap and we may have to displace people or find them alternative roles."

With the Cobbetts deal coming swiftly on the back of DWF's takeover of professional indemnity firm Fishburns on 1 February, another major challenge immediately facing the fast-growing firm will be to integrate the new arrivals as swiftly as possible.

A senior partner with experience of law firm mergers cautioned: "I don't think there's a law firm in the country that can take on 170 people one week and follow that with 500 people the next – integration into one coherent unit will be a huge task and extremely costly."

Cobbetts – Five-year revenue overview

2007-08 – £59.3m
2008-09 – £48.5m
2009-10 – £43.8m
2010-11 – £44.5m
2011-12 – £45.2m