LG needs a strong merger partner and Wragges could fulfil its City ambition, but are they compatible?

Once a Birmingham-centric firm, news this week that Wragge & Co is in merger discussions with Lawrence Graham (LG) marks a significant step in the firm's long-held ambition to build in the City.

International expansion, including most recently in Germany and the Middle East, has helped Wragges move away from its origins as a regionally focused firm. It has also largely got over its struggles in the immediate post-crisis years, caused by a dominating real estate practice. The firm reported a marginal increase in turnover at the end of the 2012-13 financial year to £120.5m, while profits per equity partner (PEP) climbed 2.7% to £339,000.

However, Wragges has been seeking a tie-up with a smaller London firm with several niche practice areas since realising it was struggling to make real headway in the competitive City market, since launching there in 2000. 

The proposed merger would create a firm with turnover in excess of £170m, gifting Wragges the expanded London presence it has been seeking since the turn of the decade. It would take the combined number of partners to 189 and combined turnover to £172.3m, putting the firm just outside the UK top 20, according to last year's financial results.

LG, meanwhile, has had a tough run in recent years, with its heavily real estate-focused business being hit hard by the downturn and revenues falling from a high point of £67.5m in 2007-08 to £51.8m this year. In 2005-06 they were the UK's 32nd largest law firm by revenue, turning over £61.1m, before falling out of the top 50 altogether in 2010-11.

Profits at LG have also plummeted, in part due to an onerous property deal that saw the firm move into new offices in More London just before the market turned. It has subsequently sub-let 20,000 sq ft of surplus space to Bond Dickinson, releasing it from much of the commitment, although some excess space remains. At the end of 2012-13, PEP was down 14.2% to £260,000.

The property commitments coupled with falling financials have been the biggest hurdle to LG finding a merger partner to date. It has had talks with several firms in recent years, with discussions with Field Fisher Waterhouse called off last June after the firms were unable to come to an agreement. Despite the breakdown of talks, it is understood that both remained keen on a UK merger.

One former LG partner commented: "Lawrence Graham has clearly got to do something, it is carrying a much higher cost-base than it used to; however, this doesn't seem like a compatible match to me. Lawrence Graham purports to be an international firm – which it is – but this merger won't get them any closer to the international markets. Any tie-up between a City and regional firm carries all the risks in the UK legal practice, of which there are many at the moment.

"If Wragges is seeing it as an acquisition then they are crazy; they will be taking on a London cost-base with the new lease of More London and will have to pay London salaries. It could only benefit Lawrence Graham in terms of back office costs from Wragges outside of London."

However, a partner with knowledge of both firms countered: "Wragges and LG are a good fit on paper. Geographically there is hardly any overlap. Wragges is financially astute and has more of a go-getter approach out of the two, while LG has a good bunch of high-quality lawyers.

"However, I suspect discussions would be painted as merger talks when, really, Wragges will be looking at an acquisition. LG's declining financial figures and property problems have been their main obstacles in finding a merger partner."

Although both Wragges and LG have relatively sizable UK practices – Wragges has 101 partners in the UK, while LG has just under 60 – there is little overlap internationally. LG has offices in Dubai, Monaco, Moscow and Singapore, while Wragges is present in Brussels, Paris, Dubai and Guangzhou, in addition to an IP-focused base in Munich.

A date has yet to be scheduled for a vote on the proposed merger, with partners told of plans on Monday (18 November).