Thursday, April 16, 2009

Legal Support Industry - Investor Report: by VRA Partners

This report, published by VRA Partners in April 2009, provides details about the following topics & trends in the legal support industry: Litigation Support, Law Firm Technology & Services, Sector M&A, Sector Private Equity and Sector Public Markets; along with a list of the transactions (listing target and acquiring companies) dating back to January 2008. Below are a few excerpts.

Introduction:
The United States legal support sector is unique in both its size and importance. The country’s predilection for litigation and complex regulation supports an industry that has the most lawyers, and the most lawyers per capita, of any country in the world. As a benchmark of the legal support sector’s size, the U.S. supports approximately 250,000 law firms that represent a $235 billion market. Historically, this market has exhibited consistently strong growth. According to Hildebrandt International, law firms experienced unprecedented double-digit annual revenue growth between 2001 and 2007. Due to these size and growth characteristics, the legal support sector has been an increasingly attractive sector for technology and service providers, as well as investors.

Impact of Recession:
Though the legal market has historically demonstrated strong growth and resistance to economic downturns, productivity began to decline in 2007 as the economy softened. 2008 marked the worst year in the legal market in 20 years due to sharp downturns in real estate, structured finance and transactional practices, such as capital markets and merger and acquisition activities.

“Current economic conditions will further prompt corporations and law firms to utilize cost-lowering technologies, low-cost service providers and additional
outsourcing.”

Trends Unrelated to the Recession:
Notwithstanding the current economic environment, significant trends have influenced the legal support sector. Two of the most significant trends are:
- Increased complexity of the discovery process due to the proliferation of electronic documents and communications
- Growth, consolidation and globalization of law firms to meet the needs of their growing, global corporate clients

“We expect to see significant merger activity over the next 12 to 24 months between firms whose growth has stalled and are unable to generate significant, consistent profitability due to the required infrastructure and the volatile nature of the revenue streams they are generating.”

“The cost of review is estimated to be approximately $5 to every $1 of EDD processing, which would estimate the total market for review services to be over $10 billion.”

Recent M&A Issues:
- Overall market conditions and credit crisis
- Several failed sale processes of EDD businesses due to the inability to achieve desired valuations
- Track record of private equity (“PE”) firm investments in the sector that have either failed, sold for a fraction of cost, or restructured to survive

Why the sector is still attractive for M&A and private equity:
- Long-term growth sector
- Dynamic market
- Many companies are still achieving very attractive margins (20%+ EBITDA)
- Importance of scale
- Significant market fragmentation

You can download the entire 15 page Legal Support - Industry Review report from the VRA Partners' website.

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