Bloomberg Law recently identified four key practice areas Big Law leaders will need to focus on in the coming year to decide whether they’ll be able to deliver profit increases, or whether they will need to be targeted for cost cutting.
While IPOs and mergers & acquisitions were among the practice areas that slowed the most for Big Law firms in 2022, they fueled record returns in 2021, and whether they rebound in 2023 — and an expected increase in litigation and bankruptcy work comes to fruition — is likely to determine the fortunes of major firms in 2023.
Here’s what those practice groups will need to see to recover this year:
In 2022, two years after the start of the pandemic, the dockets held fewer pending civil cases than would have been expected based on pre-COVID trends, primarily because there had been 6% fewer such cases filed in 2020 and 2021.
However, there are still a large number of pending high-profile cases that have progressed more slowly toward trial because of the pandemic, according to Jason Peltz, Managing Partner of Bartlit Beck LLP.
“High-stakes cases are less likely to resolve until reaching the courtroom steps or the courtroom itself,” Peltz said. “They are a lot less likely to go away absent that trial pressure.”
Demand for restructuring saw a down year in 2021 as well after the pandemic pushed companies into bankruptcy at a record rate in 2020, and it fell again by nearly 11% through three quarters in 2022, according to data from Thomson Reuters.
According to data from Bloomberg, there were 244 Chapter 11 bankruptcy filings by companies with more than $50 million in liabilities in 2020, 121 such filings in 2021, and 94 through early December 2022.
However, bankruptcies tend to be counter-cyclical, meaning the practice could come roaring back in 2023 if a looming recession threatens corporate balance sheets and companies find it harder to obtain financing due to higher interest rates.
“This could be several years of major restructuring activity across many, many different types of industries and types of companies,” said Kirkland & Ellis restructuring partner Joshua Sussberg.
The cryptocurrency crash, which has garnered major headlines of late thanks to the spectacular collapse of FTX, has already led to an increase in legal fees, with Kirkland representing three of the four major crypto exchanges that have filed for bankruptcy so far and billing nearly $25 million on two of those cases in just three months.
M&A activity during the second half of 2022 was the lowest it’s been since 2013 — there was just $704 billion in deals worldwide in the third quarter — and M&A practices saw demand decline nearly 14% through three quarters compared to the prior year, according to Thomson Reuters.
Factors like high inflation, the war in Ukraine, the possibility of recession, and the hiking of interest rates by the Federal Reserve have also placed significant downward pressure on M&A deals, said Sonia Nijjar, an M&A partner at Skadden, Arps, Slate, Meagher & Flom based in Palo Alto.
Those challenges still remain as 2023 begins, but Nijjar said technological disruption, an increase in distressed sellers, strategic plays for carveouts and spinoffs, and private equity firms holding significant dry powder still mean interest in doing deals exists among many companies.
“Right now we have clients working on all types of transactions, including strategic transactions, private equity deals, minority investments, and carveouts,” Nijjar said. “You still have those strategic drivers of M&A in place.”
The rate of new IPOs in 2022 compares poorly to just about every year since 2008. According to data compiled by Bloomberg, new IPO filings were the lowest since 2009, thanks in part to one of the worst-performing stock markets in years.
Excluding special purpose acquisition companies (SPACs), new issues in New York in the third quarter of 2022 raised just $2.7 billion, making for the lowest third quarter numbers since 2008 and leading law firms to earn about $575 million less in 2022 than in 2021, according to a Bloomberg Law analysis.
However, if inflation starts to come down, the Fed’s interest rate hikes could become more muted and predictable, which should inspire some calm in equity markets and pave the way for more companies to go public.
“I’m optimistic for the second half,” said Ian Schuman, Global Chair of Latham & Watkins’ Capital Markets Practice. ”There are a lot of companies that continue to be interested in preparing for a possible IPO or public capital raise. Fingers crossed, things will stabilize for the market to open up.”