M&A Dreams Fading, Big Law Is Now Preparing for a Recession

Welcome back to the Big Law Business column. I’m Roy Strom, and today we look at how Big Law might respond to a recession. Sign up for Business & Practice, a free morning newsletter from Bloomberg Law.

Nearly 100 days into the second Trump administration, few groups of business leaders are experiencing an expectations reset as dramatic as Big Law leaders.

Not only has President Donald Trump caused massive disruption across the legal industry by threatening the business of law firms he personally dislikes, but he hasn’t delivered the positive business environment many law firm leaders expected to develop this year.

Major banks Goldman Sachs and JP Morgan this month warned the odds of a recession this year have spiked to 65% and 60%, respectively, if Trump’s tariffs are implemented. Far from their post-election dreams of an M&A boom, Big Law leaders are now beginning to prepare for that outcome.

Even amid the attacks on law firms from Washington, law firm consultants say Big Law leadership discussions today are just as focused on the threat of a deteriorating economy. They’re dusting off recession playbooks crafted in the earliest days of the Covid-19 pandemic, hoping to avoid the deep cuts seen during 2008 financial crisis that blew holes in their talent rosters for years to come.

“Firms are looking back at prior downturns to think through what went well, what they could have done better, and how to prepare,” said Kent Zimmermann, a principal at law firm consultancy Zeughauser Group. “There are a group of firms modeling out scenarios and making decisions about what they’re going to do.”

Not a Bad Start

Law firms are expected to deliver a strong financial performance for the first quarter of the year, despite the recent volatility in financial markets. Banks that track the legal industry will soon unveil the results.

Some firms outperformed their first-quarter results from a year ago, Zimmermann said. That group mostly consists of high-performing firms that have a balanced mix between transactional and countercyclical practices, like litigation and restructuring, he said. The well-balanced firms are also best positioned to ride out any recession, Zimmermann added.

The strong start to 2025 is in part because law firms entered the year with a large backlog of bills to be collected from a strong end to 2024. Many firms aggressively raised billing rates in the first quarter. Plus, Trump’s tariff announcement came days after the first quarter wrapped.

M&A levels also didn’t disappoint in the first quarter. With $699 billion in deals, it was the second-highest volume in the first quarter over the past five years, according to Bloomberg data.

Still, dealmakers don’t sound optimistic going forward. Kirkland & Ellis partner Michael Weisser told Bloomberg Law this month that traditional M&A and private equity “might be a little slower than usual,” while Wachtell partner Jacob Kling highlighted the “inverse relationship” between volatility and M&A.

“A lot of the slowdown in transactions has been quite recent,” said Lisa Smith, a principal at law firm consultancy Fairfax Associates. “Firms are seeing it, but it’s a question of how long that’s going to last.”

Recession Plans

Law firms responded to the 2020 recession much differently than the 2008 financial crisis. In 2020, many law firms cut associate and staff salaries while making promises not to conduct mass layoffs. Some also delayed partner draws, pledging that equity partners would take the biggest hit from a prolonged downturn. Ultimately, business didn’t evaporate—quite the opposite—and most firms later made their associates and staff whole from the proactive salary cuts.

After the 2008 crisis—a deeper, longer downturn—many firms made mass associate layoffs. The firms largely came to rue that decision when, years later, they had to fight to hire a relative dearth of mid-level associates.

If there is a recession this year, law firm leaders will likely seek to avoid layoffs again. But that could be complicated by the fact that they are now managing a group of lawyers that earn significantly more than they did in 2020.

Compensation for seventh-year associates grew by nearly a third from 2019 to last year, to $560,000 from $425,000, according to Biglaw Investor, which tracks industry pay. First-year associate pay is up about 22% over that time.

Lawyer salaries typically are a firm’s largest cost. The sharp growth in pay is a departure from what happened in the wake of the 2008 financial crisis, when associate salaries stagnated for years. That lack of growth, and the fact that the 2020 recession was so short-lived, made it relatively easier for law firms in 2020 to avoid mass layoffs.

The more recent increases in pay—driven in many instances by the highly profitable firm Milbank LLP—could make layoffs more likely in the next recession.

Of course, law firm profits have grown even more over that time. Partners could opt to keep more lawyers on salary and take home less profit.

Firms in 2020 learned that fewer headcount reductions can be beneficial for when business ramps back up, and they remain reluctant to engage in mass layoffs, Smith said. They’ve also become more diligent in counseling out underperforming lawyers and managing costs more broadly, she said.

“That provides a little bit of a cushion, but nobody wants to see their profitability go down,” she said. “If it’s 5%, that’s one thing. If it’s 20%, that’s another. So, I think firms will take quicker action if it looks like it’s going to be a prolonged downturn.”

Worth Your Time

On Susman Godfrey: A DC federal judge on Tuesday temporarily barred the Trump administration from enforcing an executive order targeting the firm, Tatyana Monnay reports.

On Reed Smith: The global law firm is doing away with the DEI branding for hiring and promotion in response to a workplace discrimination probe by the Equal Employment Opportunity Commission, Meghan Tribe and Rebecca Klar report.

On Sullivan & Cromwell: Sen. Chuck Schumer (D-NY) said he plans to block the nomination of Sullivan & Cromwell lawyer Jay Clayton as US attorney for the Southern District of New York, Seth Stern reports.

That’s it for this week! Thanks for reading and please send me your thoughts, critiques, and tips.