The COVID-19 pandemic has accelerated the digital transformation of many a sector and the legal profession is no different. In fact, the rapidly burgeoning industry of ‘Legal Tech’ has been quietly and fundamentally changing the face of the law for the past few years. And it’s testament to that transformation that Cavendish recently advised on the sale of Legal Tech innovator CaseLines to multinational Thomson Reuters.

Perhaps somewhat taking the baton from the FinTech revolution, after a period of exponential growth we are now entering a prime period for Legal Tech as private equity funds and venture capital are showing a lot of interest. To put that on a scale, in 2016, Legal Tech received only $225M of investment. By 2019, that amount had grown almost tenfold to $2.1B.

Flourishing despite COVID

And while investment may have waned as a result of COVID, Legal Tech is flourishing despite the downturn. An already growing demand for innovative legal technologies was expedited further during the pandemic as courtrooms looked at how they could continue to operate, and professionals sought new ways to serve their clients’ cases and keep their practises running in these exceptional circumstances.

It’s for these reasons we expect a lot more M&A activity in this area in coming months. Indeed, the number of Legal Tech deals rose from 106 in 2016 to 186 deals in 2019. Not only are PE and VC firms looking to fund promising legal technologies, but larger strategic M&A activity will likely be borne from big firms wanting to acquire such technologies for their own customers’ needs.

CaseLines acquired by Thomson Reuters

In the case of CaseLines, which provides a cloud-based solution for evidence management and has clients worldwide, during COVID the firm received a wealth of demand from court districts to facilitate virtual hearings and manage evidence. As a large company looking to adopt these kinds of technologies for its customers, Thomson Reuters saw CaseLines’ potential for enabling legal processes to operate in a faster and more efficient manner.

CaseLines Founder Paul Sachs comments: “In Thomson Reuters we found a strategic buyer that shares our commitment to the rule of law. We have a proven track record of enabling the courts’ digital transformation in the UK. We are optimistic that with Thomson Reuters’ global footprint we will be able to help courts around the world to continue to operate effectively and efficiently into the future.”

M&A drivers

e-Discovery software solutions have driven the bulk of Legal Tech investment in recent years. M&A activity meanwhile has been happening across legal subsectors. Fastcase, for example, has built itself to be the #3 contender in the legal research market, behind LexisNexis and Thomson Reuters. It managed this through a series of deals including its acquisition of LoisLaw, followed by smaller acquisitions including Docket Alarm, Next Chapter and Law Street Media.

In September 2015, TA Associates acquired the enterprise legal management business Mitratech from Vista Equity. In 2020 alone, Mitratech has acquired three further companies.

We expect this kind of M&A activity to continue and fuel even more interest in the sector.

Of course, where the true transformation happens is when technology actually alters consumer behaviour. Take DocuSign for example, a company which fundamentally changed the way that professionals seal agreements and contracts, and which successfully IPO’d in 2018, raising over $600m.

John Farrugia, Partner and Head of Technology, Cavendish Corporate Finance, comments: “Over the past few years all areas of Legal Tech have been active – Practice Management, Case Management, eDiscovery, Compliance and Research & Analytics. We have seen both incumbent, large Legal Tech companies such as Mitratech, Lexis Nexus, Thomson Reuters and Tyler Technologies continue to expand their product offering by acquiring small but fast growing companies on a global scale.

“On a high level and general basis most SaaS companies within legal tech have been commanding a valuation between 4x – 8x revenue. Achieving the upper end of the revenue multiple ultimately boils down to understanding key business drivers as well as understanding the key product gaps that need to be filled by those potential acquirers. Working with a financial adviser early can certainly assist with business positioning are arguably can help achieve a higher overall valuation.”

While the Legal Tech industry is still dwarfed by investment in FinTech, it nevertheless provides solutions that are just as fundamental to our way of living, of doing business, and of upholding the law. And the industry is now very much at an inflection point, ready to drive increased investment which will in turn drive future increased M&A.

As Stephen Rubley, President of the Government Segment of Thomson Reuters, puts it: “Our aim is to support our customers in creating an increasingly accessible justice system for all.”

If you are considering M&A activity or raising growth capital, please give us a call.