The City legal market could be set for a wave of mergers between mid-sized firms as they fight to remain competitive.

The financial crisis hit the legal sector harder than anyone expected and few firms were unaffected. But the firms ranked No 11 to No 25 by revenue were hit worst, according to the report on the legal sector published by PricewaterhouseCoopers.

On average, their revenue declined by 9 per cent in 2008-09, PwC said, compared with a 4 per cent drop among the top ten firms and a 2 per cent fall among the rest of the top 50. Likewise, their profits fell more sharply, down 28 per cent.

Firms such as Simmons & Simmons and SJ Berwin once aspired to match the “magic circle” but now find themselves in a difficult position. From 2004 to 2007, a boom in transactions meant that there was enough work for law firms across the City to enjoy double-digit growth.

Alistair Rose, head of the professional partnerships group at PwC, said that growth simply obscured that there were too many similarly sized firms fighting over the same turf. Unable to compete regularly with the elite firms for the most lucrative global work, the second-tier firms built themselves around practices such as private equity, mid-market mergers and acquisitions and commercial property, which turned out to be the areas the suffered most in the downturn.

As revenues fall, those firms have been doubly squeezed because of their high fixed costs. They may not be the size of Clifford Chance, but they are still big enough to have expensive offices in London and overseas.

Then there are their huge wage bills. Starting salaries for junior lawyers at even mid-ranked City firms soared to more than £60,000 in recent years.

Despite this, the second-tier firms have generally been slow to react to the downturn, according to Mr Rose. Many have made redundancies and cut the number of partners, but further cuts may be necessary, he believes. And profits could fall again if work does not pick up dramatically in the second half of the financial year. Many are likely to seek a merger to survive, Mr Rose said.

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