Hot lateral market keeps pace in 2013

by Sandy Lechtick
Daily Journal

Sandy Lechtick is president and founder of Esquire, Inc., a Los Angeles based legal search firm. Sandy has been retained as an expert witness by several law firms and specializes in partner representation and law firm mergers and acquisitions. He can be reached at www.esquiresearch.com.

There are four questions that partners have been asking lately: (1) Why have there been so many partners changing law firms? (2) What’s my opinion about the 2013 legal market? (3) Do I see any major firms failing? (4) How has the economic climate specifically affected the placement business in the last few years? U.S. Court of Appeals for the 9th Circuit Political advertising on public television gets cool reception during 9th Circuit hearing The prospect of election advertising on public broadcasting stations got a largely skeptical reception Tuesday from an en banc panel at the 9th U.S. Circuit Court of Appeals.

The answer to the first question is, there is a combination of several trends all intersecting at the same time in a perfect storm. In part, there has been a lot of pent up demand and the flood gates have opened. Visualize Apple iPhone lovers rushing on the first day of a new release.

Most of the managing partners I talk to are more bullish than bearish for 2013. Some are exceptionally bullish. My company tends to gravitate to the more profitable firms who are focusing on long-term growth and talent acquisition, so I am not surprised by that sentiment. While anxiety has not completely dissipated and there are many challenges that lie ahead, the fact is many firms are doing reasonably well and have more money to spend. The stock market started 2013 on a bang and is up 10-plus percent this year. On the other hand, the business implications of spending, hiring and growth decisions will be increasingly important. While the recession will become a distant memory for some, for others the effects will be long felt. One of the least publicized facts in 2012 was the amount of stealth layoffs and de-equitized partners. That is still quietly happening. Another thing not reported, for obvious reasons, is that many partner moves are not necessarily predicated by greener pastures – some partners were gently nudged out the door and had to move. There is no question that the equity bar has been raised at many firms, and shareholders do not wish to dilute further unless there are compelling reasons to do so. Law firm leaders are increasingly making bottom-line decisions of who’s in and who’s out.

A handful of law firms saw the last few years as a unique opportunity to buy low and sell high, and pick up “bargains.” That is, outstanding partners, some who had practices that fell, but who had fine reputations and were gaining traction in rebuild mode. But more were asking the threshold question: “What is your book now?” Or, “What have you done lately?” Some firms have picked up partners who maintained busy practices but were agitated because their firm’s poor financial performance negatively impacted their individual compensation. Some firm’s overpay their equity partners whose performance does not necessarily live up to the hefty price tags. Many laterals, too, have been disappointing.

Because some firms have been burnt by lateral partners who overpromised and underdelivered, due diligence is now greater. Law firms are looking more closely at client relationships, work at hand, and specific matters. Compensation levels are more closely tied to collections. Deals take longer.

Partners that were holding back on moving until they felt better about their practices now feel better. Many who had decided to move before were simply waiting until things picked up, they got their bonuses, and there was less risk. The analysis paralysis mindset that had gripped so many partners during the recession has diminished. However, inertia continues to keep many in place and some have concluded that the grass is not necessarily greener on the other side. Market value increases and viable options expand when the partner has a growing and self-sustaining practice.

Practices that have held their own the last few years include: complex business litigation; labor and employment (especially wage and hour class action defense); intellectual property (especially patent litigation and prosecution); project finance (especially in the energy sector); insurance and professional liability; and products http://www.dailyjournal.com/subscriber/submain.cfm 3/20/2013 SPECIAL REPORT Top Firms Daily Journal – California’s Largest Legal News Provider Page 2 of 3 liability (especially medical devices and pharmaceuticals). While corporate lawyers got hit hard and saw their practices plummet, many are seeing a rebound and books are on the up-tick. Many law firms are looking for corporate lawyers, especially those who specialize in private equity, securities, mergers and acquisitions, and corporate governance.

Law firm leaders simply are focusing more attention to growing key practice areas through lateral acquisitions, recognizing it as one of the pillars of growth. The practice of law has become more globalized. The organic growth model has evolved into free- market laterals – bringing in those with strong portable books of business and attractive clients. Certainly the highly organic Munger Tolles & Olson LLP model of internal growth is commendable and helped to create a stellar first-rate law firm. But how many Munger Tolles are left? The fact of the matter is that capturing key laterals can either jump-start new practice areas, add bandwidth to others, or enhance the firm’s momentum, growth strategy and profits.

It is my impression that other legal search firms had similar stories – although legal search firms that specialize in associate placement continue to have challenges. Others that transitioned from associate to partner placement have had varying degrees of success.

Supply and demand economics are alive and well. There are simply a lot more opportunities today – more than I’ve seen in eight or nine years. There are many new national and regional firms that have opened offices in Los Angeles, Silicon Valley, Orange County and San Francisco, plus many local firms that are actively looking to hire. Simply put, there are more opportunities at large and small firms. Some are off the beaten path and fly under the radar.

As far as whether any firms will fail, I do not see anything on the scale of Howrey or Heller Ehrman or Thelen Reid, but my company is closely monitoring one or two firms.

What’s evident is that the firms that put too many eggs into too few baskets or waited too long to make tough bottom-line business decisions will see profitability lag and trouble gaining momentum or attracting first-rate lateral partners. Furthermore, the divide between the most profitable and better managed firms and others will grow.

As far as my company’s placement success in the past few years, 2007, 2008 and 2009 were outstanding. In 2010 we hit a brick wall, but 2011 and 2012 were strong years. I am not sure if we got lucky, the stars simply lined up, or if all that hard work paid off. We’re off to a pretty good start this year – but who knows? Like a movie producer, we are only as good as our last movie. Resting on ones laurels or being complacent is a recipe for disaster. I’ll probably put Andrew Grove’s book on my desk to remind me that there is no substitute for hard work and long hours. The book’s title – “Only the Paranoid Survive.