“When a firm is perceived to be wounded – they’ve had bad financials, or a lot of defections…”

“ANOTHER RECORD YEAR FOR LAW FIRM MARRIAGES” .
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Wednesday, December 17, 2014

 

Another record year for law firm marriages

Legal analysts view ‘rescue mergers’ as a dangerous strategy for struggling firms

By Alexandra Schwappach

Daily Journal Staff Writer

2014 was another banner year for law firm combinations, with the number of mergers – up to 62 as of September – expected to outpace last year’s total of 88, according to data from Altman Weil Inc. Legal analysts say the ever-increasing number of law firm mergers, both large and small in size, depict a future in which law firm business is more tiered than ever before.

But not all mergers are successful, nor do proposed combinations always pan out. In looking back at 2014, experts muse over what went right and what went wrong, and what to expect in the years to come.

Some of the more notable mergers from this year include Texas-based law firm Locke Lord LLP and Boston-based Edwards Wildman Palmer, whose December combination created a 1,000-attorney firm with 23 offices in the United States, Europe and Asia.

Edwards Wildman had been struggling for months before partnership talks began – since January 2012 the firm lost roughly 200 attorneys, including partners, counsel and associates. Both firms also experienced revenue dips – Locke Lord’s gross revenue fell 3.2 percent to $415 million, while Edwards Wildman’s revenue slipped by 9.4 percent to $311.5 million.

Locke Lord and Edwards Wildman’s pair-up was not unlike two other combinations from the past year and a half, the first one being the tie-up of Patton Boggs LLP and Squire Sanders LLP, which created a firm with more than 1,500 lawyers.

In what was clearly a rescue merger, Ed Newberry, co-managing partner of what is now Squire Patton Boggs, said post-combination that financial pressure and a steep decline in revenue forced him to look to the merger solution.

The other striking combination of this year was Morgan Lewis & Bockius LLP’s November acquisition of more then 220 attorneys from the struggling Boston-based Bingham McCutchen LLP. Though not exactly a traditional merger, the unique deal – best described as a massive lateral acquisition – caught the attention of lawyers and legal analysts nationwide.

Legal experts say that oftentimes a rescue merger can be a slippery slope.

“When a firm is perceived to be wounded – they’ve had bad financials, or a lot of defections – that can potentially damage the acquirers reputation,” legal recruiter Sandy Lechtick said.

“It’s a drag on profits any time you take on an under-performing entity,” said Gary Miles, legal recruiter of Alan Miles and Associates Inc.

William J. Perlstein, partner and former co-managing partner at Wilmer Cutler Pickering Hale and Dorr LLP who led the merger between Boston-based firm Hale and Dorr and the Washington-based firm Wilmer Cutler & Pickering 10 years ago, said completing a merger in order to resolve issues is “very bad idea.”

A merger is a major event, he said. No matter the size it is disruptive and challenges the structure of a firm.

“You should ask yourself why you are doing a merger. If a firm is doing a merger because it has significant problems that it hasn’t been able to address, that is not good.”

Significant problems could include shrinking practice groups, issues with compensation, or the lack of opportunities for younger associates to grow.

The WilmerHale merger was a win-win, legal recruiters say, but others are not so lucky and have to make necessary adjustments before merging, or end up seeing the fallout after combining.

For example, when Bingham Dana merged with San Francisco-based law firm McCutchen, Doyle, Brown & Enersen in 2002, many lawyers were purged after the combination, Gary Miles said. On the other hand, in 2009 when Bingham McCutchen acquired McKee Nelson, a deal brokered by Alan Miles & Associates Inc., McKee first shed groups of lawyers in order to “right-size” before the combination.

Some firms engage in merger talks but never seal the deal. At the end of last year, California-based Orrick, Herrington & Sutcliffe LLP and Pillsbury Winthrop Shaw Pittman LLP out of New York called off ongoing merger talks, citing conflicts of interest between the two firms. Discussions about combining the two firms – roughly 1,000 lawyers from Orrick and 600 from Pillsbury – had been ongoing since July 2013.

Other firms have met similar fates in the past. Client conflicts were allegedly to blame for the end to merger talks between the now defunct Howrey LLP and Chicago-based Winston & Strawn LLP in 2011. Morgan Lewis ended merger talks with Brobeck Phleger & Harrison in 2003, but was able to grab more than 150 former Brobeck attorneys after the firm collapsed shortly thereafter.

Having an increased presence on the West Coast, particularly California, has historically been a major draw for law firms looking to combine with or acquire another firm, and 2014 was no different, with firms overwhelmingly setting their sites on both California and Texas.

Analysts say that the two regions are ripe with legal opportunities, especially technology and entertainment in California and the energy and intellectual property markets in Texas.

Many of the mergers in Texas and California were on the smaller scale. Hinshaw & Culbertson LLP combined with 45-lawyer Los Angeles insurance defense firm Barger & Wolen LLP while Fox Rothschild LLP and Quinn Emanuel Urquhart & Sullivan LLP each absorbed local boutiques in Texas.

Though key markets in the U.S. were an important factor in mergers this year, international expansion remains a high priority in law firm expansion. Firms like Hogan Lovells, DLA Piper and Baker & McKenzie each absorbed boutiques or small firms in Mexico, Prague and South Africa.

Even the newly formed Squire Patton Boggs welcome a small firm from Toyko into the fold over the summer.

Experts say that international mergers will continue to increase. Firms with aspiring international goals have witnessed the success of others like Baker & McKenzie and DLA Piper, and feel like they need to follow suit in order to compete, Lechtick said.

“They want to have more bandwidth and more critical mass in more practice areas,” he said. “The trend is absolutely going to continue.”

But expanding internationally is no easy feat, and some firms recognize that doing so will be both costly and risky. As such, there are many U.S. firms that feel they can maintain a strong global presence without having overseas offices.

Legal recruiter Larry Watanabe said the increasing number of law firm mergers indicate that there will continue to be a growing separation between the nation’s top 20 to 25 firms – in terms of revenue – and the rest of the top 100 firms.

He said the “costs and risks involved in operating a truly global law firm are such that those without the necessary infrastructure cannot compete effectively in these markets.”

alexandra_schwappach@dailyjournal.com

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