LB141 p38-44
26/1/04
2:57 pm
Page 38
New York mergers
Bigger apples New York is the legal market that every law firm with global ambitions needs to get into, but a spate of mergers in recent years has swallowed up many of the best takeover targets. Merging into Manhattan just got that much harder TAL GUTSTADT
JONES DAY ENDED 2003 JUST AS IT began: investing in London and New York. The year kicked off with a London merger with Gouldens, and ended with a New York merger with 100-lawyer Pennie & Edmonds. Overnight, the firm topped 250 lawyers in the city that never sleeps: no mean feat. Firms on both sides of the Atlantic looked on longingly – an IP boutique may not be top of the wish list for all of them, but a greater bite of the Big Apple certainly is.
York, and they need to do it pretty soon. At the moment it is their American rivals who are perfecting the art of the Manhattan merger, and there aren’t too many dancing partners left. The English can learn a lesson or two from their transatlantic cousins. Here’s how.
Most of the Magic Circle has spent four years sniping at Clifford Chance’s Rogers & Wells adventure, but there’s no denying they all need to find a way to crack New
Merger most wanted
38 Legal Business February 2004
When Mary Cranston took the helm at San Francisco’s Pillsbury Madison & Sutro in
LB141 p38-44
26/1/04
2:57 pm
Page 40
New York mergers
THE TARGET NEW YORK FIRMS Firm Wilson, Elser, Moskowitz, Edelman & Dicker
Revenues in 2002 $167m
Lawyers 565
Specialism Full service
Offices 16 US; London; over 200 lawyers in New York
Hughes Hubbard & Reed
$161m
290
Kramer Levin Naftalis & Frankel
$150m
252
Full service with international litigation and arbitration expertise Full service
Fish & Neave
$117.5m
180
Intellectual property
Five US; Tokyo; Paris; over 150 lawyers in New York New York; Paris (has an association with Berwin Leighton Paisner) New York, Washington, DC and Palo Alto
Kenyon & Kenyon
$114m
200
Intellectual property
New York, Washington, DC and Silicon Valley
Patterson, Belknap, Webb & Tyler
$97m
175
Full service
New York
Brown Raysman Millstein Felder & Steiner
$93m
212
Technology and intellectual property
Thacher Proffitt & Wood
$88m
174
Schulte Roth & Zabel
$194m
303
Commercial and financial transactions and litigation Investment management
New York, Los Angeles, New Jersey and Connecticut. (It was the fastest growing firm in AmLaw 200 for 2002 with 33.6% revenue growth.) New York, Washington, DC and New Jersey New York, London Source: Legal Business; The American Lawyer
> 1999, she knew she needed to orchestrate a revival of the firm’s fortunes. With 650 lawyers based largely on the West Coast, the firm had to grow. Where better to head than to the city that generates a massive 36% of the world’s legal spend: New York. Her strategic plan hinged on the creation of a pre-eminent New York position for the firm. It was also vital to stem a descent down the revenue rankings. Although Cranston was determined to lead the firm into merger talks with New York candidates, some Pillsbury partners didn’t share the vision. In a bid to build partner confidence, Cranston called in consultants. They set about convincing the firm, gathering a group of partners, associates, staff and outside legal academics for two days of brainstorming about uncertainties that the business world in general, and the legal profession in particular, faced going forward. The different scenarios that the groups envisioned (including, eerily, a world fraught with international terrorism, and the hijacking of a US airliner by Osama Bin Laden) were sent to the partners, who were asked to formulate strategies that would achieve Pillsbury’s goals. The most common response she received, Cranston
40 Legal Business February 2004
Chicago-based Sidley & Austin took over old-money Brown & Wood. Growth among US law firms in the last three years has been spurred by high-profile mergers. In 2002, eight of the ten fastestgrowing firms in the US achieved their growth through mergers with other law firms, many of them in New York.
True global reach
Gorrell: firms must evaluate strategic practice fit
says, was: ‘We need to merge with a strong New York-based firm.’ Mergers with New Yorkbased law firms are certainly in vogue. Pillsbury eventually linked up with Winthrop Stimson Putnam & Roberts, a mid-size New York firm with offices in the UK, Europe and Asia; Clifford Chance acquired a fractious Rogers & Wells, and
It’s no wonder that firms want a slice of the Big Apple. New York firms traditionally service international banking and corporate giants, making them an obvious choice for suitors looking for a foothold in the global marketplace. It’s also a matter of projecting a certain international image with a New York presence, says Tom Cole, chair of Sidley Austin Brown & Wood’s executive committee: ‘There is a perception from outside the US of a strong New York presence as indicative of a firm’s abilities.’ Although Sidley already had a small presence in New York, the merger with Brown & Wood was a way to ‘take it up a notch’, he says, particularly from a global perspective. The acquisition of true global reach and practice breadth through merger can be the fastest and most cost-effective way to move
LB141 p38-44
26/1/04
2:57 pm
Page 41
New York mergers
ahead into hitherto unexplored markets. Increasingly, firms need to project themselves as international, full-service providers to secure existing relationships with clients in industries which themselves have undergone intense consolidation in the last decade – namely insurance, finance and manufacturing. As Cranston points out, ‘Law is the least consolidated of the professional services, and firms will continue to move in the same direction as their clients, who continue to consolidate and demand greater global and practice capacity, while at the same time seeking to employ fewer law firms for their business needs.’ By way of an example, she points to a Pillsbury client that is determined to trim the number of law firms it employs from 700 to 50. For New Yorkers, there’s a perception that the era of the mid-size firm is coming to a close, and that 500-lawyer firms just don’t cut it any more on a global scale. A takeover by an out-of-town firm can be seen as the way to avoid falling by the wayside. But as Arthur Culvahouse, chair of O’Melveny & Myers, the Los-Angeles-based 750-lawyer firm that recently merged with New York’s O’Sullivan, says, the best merger partner is always ‘someone who doesn’t need to merge’. Lateral growth, once the accepted strategy for achieving greater capacity and entering new markets, is no longer necessarily fast or comprehensive enough. The advantage of merging instead of going down the lateral route also lies in the fact that clients and profits are already in place, while lateral groups need time, resources and direction to start producing revenues.
Size isn’t everything Merging with a New York firm may seem like an attractive option for firms seeking to reposition themselves on a global scale, but the transition process may not be pretty – it can be fraught with perils and hugely costly. This is particularly true as mergers get bigger and more complex, notes Lisa Smith, a director of Hildebrandt Consulting. ‘On the face of it, size can be a problem,’ adds Warren Gorrell, chairman of Hogan & Hartson, an 800-lawyer Washington, DCbased firm which merged with New York’s Squadron, Ellenoff, Plesent & Sheinfeld in March 2002. He highlights the demands a large merger can place on management to
primary role. Cranston agrees: get to know both ‘At the end of the day, culture is firms’ practices and one of the most important attorneys. factors.’ Indeed, without In Sidley’s case, the a coherent long‘chemistry’ was initially estabterm strategy, lished at the most senior levels. growth in size may ‘Both sides found out that they not mean much. functioned as meritocracies, and ‘A merger cannot that they fostered internally be seen as an endsupportive collegial cultures. If all strategy,’ says we hadn’t established that, we Sidley’s Tom Cole. probably would never have An increase in a merged,’ Cole says. The business firm’s size is not a case for merging was scrutinised guaranteed and presented to both firms’ precursor to Cole: ‘be ready to hit the ground running’ management teams, before the increased partner gritty financials were addressed. As a result profits: ‘You cannot create one of the compatibility that was established strong firm from two struggling early on, this was a smooth process, he firms.’ claims. ‘Nobody got stuck on anything.’ Pillsbury understood that But a definitive sense of a firm’s culture concept from the outset, can sometimes prove elusive, and it’s not so Cranston says. As soon as the easy to divine early on what the cultural fit merger was official, the new will be. What firms do have to establish firm started the next level of before moving further with a merger strategic planning, hiring conpartner is what O’Melveny’s chairman sulting firm McKinsey to help terms ‘an alignment of strategic values’. As devise a long-term strategy. a starting point for a meaningful exploWithin five months of the ration of a union, the prospective partners merger, Pillsbury had formulatmust agree on a common vision for their ed and adopted a strategic threefuture. Gorrell points out that, prior to a year plan for the new firm. merger, ‘both firms must evaluate and understand the resulting strategic practice If the practice fits… fit very carefully’. The courting of a merger Indeed, the most successful New York partner, says Cole, is a process mergers are characterised by a thorough in which cultural fit plays a understanding of how the firms will work as a combined entity and how that meets their goals. For Sidley, New York was the first stop on the way to global expansion. After a slump in the 1990s that saw its profits lag behind comparable firms, the firm decided to focus and regenerate, and the result was the departure of 25 lawyers in 1999 and the reduction of another 45 partners’ equity stakes in 2000. Although it was a 900-lawyer firm, Sidley had hardly any international capacity other than a London office, and its New York office had neither the Arthur Culvahouse, O’Melveny & Myers critical mass nor prestige to woo top-tier clients. Many of Sidley’s >
‘A merger’s success can only be determined by looking at the merging firms’ strategic goals and the extent to which the merger has brought the new firm closer to them.’
February 2004 Legal Business 41
LB141 p38-44
26/1/04
2:57 pm
Page 42
New York mergers
> New York lawyers were kept busy doing work for Chicago clients. So Sidley turned its attention to 425lawyer Brown & Wood, a Wall Street institution with a client base predominantly composed of investment banks and financial institutions. Brown & Wood was a highly specialised firm with a core practice representing the issuers and underwriters of asset-backed securities. For a long time, it had sought to break out of the investment banking niche, fearing that it was overly dependent on the capital markets and vulnerable to an economic downturn. It had encountered difficulty wooing legal talent over on a piecemeal basis, and things
Culvahouse: mergers need clear top-down direction
O’Sullivan, in turn, saw O’Melveny as a way to meet its strategic goal of establishing a larger geographic footprint, which grew out of the realisation that many of its private equity fund clients were going global. O’Sullivan’s decision was also influenced by the sharp growth in partner profits at O’Melveny in 2001 and 2002, jumping from roughly $700,000 per partner in 2000 to over $1m in 2002, bringing them into close alignment with O’Sullivan’s numbers, understood to have hovered above $1.1m. The two firms merged in September 2002. For Pillsbury, a global vision was a driving force behind its merger with Winthrop, but the first motivator was the need for a greater capital markets and banking presence in New York to satisfy Pillsbury’s existing clients. With only two attorneys in the city, and virtually no international presence, the firm had seen its national ranking by revenue, as published by The American Lawyer, drop from 28th in 1990 to 46th in 1999, and it had been bleeding lawyers. The move to find Winthrop was seen by some as a way to halt an ageing firm’s steady descent.
‘A merger cannot be seen as an end-all strategy. You cannot create one strong firm from two struggling firms.’ Tom Cole, Sidley Austin Brown & Wood took a turn for the worse in 2000 when Brown & Wood’s profits per partner decreased more than any other AmLaw 100 firm. For Brown & Wood, Sidley provided the platform for diversification that it desperately needed. In turn, Brown & Wood’s bread-andbutter corporate work, though often highvolume and low-margin, would open the door to New York’s elite clients for Sidley.
Opposites attract Hogan & Hartson already had a New York corporate, M&A and litigation practice of about 40 lawyers when it started looking for a merger partner in early 2001. What the firm lacked was the critical mass and the corporate practice to be considered a real player in New York, and for that reason it saw Squadron, a 120-lawyer firm with a strong corporate and tax practice, as the right match. Hogan & Hartson got to know Squadron through work for Rupert Murdoch’s News Corp – Hogan on the regulatory side and Squadron on the corporate side; that familiarity influenced the decision to merge. From Squadron’s perspective, it saw Hogan – which contrary to most Washington-based firms was heavily focused on corporate and finance work – as providing a
42 Legal Business February 2004
long-term competitive advantage from a practice growth and stability point of view. Hogan had already proved its stability by riding out the economic downturn: it recorded a 20% increase in gross revenues in 2001. Likewise, in the spring of 2000, O’Melveny’s Culvahouse concluded that his firm was lacking vital transactional depth and scope in New York. O’Melveny was more heavily invested in its litigation practice than most firms of its size – almost 60% of the firm’s lawyers at the time were non-transactional. Culvahouse was considering the firm’s options to strengthen its 120-lawyer New York office’s practice, which was litigation- and IP-focused. O’Sullivan proved to be an irresistible match. With over 90% of its 88 lawyers engaged in prestigious transactional work for private equity clients, the firm was a highly soughtafter merger partner.
Teething troubles Even after a strategic alliance is formed, it’s still a long process before the new firm will start realising the hoped-for synergies and efficiencies. In theory a merger can be an efficient process, resulting in the desired growth and diversification with the only out-of-pocket costs being for integration. These are usually less than the costs of comparable lateral growth. Management needs to smooth out cultural differences, minimise conflicts and related departures and, above all, prepare and plan the communication, marketing and technology resources. (The last can be prohibitively expensive, $18m in Pillsbury’s case.) All this helps perpetuate a sense of business continuity in the new entity. ‘Be ready to hit the ground running,’ Cole says. It’s easy to pounce on departures as a sign of poor transitional management, but in fairness it goes without saying that a firm will encounter some resistance to, and even possibly departures because of, its decision to merge. It’s inevitable that client conflicts
LB141 p38-44
26/1/04
2:57 pm
Page 43
New York mergers
will force some partners to leave. Signals of a merger going awry are when streams of unanticipated departures start to occur. Some departures, however, may actually be in line with the firm’s strategic goals. It should be expected. In anticipation of seeking out a merger partner, a firm will identify practice areas or members of the firm that are problematic or underperforming. That realisation will then underpin part of the merger strategy – namely, to shed, replace or reform poorly-performing practices or individuals. Some firms have experienced a loss of valuable talent in the aftermath of merger: Hogan & Hartson saw at least five New York litigation partners depart; Pillsbury shed a whopping 152 lawyers in 2002, 35 of them in New York; and Sidley lost 27 lawyers in New York in the same year. All this while, on average in 2002, New York firms grew in size, albeit at a slower pace than in previous years. Whatever the reason, conflicts need to be minimised and anticipated, because the ensuing departures affect morale and, consequently, internal and external
perceptions of the merger’s success. A vital aspect of transition planning is getting lawyers from both predecessor firms talking to each other as soon as possible about tangible possibilities. Client teams, previously in use by both Pillsbury and Winthrop, were used by the
merging firms as an organising device for this purpose. Culvahouse suggests that firms must ensure that clear top-down direction exists during the transition period to affect a meaningful integration of the merging firms’ lawyers and practices. ‘In retrospect,’ he laments, ‘I wish that the firm’s leadership had directed more mixing and matching [of attorneys] on deals and cases – that’s the best integration you can have.’ Some firms learned the hard way that the physical integration of offices plays a vital role in the transition. Cole admits that the integration of associates in cities where both predecessor firms had offices did not take place quickly enough – a fact he concedes had an impact on the cultural adhesion of the new firm. Likewise, Culvahouse feels that his firm’s integration process was hampered by the fact that O’Melveny continues to operate out of two separate offices in New York, and will do so until April this year.
Was it all worthwhile? Cranston: shared culture is the key factor
The million dollar question for Cole is not whether a merger is successful, but how a
THE ONES THAT GOT AWAY New York firm
Merged with (year)
Pennie & Edmonds
Jones Day (National) 2003 O’Melveny & Myers (Los Angeles) 2002 Bryan Cave (National) 2002 Katten Muchin Zavis (Chicago) 2002 Sonnenschein Nath & Rosenthal (Chicago) 2002 Hogan & Hartson (Washington, DC) 2002 Sidley & Austin (Chicago) 2001 Pillsbury Madison & Sutro (San Francisco) 2001 Paul, Hastings, Janofsky & Walker (National) 2000 Winston & Strawn (Chicago) 2000 Thelen, Marrin, Johnson & Bridges (San Francisco) 1998
O’Sullivan Robinson Silverman Pearce Aronsohn & Berman Rosenman & Colin RubinBaum Squadron, Ellenoff, Plesent & Sheinfeld Brown & Wood Winthrop, Stimson, Putnam & Roberts Battle Fowler Whitman Breed Abbot & Morgan Reid & Priest
Combined revenues* $1,033m
Combined lawyers 2,100
New York firm’s specialism Intellectual property
$565m
792
Private equity
$337m
784
$314m
543
$287.5m
533
$480m
865
Corporate, securities and real estate Real estate, litigation and corporate finance Telecommunications and entertainment Corporate and tax
$831m
1,377
Asset-backed securities
$416m
639
Full service
$488m
744
Real estate
$442m
784
Corporate
$209m
397
Energy and utility
* NOTE: AmLaw 2003 figures. Source: Legal Business; The American Lawyer
February 2004 Legal Business 43
>
LB141 p38-44
26/1/04
2:57 pm
Page 44
New York mergers
> merger’s success can be determined. Is it a rise in firm revenues? Partner profits skyrocketing? The attraction of big talent and bigger clients? Ultimately, it’s possible that none of these offers true indicia of a merger’s impact. The numbers can help paint a picture of a firm’s performance, in particular vis-à-vis other firms. But it’s important to remember that there are other factors unrelated to the merger that can have an impact, including client performance, economic trends, and defections and attrition unrelated to the merger.
couple of years have hampered some firms’ abilities to realise the benefits they expected to reap from the merger. Such was the case with Hogan’s expectations for the synergies that it would derive from Squadron’s practice, Gorrell admits, as the firm’s new private equity practice suffered in 2002. O’Melveny, too, felt the pinch of the weakened economy, and the deal flow that the firm anticipated as a result of the new practice breadth did not materialise initially, notes Culvahouse. Ultimately, as Isenberg points out: ‘A merger’s success can only be determined by looking at the merging firms’ strategic goals, some of which may not be purely economic, and the extent to which the merger has brought the new firm closer to those goals.’
Deal volumes
Lateral thinking
An increase or decrease in deals can be market-driven, rather than a direct result of a merger. Take Sidley, which in the year following its 2001 merger saw a ten-fold increase in the number of asset-backed securities deals from the previous year. The rise, however, could be attributed to the burgeoning mortgage securitisation industry. Indeed, most top issuer’s and underwriter’s counsel saw their numbers jump in a similar manner in 2001. By contrast, cross-selling opportunities – whether pursued through formal client groups (Pillsbury), management meetings with top clients (O’Melveny), or informal introductions (Hogan) – can provide an important indicator of a merger’s impact. Sidley experienced an influx of Brown & Wood clients approaching the merged firm for a broader range of services. Each merged firm wants to boast that its cross-selling efforts have recently started to pay off in spades, and that existing clients have been eager to take advantage of the firm’s increased capacity. But even with such efforts, the stagnant capital markets of the last
Fast forward to late 2003, and the excited merger talk of two years ago has an air of more sober reflection. US merger activity fell from a high of 82 in 2001 to 53 in 2002 and just 22 in the first half of 2003, with a mere five New York firms involved in mergers during those six months. In part, says Hildebrandt’s Smith: ‘The slowdown in merger activity can simply be attributed to a dearth of attractive candidates.’ With over 300 law firm mergers and acquisitions since 1996 in the US, over 60 of which involved New York firms, perhaps all the good ones are already gone. UK firms have done a remarkable job building global practices that incorporate significantly different cultures. Their success can be attributed to the adoption of a corporate management model with centralised, long-term leadership at the helm – a trend that US firms have been slow to follow. The biggest hurdle to increased transatlantic mergers lies perhaps in the cultural divide, carved, in part, out of US preoccupation with high billable hours and the British practice of lockstep compensation. But in a sign that the differences may be eroding, Clifford Chance recently agreed to modify its compensation structure to attract more laterals and help it to keep its top-billing partners. Perhaps other accommodations, on both sides, will become possible. A new wave of merger-minded UK firms could be heading to New York in the very near future. LB tal.gutstadt@yahoo.com
‘Firms will move in the same direction as their clients, who continue to consolidate.’ Mary Cranston, Pillsbury Winthrop
44 Legal Business February 2004