Tag Archives: law firm mergers

ANOTHER BIG LAW FIRM COMBO?

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You might think that the leaders of SNR Denton would pause to take a breath after completing the firm’s March 2013 merger with Paris-based Salans and Canadian-based Fraser Milner Casgrain. But according to published reports, almost immediately after closing the Salans/FMC deal to become a 2,700-lawyer mega-verein, Dentons began discussions to add yet another contingent — McKenna Long & Aldridge and its more than 500 attorneys.

As I wrote almost a year ago, the leaders of what had been SNR Denton boasted that they had used no strategic legal consultants or advisers in the process that led to its French-Canadian three-way. But they did have “branding and advertising advisers” who recommended the entity’s new name, Dentons.

I don’t know if Dentons’ leadership is getting advice on its current potential merger, but if it goes through, the McKenna Long & Aldridge brand seems likely to disappear — as did Sonnenschein’s, Salans’, and Fraser Milner Casgrain’s. Then again, the Luce Forward Hamilton & Scripps brand disappeared after its 2012 merger with McKenna Long.

The venerable McKenna Long brand won’t be the only casualty. The combined firm would have two offices (each with a significant number of lawyers) in five cities: Washington, Los Angeles, San Francisco, New York, and Brussels. In touting the prospect of creating the world’s third’s largest law firm of more than 3,100 attorneys, no one is estimating the number of likely near-term departures.

Who is being served? Clients?

The rhetoric accompanying most big law firm combinations is usually the same. In response to inquiries about its discussions with McKenna Long, Dentons issued this statement: “Since creating Dentons earlier this year, we have been very clear in our determination to always deepen our capabilities to serve clients in the U.S. and around the world.”

But clients aren’t asking their outside law firms to join with other firms. In fact, most clients understand that no single firm (or collection of firms in a verein) could or should house every attorney most appropriate for their needs throughout the country, much less the world.

Who is being served? Partners of the merging firms?

Perhaps the prospect of financial gain for individual partners underlies the Dentons/McKenna Long discussions. For the Dentons partners who haven’t yet lived through a full year since the Salans/FMC combination, that suggestion seems like a triumph of hope over what is, at best, profound uncertainty.

Maybe the myth that economies of scale accompany the growth of law firms is driving this deal and others that have preceded it recently. But according to law firm management consultants Altman Weil, getting bigger doesn’t make law firms more efficient. It usually works the other way.

On the McKenna Long side, the financial motivation is even less evident. According to the 2013 Am Law rankings, the firm had 2012 average partner profits greater than SNR Denton’s ($930,000 for McKenna Long v. $785,000 for SNR Denton prior to the Salans/FMC merger), along with a better profit margin (26 percent v. 22 percent).

Maybe McKenna Long partners are relying on the verein structure of the combination to preserve their relatively superior economic position. After all, individual firms in a verein retain their financial independence. But as Edwin B. Reeser and Martin J. Foley suggest in their recent article on undisclosed fee-sharing agreements, that structure could also be creating thorny ethical complications when client referrals across member firms within a verein become factors in compensating partners.

Who is being served? Empire builders

For many big firm leaders, growth has become a stand-alone strategic objective. How many of them remember Steven Kumble’s similar view?

Kumble presided over an explosive expansion that, by 1986, made Finley Kumble the second largest firm in the world. As Kumble erected his firm’s global platform from 1977 to 1986, a fellow partner asked him why his goal wasn’t to create the best firm, rather than the biggest one.

Kumble replied, “When you’re the biggest, everyone will think we’re the best.”

He was wrong. As Finley Kumble became one of the biggest firms, no one ever thought it was the best. Through acquisitions of other firms and aggressive lateral hiring of rainmaker partners, Kumble promoted a culture in which money became the glue that held things together — until it didn’t.

In December 1987, Finley Kumble dissolved and its brand became a symbol of monumental law firm failure.

HOWREY’S LESSONS

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If Howrey LLP disappears, most big law leaders will make distinctions; they’ll focus on how their organizations are different from Howrey’s. More interesting are the similarities, especially the universal forces that might render others vulnerable to the highly respected firm’s current plight.

First is the speed with events can overtake seemingly secure institutions — and I’m not referring to the fall of Mubarak in Egypt. On May 19, 2008, the Legal Times hailed Howrey LLP’s chairman Robert Ruyak as one of the profession’s “Visionaries.” He deserved it. During the prior 30 years, his distinguished career enhanced Howrey’s reputation and the business of law in DC. But on February 1, 2011, he and Winston & Strawn’s managing partner Thomas Fitzgerald together urged Howrey partners to act quickly on Winston’s offers to hire about three-quarters of them. The big law world can rapidly take a dramatic and unexpected turn.

Second is the way unprecedented demand for big law services combined with the prevailing business model to create enormous financial paydays that became even larger as firms grew. When Ruyak became chairman in January 2000, Howrey ranked near the middle of the Am Law 100 in average profits per equity partner (PEP — $575,000). It had 325 attorneys (89 equity partners).

Ruyak’s strategy targeted growth in three core practice areas: antitrust, IP, and litigation. As the Legal Times observed, “To achieve that vision, Ruyak knew that the firm had to be bigger, so Howrey went on a merger spree.” It added Houston-based patent firm Arnold, White & Durkee, acquired the antitrust practice of Collier, Shannon, Rill & Scott, and established European offices in London, Amsterdam, Brussels, Paris, Munich, and Madrid.

By 2006, Howrey had 555 attorneys; its 127 equity partners averaged $1.2 million each. After profits dropped in 2007, they soared by almost 30% in 2008 — the biggest percentage revenue-per-lawyer gain in the Am Law 100. Howrey’s 2008 profits were $1.3 million per equity partner — an all-time high.

Third is the fragility that such financial prosperity created for the fabric of many law firm partnerships. When profits plunged 35% in 2009, Ruyak’s partial explanation was that 2008 had been aberrational. Large contingency receipts accounted for much of that year’s non-recurring spike. The firm was still “figuring out how to do [alternative fee arrangements] well.” (The American Lawyer, May 2010, p. 101)

Unfortunately, the revolution of rising expectations was underway; the short-term bottom-line mentality is an impatient and unforgiving two-edged sword. In 2000, Howrey had a clear identity and average equity partner profits of almost $600,000 — seemingly sufficient to keep partners satisfied and any firm stable. Certainly, that amount far exceeded any current big law equity partner’s wildest financial dreams when entering the profession. A decade later, disappointing projections that the firm might reach only 80-90% of its $940,000 PEP target (or $750,000 to $850,000) fed rumors and a perilous media downdraft.

Heller Ehrman proved that lateral hiring and law firm mergers risk sacrificing firm culture in ways that inflict unexpected damage. I don’t know if that has happened at Howrey, but when cash becomes king, partnership bonds remain only as tight as the glue that next year’s predicted equity partner profits provide, assuming those predictions are believed.

That leads to a final lesson: leadership requires credibility. Only two weeks before the remarkable joint message from Ruyak and Fitzgerald, Howrey spokespersons insisted that all was well: “The amount of costs taken out of the firm at all levels — which includes leases, partners, associates, and the like leaving the firm — have made the firm much more efficient,” vice-chairman Sean Boland said. “It’s done wonders for our cost structure, such that we’re going to see some major advantages in 2011. We’re very encouraged by the cost cutting that we’ve done.”

Likewise, one of its outside consultants said that the firm was “getting back to its strengths… What’s happening at Howrey is largely by design.” Maybe so. But from this distance, the parade of top partner departures and Ruyak’s involvement in Winston’s outstanding offers make the design appear curious, indeed.

In May 2008, the Legal Times, concluded with a senior partner’s observation that Howrey had become “a very exciting place to work.” I suspect that’s still true. As with most things legal, the definition is everything.