Tag Archives: Rowe & Maw

ANOTHER DAY, ANOTHER LAW FIRM MERGER

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It’s now ancient history, but in 2002 Chicago-based Mayer, Brown & Platt (850 lawyers) joined with U.K-based Rowe & Maw (250 lawyers) in a law firm merger that seemed breathtaking. Today, combining firms has become a universal business strategy. Fourteen law firm mergers in the third quarter of 2011 alone brought this year’s total to 43.

Evaluating these ultimate lateral hiring events — wholesale combinations of independent enterprises — is a two-step process: first, defining success and, second, allowing sufficient time (measured in years) to observe results. Senior partners orchestrating such transactions have vested interests in making them look good. So do the management consultants cheering them on. Once they undertake a merger strategy, leaders take herculean steps to vindicate it. Their spin can distract from the downside, but it’s there.

Defining success

Management and its outside consultants often define success in deceptively simple terms: getting bigger and growing equity partner profits. That can be superficial and misleading.

Growth alone doesn’t create value. Recently, Minneapolis-based Faegre & Benson and Indianapolis-based Baker & Daniels announced the creation of Faegre Baker Daniels. Whatever economies of scale exist in the delivery of legal services, firms the size of Baker (320 lawyers) and Faegre (450 lawyers) seem large enough individually to have triggered them long ago. Will their 770-attorney firm operate more efficiently than two components half that size? Doubtful.

But this is certain: combined firms face more potential client conflicts than if they’d remained separate. That results from the interaction between the Rules of Professional Responsibility and arithmetic.

Some leaders promote a “bigger platform” as a way to entice prominent laterals. But bringing in seasoned outsiders makes preserving any firm’s culture even more challenging.

Culture shock

Then again, maybe there’s little culture to preserve after most significant combinations. Baker & Daniels is in the Am Law 200; so is Faegre. Together they’ll move into the Am Law 100. Is that a good thing?

Merger leaders always proclaim their determination to preserve each firm’s culture. But, those attending the first Faegre Baker Daniels partnership meeting won’t know half the people in the room. Likewise, being one of 100 equity partners is different from being one of more than 200 — and not in a way that enhances collegiality or a sense of community. Looking for a central identity or a geographic core from which senior partners working together can produce common principles? The new Faegre Baker Daniels firm won’t even have a national headquarters.

The winners

In the end, most merger proponents pander to the simplistic hope that synergy of the combined entity will produce value greater than the sum of its partner profits parts. If that happens, it’s a good deal economically for the survivors at the top. But many others may find themselves on the wrong side of a merger’s “restructuring opportunities” — a euphemism for shrinking the new equity partnership.

According to the latest Am Law listing, Baker & Daniels’ partnership has two tiers (equity and non-equity) and an equity partner leverage ratio of 1.71. Faegre has a single equity partner tier and a leverage ratio of 1.09. Something’s gotta give.

Faegre’s chairman Andrew Humphrey, a transactional attorney who will serve as the combined Faegre Baker Daniels chief executive partner, said the new firm would have a “unified compensation structure.” He plans to manage “partner expectations” and “incentivize people the right way.” I don’t know what he has in mind, but some current partners probably won’t like the results of that exercise.

Likewise, mergers put pressure on leaders to push everyone harder. They want to cite increases in billings, billable hours, and leverage as proof that the new institution is better. Never mind that no one will ever know what the base case — no merger — would have produced for either firm independently.

Even a short-term increase in partner profits doesn’t prove the long-term value of the transaction. For example, Howrey’s merger and lateral hiring binge began in 2001. Seven years later it had record profits, but by early 2011 the firm was gone.

I know, I know — Howrey was different. As I warned at the outset, beware of that spin-thing.

WHO REMEMBERS FINLEY KUMBLE?

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“I just don’t see the need to cram two firms with around a thousand lawyers [each] together. It made no sense,” one Akin partner reportedly told the National Law Journal shortly after the collapse of Akin-Orrick merger talks.

The number of law firm mergers in 2010 is down from recent years, but look at the headliners: Sonnenschein – Denton; Hogan & Hartson – Lovells; Reed Smith – Thompson & Knight; Orrick and anyone. An earlier consolidation wave produced K&L Gates, DLA Piper, Bingham McCutcheon and others.

How much of this activity proceeds from the simplistic premise that bigger is always better?

When I was a young partner in my large firm, Finley Kumble became a disaster that struck fear in the hearts of big firm expansionists. During the early 1980s, Finley rocked the legal world as it signed up high-profile figures and raided other firms’ superstars, some of whom earned the then-staggering sum of $1 million annually. From only 8 lawyers in 1968, Finley became the nation’s second largest firm by 1985.

It promoted itself as a national powerhouse run on principles of meritocracy. The more business a lawyer generated, the more money he or she took home. Money was the glue that held the partnership together. Does that sound familiar?

But Finley grew too fast, assuming debt for office expansions and promising outsized paychecks to big name lateral hires. As revenue dollars dwindled, the firm disintegrated. With more than 650 attorneys at the time of its dissolution in 1987, it was still one of the nation’s largest firms.

The ghost of Finley Kumble haunted Biglaw leaders for years. Some saw its end as confirming that even large, diverse firms possessed their own identities. Mixing cultures through aggressive recruitment of name players with portable practices was a mistake. Others concluded that senior attorneys and their egos couldn’t survive as a single cohesive unit if their sole point of intersecting common purpose was greed. Still others saw the failure as an inevitable consequence of unrestrained growth. Finley proved that there was a limit on the size that any healthy large law firm could attain. No one knew the outside boundary with certainty, but crossing it was fatal.

What did today’s Biglaw managers learn from the lessons of Finley Kumble’s demise? Probably very little. After all, lawyers excel at distinguishing away precedent that undermines their preferred positions.

In that respect, modern proponents of growth through merger and high-profile lateral acquisitions can point to many differences between Finley and today’s firms. For example, the use of MBA-type metrics that focus on short-term profits at the expense of non-monetary values is now pervasive throughout Biglaw. In that respect, the earlier potential for cultural clashes has diminished as  current year equity partner profits have become the universal coin of the realm. Likewise, lateral movement at all levels — especially among rainmakers who were Finley Kumble’s signature recruits — has become commonplace. Indeed, the legal world has become more hospitable to Finley’s central mission and modus operandi.

It would be interesting to hear from former Finley attorneys on the question of how today’s large firms differ from what their old firm once was. Perhaps Finley was just ahead of its time. Or perhaps some major players in Biglaw law are about to see their times change. Or maybe the large firm segment of the profession is proceeding toward the same countdown that big accounting firms have already experienced: From Big 8 to Big 6 to Big 5 to Big 4 — and the race is on to be one of those few.

Here’s the key question: Who benefits in the long run from the rise of mega-firms? Management consultants embrace strategic fits producing scale economies that supposedly benefit clients and equity partners. Perhaps they are correct. But who considers whether hidden costs include undermining community, exacerbating attorney dissatisfaction, or imperiling broader professional values?

Personally, I enjoyed the time when I recognized most of my equity partners at the firm’s annual meetings. Who is willing to develop or consider a metric by which to measure that?