ASIA: ONE FIRM GOES BIG WHILE ANOTHER GOES HOME

The contrasting headlines are striking. Two days after Fried Frank announced that it was pulling out of Asia, Dentons revealed that its partners had voted to jump in — big time. A week later, a ceremony that looked like a treaty-signing marked the combination of Dentons with Asia’s largest law firm, Dacheng Law Offices. The result is now a 6,600-lawyer behemoth.

A Big Bet

Dacheng and Dentons share some things in common. Both firms are themselves products of rapid inorganic growth. Dacheng was founded in 1992. Its website now boasts more than 4,000 lawyers worldwide.

Dentons resulted from transactions that combined four law firms — Sonnenschein, Nath & Rosenthal, Denton Wilde Sapte (UK), Salans (France), and Fraser Milner Casgrain (Canada) — into an organizational form known as a Swiss verein. Each firm maintains its own profit pool but shares strategy, branding, IT and other core functions. According to its website at the time of the Dacheng deal, 2,600 lawyers carried the “Dentons” brand.

But a brand is not a business, and any brand is only as good as its underlying product. Law firms have a single product to sell: the talent of their personnel. The most important challenge that comes with inorganic growth is maintaining consistent quality. In that regard and perhaps more than any other business, law firms have precious little margin for error.

In responding to anticipated questions on that subject, Dentons global CEO Elliott Portnoy framed the issue, but never really responded to it: “We know our competition will suggest that this dilutes profitability and will raise questions about quality control. But the simple truth is that we’re going to be able to generate more revenue, increase our profitability and position ourselves as a truly multicultural firm.”

The Big Question

Apart from failing to address the quality question, sound bites about multiculturalism don’t answer a central question: What will the culture of the combined organization become?

The practical differences between Dentons and Dacheng are enormous. According to The American Lawyer, average revenue per Dacheng lawyer is $78,000. In the October 2014 America  Lawyer Global 100 listing, Dentons’ RPL was $505,000. Even with separate revenue and profits pools, integrating these two giants will still be something to behold.

For example, the leadership structure of the new entity reads like the fine print on securities filing. The American Lawyer reports:

“The combined firm will also have a Chinese chair, and none of the five vereins will have a majority of board seats. Any single verein can also block a policy it doesn’t agree with. In the combined firm, the global board will be increased from 15 to 19, with five seats for the Chinese verein and the same number for the U.S. verein. Andrew says the future number of Chinese seats will be adjusted according to the verein’s revenue growth. The chair of the global board, which includes all five vereins, will be Peng; Portnoy will remain the firm’s global CEO, and Andrew will continue to be the firm’s outward face as global chair of the combined firm.”

The Big Risk

The principal question that any leader embarking on a merger of equals should ask is: What happens if it fails? Among other things, leadership requires risk management. Anticipating worst-case scenarios might lead to decisions that outsiders view as too conservative. But the downside consequence of failing to consider those scenarios can be fatal. Just ask the former partners of Dewey & LeBoeuf.

In that respect, the nearly simultaneous decision of Fried Frank to exit Asia after a nearly decade-long effort to gain traction there is interesting. That firm’s China entry began in 2006 with lateral hires from Hong Kong. A year later, it opened an office in Shanghai. But it began deliberating the fate of its Asia presence in 2009 before reaching its recent decision to leave.

According to firm chairman David Greenwald “discipline and good business judgment” led the firm to close its China offices. He deserves credit for a tough decision and forceful action. Calling the time of death on any failed effort is never easy.

In commenting to the American Lawyer about Fried Frank’s departure, law firm consultant Peter Zeughauser said, ““Nobody wants to admit defeat, but Fried Frank might be the canary in the mineshaft. China has always been a hard market, and with the local firms getting much stronger and starting to capture the lion’s share, it’s not getting any easier. Some firms will view it as a necessary investment for the future, but for others, it’s just not worth it.”

Different Approaches; Different Outcomes?

Published reports suggest that Fried Frank initially went into China hoping to capitalize on its existing relationships with U.S. clients — including Goldman Sachs and Merrill Lynch. Dentons appears to have a dramatically different strategy: joining forces with the largest of the China-based firms that Zeughauser identified as getting stronger.

Whatever else happens, the leaders of Dacheng-Dentons can say that they once presided over the largest ever lawyer branding experiment. Especially for Dentons, it involves a big bet. For the sake of everyone involved, let’s hope it’s on the right horse.

A BIG LAW FIRM THREE-WAY

With Hurricane Sandy and the election dominating last week’s headlines, news of another blockbuster merger didn’t receive the attention that it deserved. Later this month, the combination of SNR Denton, the Canadian firm (Fraser, Milner & Casgrain – FMC), and Paris-based Salans will create a 2,500-attorney enterprise known as Dentons, assuming their respective partners approve the merger. The transaction merits a closer look.

Not so long ago

Twenty years ago, Elliott Portnoy graduated from Harvard Law School. In 2002, he joined Sonnenschein, Nath & Rosenthal. Prior to that, he’d headed the public policy group of Arent Fox, an Am Law 200 firm, in Washington, D.C.

In June 2006, at age 40, Portnoy became the youngest chairman in Sonnenschein’s history. At the same time, the firm released a new strategic plan whereby it would increase average equity partner profits from $800,000 to $1.4 million by 2008. That didn’t happen.

In 2007, Sonnenschein had 600 lawyers and average partner profits of $915,000, but since then it hasn’t seen profits numbers that high. Central components of its strategy have been the aggressive recruitment of lateral partners and the pruning away of others. In early 2008, 37 lawyers and 87 non-attorney employees received their walking papers. By year-end, average partner profits had dropped to $805,000. Of course, the onset of the Great Recession contributed to that decline, but many other firms weathered the storm with much less damage.

Time to merge

The 2008 drop in average partner profits didn’t seem to affect Sonnenschein’s strategic plan. Aggressive lateral hiring continued, including 100 lawyers from failing Thacher, Proffitt & Wood in December 2008. Average partner profits kept dropping — to $780,000 in 2009. The following year, 2010, brought the ultimate lateral hiring event: Sonnenschein’s merger with U.K.-based Denton, Wilde & Sapte to create a 1,200-lawyer firm.

As a Swiss verein, the two firms retained their independent financial status. But according to the Am Law Global 100, SNR Denton’s first full year as a combined entity produced overall average partner profits of $700,000 in 2011. The former Sonnenschein side of the firm reported $880,000 in average partner profits, so Portnoy heralded the merger a success and “not a destination, but a part of the journey.”

The journey continues

In 2011, SNR Denton was one of several firms exploring merger possibilities with Dewey & LeBoeuf as it careened toward disaster. According to the Wall Street Journal, Sonnenschein’s leadership had named its proposed deal “A Phoenix Rises from the Ashes” and contemplated a full-scale merger that combined all 1,000 Dewey & LeBoeuf attorneys with SNR Denton. Borrowed money would have financed the transaction — a tactic apparently drawn from the big law firm “lessons not learned” list.

Unexpected bad news may have saved SNR Denton from itself. According to the Journal, the deal was gaining momentum when it cratered after Dewey’s revelation that Manhattan district attorney Cyrus Vance, Jr. had opened a criminal investigation into Dewey.

Doubling down on a dubious approach

The journey has now led to the proposed combination of SNR Denton, FMC, and Salans. If consummated, the merger would double the size of the current SNR Denton. If the transaction goes through, what results won’t be a partnership. Whether it would become a profitable business venture for the participants is an open question.

To help answer that question, SNR Denton’s management got limited outside help. According to Portnoy and SNR Denton’s global chairman Joseph Andrew, “branding and advertising advisers” recommended a single-name moniker, Dentons. (Do they know that Dr. Dentons are children’s pajamas with feet?) But Andrew also noted that the firm used no strategic legal consultants or advisers in its process.

I don’t know if the other firms had advisers. Nor do I know if Salans had advisers in 1998, when it blazed a trail by becoming the first major law firm to complete a transatlantic merger, acquiring Christy & Viener. But that transaction didn’t turn out very well.

Maybe this time will be different. For the sake of many fine lawyers and even greater numbers of staff who are relying on management to chart a wise course for three law firms, let’s hope so. Among the most important lessons of Dewey & LeBoeuf are these: the margin for leadership error is slim and the consequences of missteps can be catastrophic.

WHO REMEMBERS FINLEY KUMBLE?

“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?