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With Dip in Economy, Are Associate Layoffs on the Horizon?
The Legal Intelligencer
August 28, 2007
With this dip in the economy and a potential credit crunch, some law firm leaders are predicting layoffs in what have been the most lucrative practice groups over the past four or so years -- structured finance, real estate and corporate mergers and acquisitions.
Others say an economic downturn is an opportunity for bankruptcy and litigation practices and corporate attorneys will just adapt.
So could the effects of this economic downturn -- including the thousands of layoffs in the subprime lending market -- mean future layoffs of law firm associates? Well, it's a touchy topic.
"Future layoffs are a realistic possibility, and they would come in the areas of corporate finance and real estate," Duane Morris Chairman Sheldon Bonovitz said. "This is by reason of the turmoil in the debt markets which has made finance of many transactions in the pipeline problematic or not feasible."
The firms that will be hit the hardest, he said, are ones focusing on financings and securitizations as well as leveraged buyouts. Litigation, bankruptcy and employment law would then pick up, Bonovitz said. Practices like health care, intellectual property and energy would probably be immune from any hits, he said.
While the law goes in cycles and corporate attorneys could focus on workouts when times are tough, Bonovitz said he thinks times may call for more drastic measures, and there is a "significant risk of layoffs." He was, however, quick to point out that Duane Morris was not in that position, because it has focused on becoming highly diversified and hasn't been too involved with the public debt markets.
Bonovitz equated the current economic picture with two other dramatic market turns that affected the legal industry.
The first, he said, occurred in the early 1990s with the savings and loan scandals. The second was in 2002 with the burst of the dot-com bubble, Bonovitz said.
FIRMS GOT SMARTER
Not everyone can envision this current cycle becoming so grim. Consultant Peter Zeughauser of the Zeughauser Group in Orange County, Calif., said most firms have learned their lesson from the early 1990s and earlier this decade and have become more conservative in their hiring practices.
"I would be surprised if there was any kind of a wave of layoffs," he said.
Firms are at a war for talent and often can't find enough corporate attorneys.
"I can't even imagine a firm laying off an M&A lawyer," Zeughauser said. "It's beyond comprehension."
A mergers and acquisitions practice is the most profitable, the most difficult to build and "you just don't let go of that talent in a downturn," he said.
Mark Jungers, a recruiter with Major Lindsey & Africa in Chicago, said he has been hearing firms talk about the possibility of layoffs and there is a concern. He hasn't, however, heard any of his large-firm clients seeing a decline in work.
There still aren't enough corporate associates to satisfy firm needs and transactional practices are still working hard, he said.
"There's a cloud off in the distance," Jungers said. "Maybe it's going to rain on us, maybe not."
K&L Gates Chairman Peter Kalis said firms should have learned their lesson at the dot-com boom that they will suffer if they are overcommitted to one client industry sector. Brobeck Phleger & Harrison was a perfect example, he said, of a firm that fell after the dot-com boom.
"Where I came from, you learned at an early age when you buy bar stools, the more legs the better," Kalis said.
His firm has focused on becoming highly diversified, and with that model, Kalis said he has seen challenges and opportunities come at the same time.
For example, firm partner Michael J. Missal was named in June as the examiner in the bankruptcy proceedings of subprime lender New Century Financial Corp.
"Law firms that are positioned for the long run don't fear the business cycle and its inevitable moves as much as law firms that are positioned for this quarter or this year's profits," Kalis said.
While he said any potential layoffs would depend on the individual firm, there are some firms who haven't learned their lesson.
HISTORY REPEATS ITSELF
In the late-1980s the savings and loan market was white-hot, he said. In the late-1990s, the dot-com boom had endless support despite the fact that the companies weren't showing any earnings, Kalis said.
If law firms have created business models around subprime lending activities, then they didn't learn the lesson, Kalis said.
Drinker Biddle & Reath Chairman Alfred Putnam said corporate work would naturally lag if the economy takes a downturn, but he hasn't seen that yet. He said he couldn't predict where the industry would be in a few months, but he hasn't had any distress calls from clients yet.
"Plainly there's a lot of layoffs going on in the financial side of the world," Putnam said.
That could, however, result in more, not less, work for at least the immediate future, he said.
When the economy slows, the legal industry doesn't see a lag right away, he said. But if a firm is representing one of the companies with economic troubles, that client may first look to cut its outside legal costs, Putnam said.
John Iino heads up Reed Smith's corporate and securities group out of the firm's Los Angeles office. He said the practice has seen some deals put on hold, but they are getting new deals at the same time.
He said he was relieved to see the Federal Reserve was intervening -- the central bank infused about $40 billion into the banking system in the past few weeks to increase liquidity and ease fears of a credit crunch.
"Rather than ... a burst of a bubble, we're hoping for a soft landing," Iino said.
Several firms are bulking up in litigation and bankruptcy to soften any potential blow, but Iino said Reed Smith is also being "very bullish" in continuing to grow in the mergers and acquisitions area.
Bonovitz said New York firms -- which faced layoffs in the past two down cycles -- could be hit the hardest. He said most Philadelphia firms aren't deeply entrenched enough into the financial markets to be affected as much.
The firms that have been jettisoning practice areas to focus on the finance and real estate markets could be in a tough spot, Bonovitz said.
Iino said he would love to see a New York firm ditch corporate attorneys because it would create opportunities for his firm.
He said Reed Smith doesn't see any need for a change or a reaction to the current market, but it will be interesting to see how things play out in the fourth quarter.
Zeughauser said short of a "meltdown of the global economy," firms aren't going to face layoffs.
"In terms of normal ebbs and flows, even with fairly steep ebbs, law firms aren't going to layoff," he said.
Susan Raridon Lambreth of Hildebrandt International said that as expected with most economic downturns, bankruptcy and securities litigation might pick up while private equity, real estate and mergers and acquisitions are already slowing down.
She said regardless of all of that, it seems like firms are still just buried in work. If corporate practices are a strategic function of a firm, then that firm will buckle down and absorb the loss during the bad times, she said. If it isn't a core practice, then firms may ask people to leave.
Lambreth said firms that cut down on corporate practices in the earlier part of the decade suffered when the economy picked up.
Firms do anticipate seeing slower growth in profits for 2007, Lambreth said, but that is mainly due to associate salary increases.
Fox Rothschild recently announced that it would not raise first-year associate salaries. Firm Administrative Partner Mark Silow said firms that have been increasing over the past few years may feel the pains of those decisions in 2007.
"I have to believe a lot of firms made these decisions to increase starting salaries at a time when business was more profitable," he said.
Silow said some firms must be regretting those choices now. In past economic cycles in which layoffs were seen, it was the more leveraged firms with higher salaries that had to face layoffs, he said.
While Silow said Fox Rothschild doesn't anticipate facing any layoffs, firms overcommitted to certain practices will either have to absorb the losses or get rid of attorneys.
