Following months of speculation and rumors, merger talks between Heller Ehrman and Baker & McKenzie are off.
In a voice mail sent to partners on Monday morning, Heller Chairman Matthew Larrabee cited conflicts as a key reason for the end of the talks. While industry observers say conflicts were probably a major concern, other considerations may have been involved, they said, noting that differences between the two firms would have required major adjustments on both sides. He also said there was an alternative plan in the works and promised to be more communicative.
The end of talks, first reported on the Above the Law blog, is both good and bad news for Heller, observers said. Heller will retain its culture, which might have drowned in the much-larger Baker firm, but the end of the talks once again raises uncertainty over Heller's status. The firm has lost more than 30 partners this year -- just last week the head of the firm's Washington, D.C., office left for Bingham McCutchen. With the merger now off and partners continuing to leave, pressure is on for the firm to take action by either finding another merger partner soon or demonstrate an effective course of action without a merger.
"I would say they need to do something fairly quickly," said Stacy Miller, a recruiter with Miller Sabino & Lee in San Francisco. Miller and others said it's important for the firm to wrap up a merger soon to put clients at ease, which, she said, may not be too hard for Heller, "a marquee law firm."
"My sense is that other firms will be contacting Heller, or Heller will be contacting, or could be in conversations with, other firms," said Richard Matthews, a legal recruiter in San Francisco. A source familiar with Heller said the firm has other candidates in line. Heller Managing Partner Robert Hubbell and a firm spokesman declined to comment on Monday, as did a spokesman for Baker & McKenzie.
A Heller-Baker merger would have created a 4,000-lawyer firm, with Heller contributing about 650 lawyers -- fewer than Baker's current number of equity partners. At face value, the merger made sense. The two firms seemed to match up well on partner salaries, with only a $60,000 difference between the profits per partner reported by each firm in 2007, which hovered around $1 million. That might not be the case in 2008, though, observers said. Baker's PPP is rising, a source familiar with the firm's financial information said.
And while there were major conflicts -- such as which firm's insurance practice would survive a merger, with Heller representing policyholders in insurance fights -- industry observers were skeptical that conflicts were the sole reason the talks were abandoned.
"They are there, there's no question about it, but if you want a merger, in most cases you can work around a conflict situation one way or another," said Friedrich Blase, a consultant with Kerma Partners in New York.
It was rumored that Baker, which has two tiers of partnership, wanted Heller to de-equitize some partners, something that would have met resistance within the firm.
There are concerns over how the end of the long-rumored talks will affect Heller, with some recruiters pointing to failed talks between Orrick, Herrington & Sutcliffe and Dewey Ballantine, which ended with Dewey losing some lawyers, and between Baker and Coudert Brothers, which ended with the dissolution of Coudert.
"Are you going to see partners disappearing in the next two weeks, and maybe whole offices disappearing? Or are you going to see a relatively stable period as you saw with Dewey after the merger collapsed?" asked Blase, who added that he didn't expect to see Heller face the same difficulty those firms did after failed talks.
"Can they pull off another merger? Yes," he said. But still, "the hawks are gathering," Blase said, and the firm will have a hard time fighting them off.
"Heller has a huge upward battle to pull off another merger or to come back somehow with the diminished partnership that they already have."
