Thacher Proffitt & Wood didn't have a lot of time left when Sonnenschein Nath & Rosenthal entered the picture two weeks ago.
The announcement late Sunday that Sonnenschein would hire 100 lawyers from the Wall Street firm signals the end of Thacher, which saw its fortunes fall as the securitization market collapsed. A partner at Thacher confirms the firm is expecting to announce dissolution plans by Dec. 31. Yet it could have been much worse had a deal not been struck by then or under other arrangements, lawyers involved in the transaction say.
Thacher entered 2008 already struggling financially. The firm had suffered a dismal 2007, with gross revenue growing only 1.6 percent to $194.5 million and profits per partner dropping 22.1 percent to $1.02 million. The year to come didn't treat the firm much better, especially come September, when several bank clients either collapsed or went into hasty mergers.
"The firm's been under significant pressure in this environment and had been looking at a lot of different strategic opportunities," says Robert McCarthy, chairman of Thacher's planning committee.
Partners began to defect, most recently to Greenberg Traurig, Hogan & Hartson, and DLA Piper. Thacher's banks, including Citigroup, were pressuring the firm to do something quickly, a source at Thacher says. The banks as lenders would have had the option to call in the loans, as happened with Heller Ehrman and Thelen. The expectation was the firm had to find a solution by New Year's Eve, the source says.
For months, Thacher had tried and failed to convince King & Spalding to acquire the firm outright. Discussions with the Atlanta-based firm to instead hire a chunk of its lawyers had plodded along for weeks. A deal to hire about 75 lawyers was close, but still not final, two sources at the firms say. With time running out for the 150-year-old firm, Thacher's lawyers began talking to others, including Sonnenschein.
"We had been talking to a couple of groups of Thacher partners for a couple of weeks," Sonnenschein Chairman Elliott Portnoy says. One was a group of real estate lawyers led by Donald Simone, the chair of the practice at Thacher. (Portnoy declined to name the other group.)
Then almost two weeks ago, Portnoy says Sonnenschein became aware there might be an opportunity to speak with a broader group of Thacher lawyers. Those included the heads of key practice groups and client engagements, Portnoy says. A legal consultant suggested to Thacher partners they consider the bigger deal, McCarthy says.
Sonnenschein's entry into the situation came while talks with King & Spalding continued. "We have great respect for King & Spalding," McCarthy says. "But the talks were not at a stage where we felt that they would progress to a transaction that was most in the interests of a broad number of people at Thacher."
The deal Sonnenschein offered the Thacher lawyers, though, came off as much more appealing than the one King & Spalding had on the table. Sonnenschein was willing to hire 25 more lawyers than King & Spalding's latest offer, a source at Thacher says. Sonnenschein also was willing to hire more support staff, allowing Thacher to save more jobs.
Sonnenschein also allows Thacher, at least for part of next year, to remain in some of its space at Two World Financial Center in downtown Manhattan, an important factor for Thacher given its historical roots. Thacher Proffitt had offices in Two World Trade Center on Sept. 11, 2001, and remained committed to downtown Manhattan's revitalization, McCarthy says.
Sometime last week, the Thacher partners informed King & Spalding of the talks with Sonnenschein, McCarthy says. News of King & Spalding's disappearance leaked out as Sonnenschein partners voted Friday to hire the Thacher lawyers. A firmwide memo on the announcement was distributed Sunday night.
(A spokesman for King & Spalding, when contacted for a comment, referred to a statement from last week: "King & Spalding regularly explores opportunities. As a matter of policy, we don't comment on rumors in the market.")
The hires include 40 partners, including managing partner Paul Tvenstrand and the heads of Thacher's structured finance, corporate and real estate groups. Also joining are four litigation partners. Two other litigation partners, including practice head Richard Hans, made separate moves to DLA Piper last week.
Given how badly Thacher's structured finance practice was hit by the current financial crisis, it's fair to ask why Sonnenschein would want to hire 100 of its lawyers. The hires are part of a long-term bet, Portnoy says. When the markets eventually rebound, Portnoy says Sonnenschein will be in a position to capitalize on the resurgence of structured finance work. "This is an investment not in 2009 but in the future," he says. Nevertheless, Sonnenschein is hedging its bets and has structured the deal so that, assuming the economy remains dismal throughout 2009, the Thacher hires won't hurt the firm's revenue. The number of lawyers is aligned with projected client needs for next year, Portnoy says.
"We structured the lateral additions so it will be net income positive in 2009, using the most conservative approach," he says.
In 2007, Sonnenschein had $478 million in revenue, up 4 percent. Profits per partner reached $915,000, up 10.9 percent. But this year, Sonnenschein, like other firms, has felt the pinch of the recession. In two separate rounds of layoffs, the firm cut 62 lawyers.
The Thacher Proffitt partners also are hopeful that they will be able to keep a $500,000 contract with the Treasury Department. Thacher put in its bid for the contract Dec. 2, and won it Wednesday. The partners on the contract -- McCarthy, Eric Klingenberg and Jeffrey Murphy -- are all joining Sonnenschein, though the firm has not yet spoken with the Treasury Department, Portnoy says.
What's left now is to take apart Thacher. McCarthy says the firm has spent Monday informing associates and staff of the news. The 60 associates that'll come to Sonnenschein have not yet been picked. It's unclear what will happen to the remaining 75 lawyers, including 14 partners. Dissolution is imminent, though, and expected by Dec. 31. The Thacher lawyers will begin work at Sonnenschein the next day.
"The plan has not been adopted by the partnership, but I think it would look toward the end of the year," McCarthy says. "We are all here working to handle Thacher's affairs."
Additional reporting by David Bario.
This article first appeared on The Am Law Daily blog on AmericanLawyer.com.
