K&L Gates Looks to Enter Chicago With Bell Boyd Merger

Gina Passarella and Lynne Marek

The Legal Intelligencer

2008-12-05 00:00:00.0

K&L Gates may finally get its wish to be in the Windy City.

The firm announced it was in late-stage talks with Chicago-based Bell Boyd & Lloyd that, if approved by the partnership, would see the two firms merge into a 2,000-lawyer firm in the first quarter of 2009.

Aside from Chicago, the Am Law 200-ranked Bell Boyd has offices in San Diego and Washington, D.C. In a joint statement by the management at the two firms, K&L Gates Chairman Peter J. Kalis said Bell Boyd is well known for its investment management and intellectual property practices.

Kalis said in an interview that the two practices were also strong for K&L Gates but that each firm brought its own general service capabilities to the table as well. He said to enter the Chicago market in general was an important step for the firm that has a presence from Greater China to Europe and the United States. To fill a hole in that footprint in the fourth largest legal market was a "giant step forward" for the firm's entire platform, he said.

According to Kalis, the merger would put K&L Gates among the two or three largest non-Chicago based firms in that city with 225 lawyers in the office there.

Completing this deal would make for the third merger for K&L Gates since the beginning of 2008. It completed a combination with Texas-based Hughes & Luce at the beginning of the year and finalized a deal with Charlotte, N.C.-based Kennedy Covington Lobdell & Hickman in June.

One source connected to the Chicago legal market said that when K&L Gates announces it is in talks with a firm, that generally means it's a done deal.

The source characterized Bell Boyd as a firm "on the decline" because, at about 250 lawyers, it was the wrong size for the Chicago market. The source said Bell Boyd still has a sufficiently large number of good attorneys with good names. The source said the intellectual property practice is still going strong and the investment management practice, while possibly hit by the economy, is a marquee practice that won't go anywhere.

The source compared the merger to other large-scale mergers between Pennsylvania and Chicago-based firms. He said it was similar to Drinker Biddle & Reath's acquisition of Gardner Carton & Douglas and Reed Smith's acquisition of Sachnoff & Weaver. He said all of the Chicago firms were faced with difficulties because of their size in that market.

The source said he wouldn't have been surprised if all of the Pennsylvania firms had spoken with all of the three Chicago firms and just found the best cultural fit for them.

Bell Boyd, like Gardner Carton at the time of its merger, has seen some defections prior to merger discussions. According to an article by The Legal Intelligencer's sister publication, The National Law Journal, Bell Boyd lost groups of partners this year in part over a disenchantment with management's then-unwillingness to grow via merger. The firm lost the leaders of its environmental, bankruptcy and antitrust practices along with 12 other attorneys this year, the NLJ reported. All of the groups moved to larger firms.

At the time, Bell Boyd Chairman John T. McCarthy told the NLJ that he believed there's a place in the market for midsized regional firms because they can be more nimble and may not face the conflicts of interests that sometimes stymie work at larger firms, he said.

"The larger you are, it seems to me, it becomes more difficult to deal with systemic changes," McCarthy had said.

Kalis said both firms had to get comfortable with one another's models during the talks, and they did.

"I don't think it's any secret that mid-sized firms in the last several years have had more challenges than they did historically in maintaining their traction and that's true of a number of our legacy firms," he said. "But what we found [in Bell Boyd] when we really drilled down was an extremely strong, healthy law firm enterprise that is extraordinarily well positioned in this market" as well as beyond Chicago.

Chicago-based recruiter Mark Jungers of Major Lindsey & Africa said K&L Gates would make for a great addition to the market. He said the firm is an "inspiring success story" given it was a 400-attorney Pittsburgh firm just a few years ago. He said the merger would be a benefit to both firms. He said he thinks a global, 2,000-lawyer firm is a pretty safe place to practice in this economy, so "we're pretty bullish on K&L Gates."

In talking about the number of mergers his firm has done during this tough economy, Kalis said K&L Gates will, if given the opportunity, "grow aggressively in this downturn." He said the firm has no short-term or long-term debt and never has.

"When you have a clean balance sheet, God gives it to you for a reason, and that is you are positioned to take steps in a down market that perhaps other firms have to think twice about," Kalis said.

McCarthy said in an interview Thursday he was pleased that the merger will provide a much larger geographic footprint while avoiding any debt for the firm.

K&L Gates has "a recognized success in integrating groups who have joined them over the years," McCarthy said. "Even more impressive, they have done it without borrowing."

McCarthy will join the combined firm's management committee as will Bell Boyd Vice Chairman Robert Barrett to give the smaller firm two of the eight seats in that executive body, but McCarthy will not hold any other title. Bell Boyd partner Nancy Bertoglio, the firm's current managing partner, will be the administrative partner in the combined firm's Chicago office.

McCarthy said the two firms had very few conflicts of interest with respect to their combined business, and he expects few, if any, additional departures.

Other law firms with which Bell Boyd has had merger talks in recent years included Alston & Bird, Squire Sanders & Dempsey and Hunton & Williams, according to former partners and consultants.

For Bell Boyd "to continue to grow as opposed to decline, they did need to do this," Chris Percival, a recruiter with Chicago Legal Search, said. "It's very good for them to have done it now versus later."

Bell Boyd's partners have been prepared for a merger and are likely to support one, Percival said. This gives Bell Boyd the opportunity to expand without bearing the expense of opening new offices, she said.

The only caveat to the combination may lie in the cultural fit. Bell Boyd is a firm that has valued its work-life balance options and, if the culture at K&L Gates is more aggressive, the match may not work well, Percival said.

The firm's numbers seem to match up relatively well, though K&L Gates has about $100,000 more in profits per equity partner (PPP).

Bell Boyd had 2007 revenue of $129 million, up 4.5 percent from the prior year, and revenue per lawyer (RPL) of $610,000 with PPP of $695,000. K&L Gates had $755 million in 2007 gross revenue, $610,000 in RPL and $800,000 in PPP.

According to the statement the firms released, formal proposals will be presented to the partnerships in early 2009. Discussions began this summer and "progressed continuously" during that time.

Lynn Marek, Chicago bureau chief of The National Law Journal, co-wrote this article with Gina Passarella, senior staff reporter with The Legal Intelligencer.