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Does the Future Belong to Cadwalader?

Or has its focus on profits gone too far?

It's bowling night at Cadwalader, Wickersham & Taft, and even the firm's biggest names are staring down pins at New York City's Bowlmor Lanes.

Mergers and acquisitions partner Dennis J. Block, in a white T-shirt, determinedly hoists a ball in hopes of leading his group to victory. But his score for the game is a mediocre 83, and his team barely seems in contention.

Over in the last lane, firm Chairman Robert O. Link is cutting a more jovial figure. Wearing a shirt that goofily declares, "The captain of my team did not submit a design so all I got was this crummy t-shirt," the captain described laughs about how he took up bowling during long layovers in the Midwest.

But between jokes, Link rolls a steady stream of strikes and spares. His team does not win (the environmental practice group is victorious), but Link individually bowls 145, two games in a row.

"Don't let him fool you," someone says as Link, 52, takes down another frame. "He's the most competitive person you'll ever meet."

In the competition that matters most to him, Link also has been coming out on top of late. Over the past three years, Cadwalader, once largely dismissed as a second-tier firm, has surged into the very top ranks of the nation's law firms in terms of profitability.

According to the most recent Am Law 100 survey by The American Lawyer magazine, a New York Law Journal affiliate, Cadwalader had profits per partner of more than $2.5 million in 2005, topped only by perennial leaders Wachtell, Lipton, Rosen & Katz and Cravath, Swaine & Moore and ahead of Sullivan & Cromwell, Davis Polk & Wardwell, Simpson Thacher & Bartlett and other elite names. The figure was also more than double Cadwalader's profits per partner from 2002, when the firm ranked just 15th in the nation by that measure.

Last week, Link, the firm's chairman since 1994, said Cadwalader's profits per partner jumped again in 2006 to $2.9 million on revenue of $555 million. He said he saw no reason 2007 should be different.

"Are we going to have difficulty sustaining this?" he asked. "No, short of some cataclysmic event that hits everyone else too."

But to others in the profession, Cadwalader's apparent success is itself something of a cataclysmic event. The oldest law firm in America and once one of the most genteel, Cadwalader under Link went through a wrenching and controversial 1990s turnaround during which it transformed itself into perhaps the nation's most aggressively profit-focused law firm. Today's Cadwalader, at which big producers are lavishly rewarded and underperformers are shown the door, presents a stark alternative to the more conservative ways of New York's traditional top-tier firms.

"They are definitely the firm to watch," said the managing partner of one leading New York firm recently overtaken by Cadwalader in the profit charts. "Even though they recognize the business realities, most law firms still hold on to certain ways of doing things. Cadwalader is run like a corporation."

But whether a law firm should be run that way is a question Cadwalader is far from definitively answering. The departure last week of antitrust chief Steven Sunshine, lured to the firm just two years before from Shearman & Sterling and now heading to Skadden, Arps, Slate, Meagher & Flom, underscores persistent criticisms that the firm, while able to attract star laterals with high pay, is unable to build sustainable practices around them.

And Cadwalader's approach has won it a reputation for ruthlessness that suits some but turns off others.

"It's exactly the shark tank that everybody says it is," said former partner Robert Vitale, "If you're a shark, it's great."

Over lunch near the firm's World Financial Center headquarters, Link said the firm's toughness is often exaggerated and that partners generally get along well and respect each other. But he acknowledged Cadwalader can be a "rough and tumble" place.

"We're a meritocracy," he said. "This is not a place for people who want some place to be comfortable."

'WE FELL ASLEEP'

In Link's view, the profession is still populated by too many lawyers and firms for whom being comfortable is the most important goal. The Cadwalader he joined as an associate in 1987 certainly fit that bill, he said.

At the time, Link was an outsider to the white-shoe New York legal scene. His law degree was not from Harvard or Yale but the University of Tennessee, where he also earned an accounting degree and an MBA. He began his legal career in the Atlanta office of New York's Hill Betts & Nash. He said he might have spent his whole career in Atlanta, but his New York-born wife, Dorina, eventually urged him north.

As an outsider, Link says he had no illusions about Cadwalader. Founded in 1792, it is the nation's oldest continuously functioning law firm, and that history long contributed to a public image -- and self-image -- of Cadwalader as a part of the profession's knickerbocker elite. But by the time Link became a partner in 1990, it was clear to him that the white-shoe image was out of step with reality.

"We fell asleep," he said, describing a firm that was still focused on fading areas like maritime law and trusts and estates while other firms were reaping big fees in M&A and high-yield bond offerings. Link became one of the leaders of a group of younger partners who decided to take over and take action.

Cadwalader's current reputation as a tough place owes a great deal to the 1990s reorganization those young partners engineered. Under "Project Rightsize," less productive practices and partners were axed and the firm's 15-lawyer Palm Beach, Fla., office was closed.

The office closing led to a lawsuit by former partner James Beasley, who claimed he was illegally expelled. The closely watched case made Cadwalader a symbol of a changing legal profession. Many observers, including the judge who awarded Beasley $2.4 million, viewed those changes with alarm.

"Such activity cannot be said to be honorable," Palm Beach County Circuit Judge Jack Cook wrote in his 1996 decision. "While life in the marketplace may well be made up of fear, greed and money ... life in a partnership is not so composed."

The spirit of Project Rightsize still animates Cadwalader today. The firm holds partners accountable for the revenue they generate, and those who do not meet expectations are eased out of the firm. Link is adamant about the firm's performance goals. He said Cadwalader believes each of its equity partners should be responsible for at least $5 million in business.

"We're not going to be happy with a strong ego bringing in $1 million a year," he said.

Perhaps unsurprisingly, Cadwalader has fewer equity partners than most other firms of similar size, a fact that many use to question the impressiveness of its profit-per-partner numbers. The firm has 76 equity partners out of a total headcount of around 630. There are around 30 nonequity partners as well. In comparison, Davis Polk has roughly the same number of lawyers but almost twice as many equity partners, with no nonequity partners.

"It would be relatively easy to achieve what they have," said the head of one rival firm. "We're just not willing to do that."

Though Link professes not to care about such put-downs, they clearly irk him.

"There's so much jealousy," he said. He also expresses a characteristic impatience with the mindset behind the accusation.

"Why would I have any more partners than I need?" he asked.

CHALLENGING THE MODEL

Link's view of partnership as something less than sacrosanct would no doubt make sense to most corporate executives, Wall Street bankers or even the managing partners of some other large law firms. But many in the profession still question the wisdom of running a law firm in that manner.

Link said the firm is "humane" in easing out underperforming partners and practices, a process that he said can stretch over several years. He cites the project finance group as an example of a practice the firm decided to abandon after a lengthy period.

Vitale headed that group until March 2005. Cadwalader recruited him and five associates from the former Brown & Wood in 1997 to launch the practice. Though it expanded somewhat in the years that followed, the practice was ultimately deemed a profits disappointment. Vitale, now a partner in the New York office of Paul, Hastings, Janofsky & Walker, disagreed with that determination, but he credits Link and others with being up-front about their own priorities.

"There was no trickery," said Vitale. Everyone was treated fairly and given ample opportunity to seek opportunity elsewhere, he said.

But the difference between Cadwalader and other firms he has been with is still striking to Vitale. Though he said there was no question that Cadwalader had achieved tremendous financial success, he said the firm still seemed to be trying out a "new model."

"It'll be interesting to see whether they've really built something that lasts," he said, "or if it's Finley Kumble in richer clothing."

Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson & Casey; Shea & Gould; and Brobeck, Phleger & Harrison were all law firms that rose to prominence rapidly, recruiting stars and touting new business models for practicing law. They also all spectacularly flamed out.

Cadwalader's litigation chair, Gregory A. Markel, who arrived from Brobeck in 2002, said that other than its focus on performance, Cadwalader is vastly different from other firms that have challenged the status quo in the past. He noted that all of those firms expanded like topsy, rapidly opening branch offices and bringing in hundreds of new partners and associates. By contrast, Cadwalader has kept expansion outside New York to a minimum.

But Markel agreed that Cadwalader represented a very different model from the group of old-line New York firms generally regarded as the apex of corporate practice.

Those firms regard collegiality and stability in their partnership ranks as cornerstones of their success. Partners are trained to put the interests of the firm first and discouraged from thinking of themselves as rainmakers or stars. Such firms generally avoid outsiders in the form of lateral partners and maintain some semblance of a lockstep compensation system, whereby partners are paid according to seniority rather than business generation. These firms say their traditional approach is the only way to maintain continuity in client service and thereby safeguard their own institutional longevity.

'ENTREPRENEURIAL' SYSTEM

Markel, who began his career as a Cravath associate, said he respected that firm and its lockstep system enormously. But he noted that elite firms' lockstep system was underpinned by the sort of "truly extraordinary" client base that Cadwalader did not have a decade ago.

"One of the reasons Cadwalader has had a dramatic rise in the ranks of law firms is because of the entrepreneurial system we use," said Markel. He allowed that such a system was not for everyone.

"There's no doubt in my mind there are people who don't want to be a part of what they perceive our system to be," he said.

But that such a system now exists as an alternative at the highest level of the corporate bar is a significant development. Their adherence to tradition is one reason New York's top-tier firms have long stood apart from the nation's other large firms. Another has been their consistent rankings as the nation's most profitable law firms, a fact that has largely shielded them from competition for talent. That is where Cadwalader's rise and its willingness to pay up for star laterals presents a challenge.

"Lockstep's lasted because no one has really been willing to double or triple what those firms were paying," said the managing partner of one of New York's top nonlockstep firms. "I could see Cadwalader doing that."

The managing partner said a financially strong Cadwalader was now in a unique position to poach talent from the elite firms. Though he said such firms probably had little to fear with regard to their institutional relationships with big Wall Street banks, first-generation practices in emerging areas like private equity could be more vulnerable. Indeed, Cadwalader targeted such an area in October when it recruited Davis Polk partner Steven D. Lofchie, a leader in the profitable niche of broker-dealer regulatory affairs.

Link makes no bones about the fact that money is a big draw at Cadwalader, and a number of senior partners at different firms said they believed Cadwalader had trumped their own offers to certain lateral candidates by some distance.

Link declined to discuss specific offers except to say that several partners earned amounts significantly higher than the firm's average profits per partner. As a result, he said, high-earning laterals do not feel the eyes of the firm upon them, as they might at the non-New York firms that he said often outbid Cadwalader for talent.

"At those other firms, they'll earn a lot more than anybody else there," he noted. "That's got to be a strange feeling."

Giving Cadwalader the financial wherewithal to recruit star laterals had always been a major goal of Project Rightsize. The hope was that, as weaker partners and practices were shed, new, higher-margin practices could be introduced, diversifying the firm beyond its core area.

Then as now, the engine of the firm is its asset-backed structured finance practice. Link made his name in the area and still serves as the firm's practice leader. It is a specialized area that, in its most basic form, involves the issuance of tradeable securities tied to fixed assets or revenue streams, most commonly residential mortgages.

It is not generally regarded as a premium practice area like M&A or high-yield bond offerings, and some have questioned how Cadwalader could have achieved such impressive results from that foundation. For the most part, the other major firms in the area are not Sullivan & Cromwell or Simpson Thacher but non-New York firms like Sidley Austin or Orrick, Herrington & Sutcliffe.

The head of another New York law firm described securitization as a high-volume "commodity" practice, an area top firms avoided because of their inability to command premium rates in it.

"Somehow they've managed to make a success of it," he said of Cadwalader.

A senior in-house counsel at one of the nation's largest banks said Cadwalader was regarded as having a higher level of expertise in the area than other firms. He said Cadwalader and Cleary Gottlieb Steen & Hamilton were regarded as the premium securitization firms, with the other firms getting more "plain vanilla" assignments.

"[Cadwalader's] more likely to get the first-impression stuff," the in-house counsel said, "and they can staff it out with associates like any other deal."

DISCIPLINED EXPANSION

According to Link, the firm only wants to be in those areas where it can achieve a similar level of profitability, primarily those revolving around financial institutions. This discipline also explains why the firm has avoided most overseas expansion apart from London and a small office in China. In the United States, Cadwalader also only has offices in Washington, D.C., and banking center Charlotte, N.C., aside from New York.

"All other offices are dilutive," said Link.

But Cadwalader's tight focus can clash with its attempts to expand into new practice areas. Vitale said it was frustrating trying to push the firm in a direction that required investment but guaranteed no immediate return. The firm did not yield.

"The firm decided that what it needed to do to expand its project finance practice, it wasn't willing to do," said Vitale.

In his case, he said, what the firm needed to do was swallow the pill and open some overseas offices, particularly in Latin America. The firm's unwillingness to do so meant its project finance group had a hard time competing for business with more global firms. Cadwalader could be a lonely place for those outside the humming core practices, he recalled.

"There's probably no better place to be a capital markets partner," he said, "but, if I were asked to go in and start a group in, say, intellectual property litigation, I'd think twice."

But Link can cite bankruptcy, led by former Weil Gotshal partner Bruce Zirinsky, and litigation, led by Markel, formerly of Brobeck, as new practices in which the firm has found success. Zirinsky led the firm's recent representation of Northwest Airlines in its Chapter 11 bankruptcy, while Markel has built a sought-after securities litigation practice.

Until last week, Link could also tout Sunshine's antitrust group. Cadwalader had looked to Sunshine, a former Department of Justice lawyer who arrived from Shearman in March 2005 with two other partners and a number of associates, to build a leading practice. His departure to Skadden with the rest of his team leaves Cadwalader back at square one in that area.

Link said the firm had been happy with Sunshine's work and had hoped to keep him. Sunshine also said he had been happy at Cadwalader but had wanted his practice to mesh with Skadden's much larger M&A practice.

Sunshine's stated reason for his departure underlines the difficulty the firm has faced pushing into the practice it had perhaps most coveted. Big-time public company M&A had always been part of the firm's plan, and it managed to recruit one of the biggest, albeit most controversial, names around.

Block, who joined Cadwalader in 1998 from Weil Gotshal, is one of the city's top deal lawyers, with a book of business some have estimated to be worth over $50 million. He has single-handedly made the firm a presence in major M&A, securing it roles in huge deals like Pfizer's 2003 acquisition of Pharmacia for $60 billion. But several observers noted that the firm has been mostly unable to build a practice apart from Block.

"When Dennis doesn't work, that's a problem for the firm," said one ex-partner.

ASSOCIATE DISSATISFACTION

But Block, who declined to be interviewed, is himself something of an issue for the firm. If Project Rightsize is one reason for Cadwalader's harsh reputation, Block is the other. He is famously ill-tempered in his dealings with associates, staff and fellow partners, and stories of his conduct abound throughout the profession.

A number of legal recruiters said Block's notoriety was an obstacle to Cadwalader's further expansion of its M&A practice.

"It's definitely an issue," said one headhunter. "People aren't sure they want to deal with that."

Link said Block had been a huge boon to the firm and a "great partner." He said a decision a few years ago to shift Block out of his former roles as co-chair of both the firm's corporate and litigation departments was a mutual decision.

"He wants to practice law," said Link. "You'll never see anyone as dedicated to the practice as Dennis. That's his whole life."

Link said he did not believe Block had had a negative impact on recruiting. Rather, he said he thought Block's presence attracted to the firm those lawyers who were truly committed to practicing law at the highest level.

The issue of that commitment, especially among young lawyers, clearly animates Link. Cadwalader routinely receives low marks in associate satisfaction surveys, and the firm has in the past had some of the worst associate attrition in the business.

The firm's notably plush offices, with an in-house gym and a spa, and its swiftness to match last month's round of salary increases, demonstrate the firm's willingness to please associates to an extent. But Link said he thinks firms can only go so far in that direction. The greater problem, he said, is that the profession continues to attract too many people unsuited to corporate practice.

"There's a big imbalance in terms of expectations of law graduates and law firms," said Link. "It's all these history majors who found out they couldn't get jobs in history and decided to go to law school."

His views on the subject mark another departure from New York's traditional elite. Whereas those firms lavish attention on Ivy League law graduates with prestigious judicial clerkships, Link wants lawyers who want to be in the business and want to work hard in it. He said his ideal candidate would probably be someone slightly older with previous work experience, maybe on Wall Street.

He has no use for Yale Law School.

"I don't think we even recruit there anymore," he said of the law school often regarded as the nation's most intellectual. "They don't seem to produce the kind of lawyer we want."

Perhaps more than most firms, Cadwalader has made an effort to find the cream of students at nonelite schools. The University of Tennessee, Link's alma mater, is a favored destination. To an unusual degree, the firm has also sought to communicate to law students exactly what corporate lawyers do and how hard the work is.

The firm maintains a recruiting Web site entitled the Real Deal that advises prospective summer associates to "stow the sunblock" because Cadwalader is all about "real work."

Link recognizes that Cadwalader's tough-minded approach will always have detractors, even now that the firm has apparently achieved many of the goals it set with Project Rightsize.

"I think we'll always have more flak and turbulence about our reputation," he said.

But he said the changes in the profession Cadwalader had been among the first to embrace were now widely recognized.

"If you look at the last 10 years, you probably have more change in the legal industry than at any other time," he said.

Even in Palm Beach, Fla., where the Palm Beach Post once editorialized against the firm's "greed," that change seems to have been accepted. Cadwalader has held its last two partner retreats at the Breakers resort there. During one of them, local firm Gunster Yoakley, to which many Palm Beach Cadwalader lawyers fled, sent flowers and a note of greeting.

Even as Link says the firm has hit a stride, he is mindful of the complacency he saw a decade ago. But he said he was confident the firm's system was keeping partners on their toes.

"Everyone should wake up in the morning and feel a little vulnerable," he said.

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