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Brobeck, Phleger & Harrison is making inroads in hammering out a merger agreement with Philadelphia’s Morgan, Lewis & Bockius, but the firm still faces potholes on the road to a deal. Additional Brobeck partners may be on the verge of defecting, particularly the litigation group in Austin, Texas, sources said. And the firm continues to carry excessive real estate costs. The Reston, Va., and Washington, D.C., outposts, for example, have shrunk to a handful of attorneys but still have much of their old office space. And an agreement reached last week by partners to fork over $26 million of their personal earnings to pay off a portion of the firm’s bank debt could pave the way for more partners to exit the firm. “It’s a potentially liberating event for some partners” who have been concerned about their personal liability if they left the firm, said a senior partner at another Bay Area firm. Nevertheless, the move could be a major step in reducing the amount of debt that Morgan, Lewis would be saddled with in a merger. Firm managers declined to answer questions about the terms of its deal with Citibank, but John Pachtner, Brobeck’s director of communications, said the restructuring is an attempt to straighten out the firm’s debt and operating expenses. “Considering the economic circumstances, any business or law firm would want to do that,” said Pachtner. Details of the agreement were first reported in Monday’s Daily Journal. Pachtner said payments by each of the firm’s 160 partners “would vary according to a complicated formula.” A source close to Brobeck said Brobeck and Morgan, Lewis are working on additional terms of a merger agreement. “The capital reconstruction was somewhat of a marking point, a trigger point,” he said. Although declining to say what other steps would be necessary to cinch the deal, he said that there would be “substantial information within the next week or so.” Legal consultant Peter Zeughauser agreed that the debt restructuring was a necessary move for Brobeck. “It’s a big step in the right direction, and it indicates a serious commitment to putting the firm on the right track,” he said. “It makes the deal [with Morgan, Lewis] much more possible than it was before.” Nevertheless, Zeughauser said such a payment by partners is extremely rare. “It only happens — if it happens — 32 years after a once-in-1,000-years flood occurs the day after a once-in-2,000-years earthquake,” he said. A former Brobeck partner predicts that Brobeck will lose another group of partners if the deal with Morgan, Lewis isn’t finalized soon. Last month, several industry insiders said Warren Lazarow, who heads Brobeck’s business and technology practice for Northern California, was interviewing with other firms. And last week, the Texas legal community began buzzing that the litigation group in Brobeck’s Austin office was on the verge of defecting. “It’s all over Austin that the commercial litigation group is looking to leave,” the former Brobeck partner said. “It’s a very known fact in Texas now.” But Brobeck partner Steven Zager, the head of the litigation group in Austin, denied that he was about to jump ship. “Tower’s press machine seems to be out of control,” Zager said in a voice mail message last week, referring to former firm Chairman Tower Snow Jr. “I’m not moving, my group’s not moving, and if I ever decide to move, I’ll call you.” Likewise, Edward Fernandes, the managing partner of Brobeck’s Austin and Dallas offices, said he has “not made any decision to leave Brobeck.” There is a question as to whether Morgan, Lewis would be interested in acquiring a Texas presence. With the exception of a Los Angeles outpost, Morgan, Lewis’ eight other domestic offices are on the East Coast. “There is some reason to believe” that Brobeck’s Texas outposts wouldn’t be included in a merger with Morgan, Lewis, a source close to the merger discussions said. But a former Brobeck partner said he had heard that Morgan, Lewis did want a Texas office if it included all of Brobeck’s current partners. “They need a litigation group,” he said. “If they leave, the office is not something they would want.” Paul Hurdlow, a founding partner of Gray Cary Ware & Freidenrich’s Austin office, questioned whether Morgan, Lewis would want to devote resources to a market where the firm has no name recognition. “The individual lawyers [at Brobeck] are compelling attorneys with good relationships,” Hurdlow said. “I would be surprised if the acquiring entity in Austin would continue the historical focus on early-stage, emerging company work.” Among its other outposts, Brobeck’s Reston, Va., and Washington, D.C., offices have dwindled to three and six attorneys, respectively. Seeking to tap into Northern Virginia’s high-tech market, the firm opened a D.C. office in 1999 and expanded to Reston in 2001. In September 2001, Brobeck had about 30 lawyers between the two offices. By the time that Rodger Tate, the former managing partner of the D.C. office, resigned in October, the offices had 14 attorneys. By comparison, Cooley Godward has 55 attorneys in Northern Virginia and Wilson Sonsini Goodrich & Rosati has 19. For Brobeck, the extra office space is surely a drag on the firm’s bottom line. A partner at a competing firm in Northern Virginia said in March 2001, leases in Class A buildings were going for $35 to $40 per square foot. Brobeck is struggling to cope with its overhead problems. Pachtner said the firm projects that in 2003 it will cut its operating expenses by 23 percent from last year’s figure.

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