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San Francisco — The water cooler buzz around Cooley Godward’s San Francisco office was that the firm was ready to close the outpost and move attorneys and staff to Palo Alto, Calif. The rumors were so prevalent they even reached Cooley Chairman Stephen Neal, who felt compelled to meet earlier this month with San Francisco attorneys to assure them that the firm had no plans to close the 120-lawyer office at One Maritime Plaza. “We had heard the rumor and part of the meeting was to forcefully dispel it and to unequivocally communicate our determination not only to maintain, but to build the San Francisco office on both the litigation and business side,” Neal says. It’s not surprising that Cooley’s ranks are jittery. The legal community in the San Francisco Bay area has been speculating about Cooley’s future, as well as that of other Silicon Valley technology firms, since the tech sector crashed two years ago. Cooley bet heavily on the tech boom and still brands itself as one of the leading technology firms. Even without the recent demise of tech powerhouse Brobeck, Phleger & Harrison, a firm that has stuck to its technology focus was bound to raise questions. Despite the dismal economy and decline in technology-related work, Cooley has managed to increase its profitability, retain most of its partnership, and avoid a quicksand of debt. At the same time, the firm is looking to the future and trying to answer a key question: Will it continue to go it alone as a solid regional player with a few outposts or will it merge with another firm to create a national, or perhaps international, legal force? “We’re going to build and diversify our client base by size and industry segment” without giving up the firm’s pre-eminence in technology, Neal says. “We’re absolutely committed to achieving that on a go-it-alone strategy. But we’re also fully open to considering a strategic combination.” The question is whether Cooley can find an appropriate merger partner. Legal consultants and former partners say that during the tech craze Cooley could have hooked up with a top-tier New York firm. But these days the suitors that come calling won’t be as wealthy. Cooley has made itself a more-attractive merger partner. It slimmed its ranks through two major layoffs in August 2001 and November 2002, dropping from a high of nearly 700 lawyers in 2001 to its current level of 514. In November, the firm closed its Menlo Park, Calif., office and in January shut down its four-year-old Kirkland, Wash., office. The firm also has protected its leverage. While some partners have opted to leave Cooley in the last few months, the firm has nudged others out the door, keeping the partnership level at 165. And Cooley has been frugal. Its bank debt is about $10 million, its paid-in capital is $32 million, and only 10 percent of its leased space is unoccupied, according to Neal. Cooley’s layoffs and belt-tightening helped boost its profitability in 2002, despite the tough economic times. While gross revenue dropped 14 percent to $301 million, profits per partner inched up 3 percent to $735,000. Cooley ranked third in profitability among firms in the Bay area last year. Neal acknowledges after Cooley released its revenue and profit figures in January, he received calls from several East Coast firms interested in discussing a possible merger. Neal rattled off the qualities Cooley is looking for: a firm with a substantial New York presence, values similar to Cooley’s, big litigation and corporate practices, either current capabilities in Europe or an interest in developing them, strong finances, a good balance sheet, and little or no bank debt. Cooley expects to make a decision about its marriage options fairly soon, Neal says. Whether or not the firm merges, Neal says Cooley needs to open shop in New York. Cooley last had serious discussions with New York intellectual property firm Pennie & Edmonds. Those talks broke off in October. Even if Cooley finds an appropriate partner, it may be difficult to get the partnership to approve a merger. Current and former Cooley lawyers say some partners, particularly those in the emerging companies group, are resistant to a merger since it would further dilute their influence in the firm. But Neal and Mark Tanoury, a senior partner in the emerging companies group and former head of the business department, pooh-pooh such talk. “I certainly have seen potential combinations that have gotten me very excited,” Tanoury says. “For a lot of emerging company lawyers, as clients mature and grow and become big companies, there is a real advantage and benefit to adding expertise the firm doesn’t have.” Tanoury says the partnership is committed to becoming a national and, ultimately, an international firm. While the emerging companies group has been the centerpiece of the firm, the litigation practice has helped bolster the firm’s finances during the current doldrums. Now making up about 42 percent of Cooley’s ranks, litigators are handling a slew of high-profile cases. Last year, Neal represented Walter Hewlett in his unsuccessful effort to block the Hewlett-Packard Co.’s merger with the Compaq Computer Corp. The firm is lead counsel for the PG&E Corp.’s bankruptcy trial, and also lead counsel to Pacificare Health Systems Inc., a plaintiff in a class action against major national managed care companies on behalf of doctors and patients. Meanwhile, Cooley’s efforts to cope with the economy and position itself to be a national or global player have continued to strain the firm’s once-vaunted collegial culture. A handful of partners have left the firm in the last four months, including veteran corporate partner Deborah Marshall, who jumped to Howard, Rice, Nemerovsky, Canady, Falk & Rabkin. Former partners and other industry sources say Marshall was an important element of Cooley’s culture, known for her open communication style. “Cooley became a less-inclusive place” when Marshall stepped down as head of the business department in 1999, a former partner says, adding that the firm has “a very opaque management system, and people have gotten frustrated with it.” But Neal dismisses such comments, noting that the firm has monthly communications with partners and multiple meetings with partners, practice groups, and all attorneys throughout the year. “The bigger you get, inevitably there is some sense of diminished involvement,” he says. The firm has lost relatively few partners in the last year. Departures cluster around the beginning of the year, when compensation is evaluated and bonuses given out. Since bonuses can be greater than a partner’s base pay, partners have an incentive to stay through the end of the year. “We’re going to maintain our pre-eminence in technology and continue to expand our client base of all sizes and shapes of tech companies and other types of companies,” Neal says. “The challenges we face are challenges of opportunity rather than challenges arising from difficulties.” This article was distributed by the American Lawyer Media News Service. Brenda Sandburg is a reporter at The Recorder.

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