Thank you for sharing!

Your article was successfully shared with the contacts you provided.
Ten years ago, a technology deal often started with a simple phone call between friends. A lawyer would call a banking buddy at one of San Francisco’s four major investment banks with a pitch about a small, but promising tech company that needed investor cash. It was the kind of transaction that the huge New York investment giants like Goldman Sachs & Co. would have sniffed at. But San Francisco bankers survived — and even thrived — on such financially meager fare. It was a cozy little world. The techies knew the lawyers. The lawyers knew the bankers. And the bankers knew the investors. “A lot of the relationships were built on personal — very strong personal ties — to individuals within the investment banks,” said Jeffrey Saper, a partner at Wilson Sonsini Goodrich & Rosati. Then came the boom. The banks and law firms gorged on the tech deals that fueled the stock market’s dizzying growth during the late 1990s. But something unexpected happened. The relationships between law firms and the banks began to break down. Firms — overwhelmed with more lucrative work — dumped the banks as clients. And the quartet of financial institutions that dominated the tech market was swallowed by mega-banks like The Chase Manhattan Corp. and NationsBank Corp. With those giants came another change for local firms to contend with: New York players. Those firms enjoyed the same kinds of relationships with the big investment banks that local firms once had with the San Francisco institutions. “For every Brobeck [Phleger & Harrison] that’s disappeared, there are two firms that have opened up,” said Bruce Alan Mann, a Morrison & Foerster partner and former investment banker. “There’s more competition among people capable of doing the work.” Now, the boom is over. Firms that counted on tech deals are hungry again for investment banking work. But they’re finding it tough going. Whether they can recover their relationships with what remains of the San Francisco investment-banking community is a vexing question for many longtime Valley lawyers. “Clearly there were investment banks that were less than thrilled about their relative pecking order as a client,” said Laura Berezin, a Cooley Godward partner who heads the firm’s investment banking practice, “and some of those investment banks chose to go elsewhere and might not come back.” THE FOUR HORSEMEN It’s an odd turn of events given the closeness of firms and the investment banks during the late ’80s and early ’90s. San Francisco’s tech-fueled capital markets were dominated by three homegrown firms — Hambrecht & Quist Group Inc., Montgomery Securities Inc. and Robertson, Stephens & Co. — and Alex. Brown & Sons Inc., a Baltimore-based company that set up shop decades earlier and was considered a local player. Collectively, they were known as the Four Horsemen — an unlikely moniker given their role in creating so much of the technology industry. Wilson Sonsini, Cooley, Brobeck and Gray Cary Ware & Freidenrich seemed to profit the most from their relationships — though most Bay Area firms seemed to have a lawyer or two with a pipeline to the banks. As clients, banks themselves were considered dull and low-margin. If a deal didn’t close, law firms weren’t paid for their work — another bone of contention for lawyers. What the firms really valued was the access the banks provided to Wall Street investors. Those investors funded the startups the law firms valued most as clients. “You develop relationships with investment banks which could lead to more work,” said Gordon Davidson, Fenwick & West chairman and a longtime go-to lawyer among bankers. During the boom, however, the four banks were perhaps a bit superfluous. Investors were dying to spend money on tech startups, and the firms didn’t need their banker friends to go begging to Wall Street for investment cash. Startups also provided equity as part of their fee arrangements with the firms and paid them no matter whether a deal closed or not. “There was a period of time when there was an institutional decision [among most Silicon Valley firms] that investment banks are the least profitable clients to have,” said Cooley’s Berezin. Success was also changing the banks. East Coast giants like Chase Manhattan and NationsBank saw the local players as their entree into the tech sector — so they bought them. And they brought with them their favored legal advisers. Consider the acquisition of Hambrecht & Quist in December 1999 by Chase. After the purchase, it became Chase H & Q. A year later, Chase Manhattan merged with J.P. Morgan & Co. to create J.P. Morgan Chase & Co. — and what was left of Hambrecht after the Chase purchase was phased out. Hambrecht had always favored Cooley and Gray Cary for legal work, but Chase had a longtime relationship with two New York firms — Milbank, Tweed, Hadley & McCloy and Simpson Thacher & Bartlett. And Chase continued to rely on those firms after buying Hambrecht. Toss J.P. Morgan into the mix, and the locals were squeezed even further. J.P. Morgan has close ties to New York’s Davis Polk & Wardwell. David Golden, a managing director at J.P. Morgan and former Hambrecht banker, confirmed the obvious result: Local law firms picked up a smaller percentage of the bank’s work. NEW YORKERS ARRIVE Since 1997, when the first of the Four Horsemen fell, New York firms have stampeded the Valley. The list includes Simpson Thacher; Davis Polk; Milbank, Tweed; Skadden, Arps, Slate, Meagher & Flom; and Sullivan & Cromwell. And other out-of-town firms with strong banking ties — like L.A.’s Latham & Watkins and O’Melveny & Myers — have also bulked up. Clifford Chance’s arrival last year also threatens the local status quo. “I don’t know if the indigenous firms are used to the kind of firepower that Clifford can expend if it wants to,” said Matthew Hurd, a Sullivan & Cromwell partner in Palo Alto. But it’s the New Yorkers that have the most significant and longstanding ties to investment banks now dominating the market. Sullivan & Cromwell, for example, is often the first choice when Goldman Sachs & Co. needs legal advice. The out-of-towners say they aren’t too concerned about over-saturating the market. In fact, they contend, the more the merrier. Each new arrival chips away at the hold indigenous firms have on the technology industry, Hurd said. “Every time a non-indigenous firm does something interesting from a competitive standpoint, it does a little bit more to erode the competitive situation of the local firms,” Hurd said. The New York firms also have a leg up when it comes to more sophisticated financial transactions, said MoFo’s Mann. During the tech boom, local firms were particularly adept at relatively simple transactions like initial public offerings and venture financings. But they have less experience with more complex transactions, like high-yield debt, derivatives and PIPEs, or private investment in public equity. “Those underwriters in all likelihood are going to stick with the firms that are capable of servicing them now,” Mann said. Even companies inextricably linked to Silicon Valley have turned away from local firms to handle more complicated deals. When Yahoo Inc. needed to raise $750 million in a just-closed convertible debt deal, it turned to Skadden, Arps. The underwriter — Credit Suisse First Boston (USA) Inc., another key player in the tech industry — was represented by Davis Polk. REBUILDING RELATIONSHIPS For their part, Silicon Valley firms say they aren’t missing out on much because few companies are going public. They say they are fully confident that when the market returns they’ll get their fair share. And a few of them continue to carve a niche with investment banks. Wilson Sonsini regularly represented Goldman Sachs & Co. when there was still a market for tech deals, and Fenwick’s Davidson also remains a top lawyer among Valley bankers. “Our competitive advantage is our deep understanding of technology companies and technology company issuers,” said Davidson. “When the market comes back, whether the investment bankers will be more likely to hire New York or indigenous firms is an open question.” Davidson’s fellow Fenwick partner Laird Simons III said he’s hoping firms that maintained some of their investment banking relationships during the boom would continue to profit when the markets pick up again. “My hope is they would use the firms they’re most comfortable with and not go with the overflow firms they used during the bubble,” he said. Local firms are hot to get back into the work not so much because it’s become more interesting or lucrative, but because “in this environment, you take money where you can find it. The days when people were turning down investment banking work are gone,” said Jorge del Calvo, a Pillsbury Winthrop partner. Wilson Sonsini’s Saper said he has been trying to cement new ties to bankers. “You have to continue to reestablish those relationships with the new generation of leaders at these banks,” he said. But he’s still worried about the future. The recent scandals involving investment banking analysts who trumpeted stocks to the public they were privately deriding have changed the playing field. Because of the regulation that resulted from the scandals, analysts are losing influence. Saper said those analysts were key to touting tech stocks to investors, and without them, it’s going to be hard to generate market interest in tech startups. “Who’s going to evangelize the new technologies?” Saper said. “How are investors going to learn about new technology companies?” Yet, a glimmer of hope may be on the horizon for law firms looking to reestablish ties to investment bankers. A large contingent of bankers lost their jobs because of the sour economy and disappearance of the Four Horsemen. They have started a new crop of boutique banks that cater to small and mid-sized tech companies. What’s still unclear is whether there will be enough interest from investors to support smaller deals. “Locally, it’s really unknown if there will be a market for small deals that used to be the mainstay of the indigenous [banking] firms,” said Cabot Brown, a partner at Seven Hills Group, a boutique investment bank in San Francisco. Despite the uncertainty, Cooley’s Berezin is meeting with the new boutiques, hoping to land a spot on their preferred provider lists. That would help insulate her from any defections by her current banking clients. Berezin managed to hang on to most of her practice during the boom, turning away banking work only when it was humanly impossible to take on more. Still, she’s worried about her competition. She faces the onslaught of New York lawyers as well as legions of idled Silicon Valley natives who are looking for any piece of corporate work they can get their hands on. “I’m more worried about the fact there are more lawyers out there, and there is less low-hanging fruit,” Berezin said. “Everybody is looking for big transactions to support their practices.” So she’s working the phones, hitting the pavement and doing lunch. Her hope? To build the kind of relationships with investment banks that were once the norm in Silicon Valley. “I work with investment bankers repeatedly,” Berezin said. “They trust me, they trust my judgment; they’re going to keep coming back to me regardless of whether Davis Polk opens up down the block.” Related chart: Apocalypse for the Four Horsemen

This content has been archived. It is available through our partners, LexisNexis® and Bloomberg Law.

To view this content, please continue to their sites.

Not a Lexis Advance® Subscriber?
Subscribe Now

Not a Bloomberg Law Subscriber?
Subscribe Now

Why am I seeing this?

LexisNexis® and Bloomberg Law are third party online distributors of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® and Bloomberg Law customers are able to access and use ALM's content, including content from the National Law Journal, The American Lawyer, Legaltech News, The New York Law Journal, and Corporate Counsel, as well as other sources of legal information.

For questions call 1-877-256-2472 or contact us at [email protected]

Reprints & Licensing
Mentioned in a Law.com story?

License our industry-leading legal content to extend your thought leadership and build your brand.


ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2021 ALM Media Properties, LLC. All Rights Reserved.