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It’s Monday morning in a bland, brown conference room at Orrick, Herrington & Sutcliffe’s Sansome Street fortress, and Ralph Baxter Jr. has just plunked a glossy, Orrick-extolling printout on the table. The document is Baxter’s ode to Orrick, a charts-and-graphs-filled production that he personally prepared, and it’s designed to sell clients, laterals and just about anyone else who’ll listen that the firm is a winner. To go with the document is a full-on sales pitch from Baxter, now in his 13th year as Orrick’s chairman, and the nondescript surroundings ensure that all eyes are on him. “Our goal is to be one of the greatest law firms in the world,” Baxter says, not once, not twice, but several times during his presentation. Orrick’s greatness has been Baxter’s mantra his entire term as chair. And undoubtedly the firm has taken big steps toward becoming a top national and international player. The firm’s profitability has risen steadily — it ranked No. 32 last year in Recorder affiliate The American Lawyer magazine’s list of the 100 top-grossing firms in the country. It’s one of the few California firms to establish a significant presence in New York, and with 200 attorneys, the outpost is Orrick’s biggest office. It has set up shop in several European markets. And it’s made strides in recasting itself as more than a public finance shop. But to make it to the lofty heights that Baxter is hoping to reach, he, his partners and competitors say Orrick must grow both in size and reputation from the 672-lawyer public finance powerhouse it is today. The easiest way to accomplish that goal is a merger or acquisition of another firm. On that score, however, Orrick hasn’t had much luck. It has pursued marriage discussions with a varied list of firms: London’s Bird & Bird, New York’s Donovan Leisure Newton & Irvine, Los Angeles corporate boutique Riordan & McKinzie, and most recently, Venture Law Group and Cooley Godward. Baxter says simply that Orrick hasn’t found the right fit. But law firm consultants and competitors familiar with some of the negotiations said Orrick may also be hampered by a leadership structure that places great authority in the hands of a single lawyer, Baxter, and its reputation as a public finance firm — a practice area that doesn’t spark much excitement among possible merger candidates. Orrick’s centralized decision making was a major factor in derailing merger talks with Cooley. One source close to the negotiations said Orrick had offered Cooley a leadership role in the merged firm, but the key question for Cooley was the nature of that role. Others knowledgeable about the discussions said Orrick balked when Cooley insisted on sharing management of the combined firm. They said Cooley was concerned about Orrick’s debt load and wanted to have some say over financial decisions. Any firm contemplating a merger with Orrick “will have to look at debt, expense and profitability issues, as well as the management structure and succession planning,” one source knowledgeable about the negotiations said. Orrick and Cooley, of course, are pursuing different courses. While Cooley has been contracting — laying off associates and closing its Seattle office — Orrick has been on a growth spurt, opening offices in Paris, Milan, Irvine and Portland, Ore., in the past year. The firm’s lawyer count has grown by about 100 since August 2002. Baxter and Cooley Chairman Stephen Neal declined to comment on the details of their discussions. Baxter said it was a mutual decision to end the talks. “Orrick is a fine firm with both challenges and opportunities ahead of it, and it will be interesting to see how it copes with them,” Neal said. PUBLIC FINANCE ICON Orrick’s name has been tied to iconic government projects since its founding 140 years ago. It helped issue bonds to finance construction of the Golden Gate Bridge and refurbish Carnegie Hall. Such work has given the firm prestige — it is ranked as the No. 1 bond counsel for U.S. public finance by Thomson Financial — and close connections to the banking industry. Its client roster includes Wells Fargo, Bank of America, Citibank, Goldman Sachs, Bear Stearns and Credit Suisse. Of Orrick’s three practice areas — finance, corporate and litigation — the finance work remains its strongest suit, representing 45 percent of the firm’s revenue last year. The No. 1 public finance firm in the country, Orrick says it collects between $35 million and $50 million a year in revenue from government contracts. However, public finance work is low-margin, high-volume work that may not be particularly appealing to potential merger partners. It involves “lobbying relationships with mayors and important council members, and most big firms don’t want to get involved at that level,” one consultant said. He added that Orrick’s employment work is also low margin since employment firms like Littler Mendelson set the market rate at $250 to $350 per hour. Like other sources interviewed about Orrick, he spoke on the condition of anonymity because of his relationships with Baxter and others at the firm. Baxter emphasized that Orrick’s finance practice is more than public finance. The firm is one of the market leaders in structured finance and has strong project finance and private equity finance practices, and a growing distressed assets practice. The firm, for example, was lead counsel for Retirement Systems of Alabama, the lead investor of U.S. Airways, in the airline’s bankruptcy proceedings. Orrick’s headquarters in the old Federal Reserve Bank Building reflect the firm’s close ties to the banking industry. But Orrick hopes to gain a hipper image when it moves to new digs at Foundry Square next summer. “This building speaks to yesterday,” Baxter said of the firm’s current space. “This looks like an historic monument. We want to be in a vibrant, exciting place.” While Orrick embraces its reputation as a leading finance firm, it has also tried to establish a name for itself in hotter, more profitable areas. Ten years ago, Orrick hammered out a plan to grow its litigation and corporate practices and build an intellectual property group. “Our strategy is to have a set of practice areas and set of locations that will make us the firm of choice for very significant clients doing very significant things, either disputes or transactions,” Baxter said. Orrick has grown these areas through lateral hires and acquisitions of large groups of attorneys. The firm got its IP practice off the ground when it hired a group from a New York intellectual property boutique. It then snagged William Anthony Jr., the one-time head of Brobeck, Phleger & Harrison’s IP practice, and Terrence McMahon, who two years ago defected to McDermott, Will & Emery. The firm further boosted its IP group to 80 attorneys when it acquired Lyon & Lyon’s San Diego office after the IP firm closed down last year. And for the past two years Orrick has made Recorder affiliate IP Law & Business magazine’s list of more than 40 firms that bring and defend the most patent cases. Its clients include Microsoft Corp. and Cisco Systems Inc. Orrick has perhaps been most successful in establishing a strong New York presence, one of the largest of any California firm. Orrick set up shop there in 1984 and grew the office with lateral hires, most significantly through the acquisition of Donovan Leisure’s 42-attorney litigation group. “Orrick has pretty much transformed itself into a New York firm, emphasizing, as we do, a financial practice in New York,” said Morrison & Foerster Chairman Keith Wetmore. In the past year Orrick has turned its attention to Europe, first opening an office in Paris with the acquisition of a local firm and then setting up shop in Milan. The offices, which focus on finance and corporate work, have 41 and 22 attorneys, respectively. Orrick also has an 18-attorney office in London and 15 attorneys in its Tokyo outpost. The firm closed down its Singapore office last year as a result of the economic slump in Southeast Asia. Baxter wants to further expand the firm’s presence in Europe and Asia. He said Orrick needs to be in China and Germany and would also consider setting up shop in other places, such as Spain and Poland. Consultants and competitors say, though, that Orrick has a long way to go to become one of the nation’s top firms. “They are not anywhere they need to be on the litigation or corporate side,” one consultant said. “If they are aiming to be among the top 25 to 50 firms in the world over the next 10 to 15 years, then they’ve really got to enhance their corporate and litigation practices, and they haven’t shown the ability to do that in a significant way.” Orrick has tried to boost these practices through mergers. A deal with VLG or Cooley would have been a big jolt to Orrick’s 100-attorney corporate group and given the firm an identity as a Silicon Valley technology player. Orrick and VLG have been working together under a client-sharing agreement for the past four years, so when VLG decided to hook up with a bigger outfit, it naturally struck up a conversation with Orrick. Several sources, including consultants and partners at competing firms, say VLG decided Heller Ehrman White & McAuliffe’s life science and litigation practices were a better fit with its emerging company focus. GOVERNING ORRICK Orrick walked away from the Cooley deal, several sources said, after Cooley demanded a greater leadership role. At Orrick, major decisions are made by a nine-member executive committee, which is composed of Baxter, four managing directors appointed by him and four at-large members chosen by a nominating committee. The nominating committee also polls the partnership to see if they approve of Baxter’s choices for the committee. While Orrick’s governance structure is very centralized, Baxter dismissed the idea that he alone controls the firm. “Orrick is led by a large and effective leadership team consisting of more than 40 partners and other professionals,” he said. “All major decisions are reached by consensus.” It’s clear from talking to partners, however, that Baxter is running the ship and that they are happy to have him at the helm. “A law firm with a lot of litigators is a loose affiliation of prima donnas,” said Orrick’s Anthony. “Getting them to dance together is not easy. � How Ralph does it is through his persuasive powers.” When he pushes an idea through, he has already sold it to partners, Anthony said. One of Baxter’s controversial ideas was moving the firm’s financial and technology support staff to an offsite facility in West Virginia. “Without Ralph’s powers of persuasion there would be no Global Operations Center,” Anthony said. “There were skeptics when we opened it. I was a skeptic. I didn’t like the idea of a shop on the East Coast. But it’s worked out very well.” Lynne Hermle, a member of Orrick’s executive committee, said the partnership is solidly behind Baxter. She was head of the firm’s annual committee, which nominates partners for the executive committee and chairmanship, when Baxter’s last term ended. The committee met with all the partners, and they unanimously supported Baxter continuing as chairman. “There never was a single dissenting vote,” Hermle said. “Not everyone is best friends with Ralph, but they will say we are extremely well led.” “I have the highest regard for Ralph and his leadership,” said Bruce Boulware, Orrick’s former chief operating officer. “I felt very much part of the team. He’s a big figure and a big personality, which has been almost entirely to Orrick’s benefit.” Boulware left Orrick last year to take the COO post at O’Melveny & Myers. Cooley, a pair of sources familiar with negotiations said, was also apparently gun-shy about Orrick’s higher expenses. Orrick has taken on additional debt opening outposts and expanding existing offices. At the same time Cooley has been reducing its size and trying to keep costs and debt to a minimum. Neal said in an interview in March that the firm’s bank debt is approximately $10 million and its paid-in capital $32 million. Firms typically don’t share such information, and Baxter declined to do so. But he did say that Orrick puts 5 percent of its income into capital every year. The firm had gross revenue of $400 million in 2002 and profits per partner of $875,000, the highest among Bay Area firms. But like other firms, Orrick has a large number of non-equity partners — 85 of its 214 partners — which has helped boost the firm’s profit numbers. By comparison, Orrick’s average compensation for all partners was $685,000 last year, while Cooley’s was $710,000. But Orrick can claim its lawyers are more productive overall. Its revenue per lawyer in 2002 was $700,000, while Cooley’s was $550,000. Baxter acknowledged that the bottom four of Orrick’s 12 tiers of partners are non-equity, receiving a partly variable and partly fixed income. They all have voting rights and make capital contributions. Baxter said the firm began making partners non-equity about 10 years ago as a way to remain profitable while continuing to elevate all qualified lawyers to the partnership ranks. “There are New York firms that make very few partners” and so stay highly leveraged with strong economics, Baxter said. If 10 people qualify for partner, Orrick wouldn’t elevate just two. “It’s not in our culture to do this. Yet we are competing for people and transactions, and each new partner dilutes our profits.” As Orrick strives to boost its profitability and standing in the lineup of top firms, it’s sure to be at the center of other merger discussions. “Orrick does intend to continue to grow by all the tactics we’ve employed over the years — hiring on campuses, hiring laterals, bringing in teams of lawyers and perhaps doing a merger,” Baxter said. “We would only add lawyers or do a merger if and when we identify lawyers and merger partners who fit with our strategy, culture and economics.”

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