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California’s Biggest Law Firm Mergers Five That Failed Merger Watch List The ink was barely dry on their merger agreement when the heads of Reed Smith and Crosby, Heafey, Roach & May began trekking around the country together to woo each other’s clients. At each stop, Reed Smith Chairman Gregory Jordan and Crosby Chief Executive Officer Kurt Peterson ticked off the virtues of their new firm: coast-to-coast capabilities, added depth in the life sciences and pharmaceutical arena, the robust combination of Crosby’s litigation skills with Reed Smith’s financial services and regulatory contracts experience. The pitching paid off. Jordan and Peterson persuaded a major pharmaceutical company to make the new firm national counsel for litigation and regulatory work. And they won dozens of other assignments, as well. “Almost nine full months out — as of the end of August — we’ve been able to identify $10.5 million in business that neither firm would have gotten but for the merger,” Jordan said. That’s the definitive sign of a merger’s success, consultants and law firm leaders say. Before two firms go to the altar, they need to have a strategic reason to tie the knot — such as strengthening certain practice areas or expanding their geographical reach — that will bring in business that neither could have won on its own. Poring over their ledgers and worrying about the unrelenting growth of their competitors, firms around the country are looking for a mate that will boost their standing with clients. But despite the constant courtships, the number of U.S. law firm mergers has fallen off since the record high of 75 domestic unions in 2001. The number dropped to about 50 in 2002 because of the economy and because many small and mid-sized firms had already been picked up. Bigger firms are now eyeing each other and also looking for international partners. “There are many merger discussions now between larger firms,” said Bradford Hildebrandt, of the legal consulting firm Hildebrandt International. And he said his firm is currently working on several international mergers. While Hildebrandt and other consultants couldn’t say who’s talking to whom, some discussions have become public. Cooley Godward, the prime merger candidate in the Bay Area, has talked to New York’s Pennie & Edmonds and most recently Orrick, Herrington & Sutcliffe. Orrick also pursued Venture Law Group and Los Angeles’ Riordan & McKinzie. VLG instead hooked up with Heller Ehrman White & McAuliffe, and Riordan chose Bingham McCutchen from its crowd of suitors. Most merger discussions, of course, break off after firms get a closer look at each other’s books and internal workings. “One of the things we tell our clients is not to merge unless you’re sure, because mergers don’t come apart,” Hildebrandt said. “It will take you a couple years until you know you’ve made a mistake.” He said this year he has advised against at least 15 mergers of various sizes. AN OBVIOUS FIT There has to be a fit between two firms, consultants and law firm leaders say. While this seems obvious, Robert Ruyak, the head of Howrey Simon Arnold & White, said firms with multiple practices that don’t mesh at all with Howrey’s narrow antitrust and intellectual property focus have approached him about a possible merger. However, Ruyak said firms are becoming more thoughtful about what they want in a marriage partner. “The old strategy was, let’s try to put two firms together for a larger geographic coverage,” Ruyak said. “Now mergers are much more strategic than they used to be.” Howrey itself is the product of a 2000 merger between antitrust powerhouse Howrey & Simon and IP specialist Arnold White & Durkee. But these days more firms seem interested in partial mergers, where one firm picks up a chunk of another rather than taking on the whole entity. Howrey, for example acquired half of Washington, D.C.’s Collier, Shannon, Rill & Scott. Similarly, Orrick picked up the litigation department of New York’s Donovan Leisure Newton & Irvine when merger discussions between the two broke off in 1998. And Philadelphia-based Morgan, Lewis & Bockius acquired 153 of Brobeck, Phleger & Harrison’s 518 lawyers when their merger talks ended and Brobeck disbanded. Morgan, Lewis Chairman Francis Milone said acquiring a group of lawyers has its pros and cons. On the positive side, he said, “you get to pick more specifically the kinds of people and practices you want,” fewer management worries crop up and compensation issues are easier. But when bringing in a group of partners, “you’re not bringing in accounts receivable or works in progress, so the cash flow is dramatically different,” he said. Merging with a full firm is likely to bring in existing client relations, he said. Even if practice areas, culture and strategy are a good match, firms face a variety of issues when they meld, such as disparate compensation systems or a practice group that may not fit with the new entity. Prior to merging with Reed Smith, Crosby, Heafey de-equitized 30 partners, many of whom left Crosby before the merger. Jordan said the move was necessary to align the structure of the two firms. While Crosby had one class of partnership, Reed Smith had both equity and non-equity partners. De-equitizing partners was “not a punitive thing,” Jordan said. “We had to restructure Crosby to look like Reed Smith and put them together.” Crosby’s insurance defense litigators also didn’t fit with the combined entity, and some left before the merger and others left right at the time of the transaction. HIGH HURDLES Pillsbury Winthrop Managing Partner Marina Park said firms in merger talks also have to look at such potentially troublesome issues as unfunded retirement liability and lease obligations. “The net present value of unfunded retirement liability can be daunting,” Park said. “Some firms we spoke to had net present obligation in excess of $30 million.” Pillsbury also learned from experience that lease obligations could add unexpected costs to a merger. When Pillsbury acquired Los Angeles’ Lillick & McHose in 1991, it had recently signed a 15-year lease for 100,000 square feet of space. Lillick also had several years on its lease. Pillsbury ended up subletting some of the space at a lower rate than it was paying and using the rest as an expensive litigation war room. “It was an anchor around our neck for 15 years,” Park said, adding that the firm just got free of the lease in August. Firms generally hammer out the major issues — client conflicts, compensation and leadership roles — before a merger. But once they tie the knot, they must integrate the new entity. And that, consultants say, is their most difficult task. “We find two legacy firms acting like they never came together,” Hildebrandt said. “There is no exchange of people, the firm is using individual computer systems, or worse, profit-centering the offices.” Law firm consultant Peter Zeughauser, of the Newport Beach-based Zeughauser Group, said mergers are problematic when key people don’t stay with the combined firm, the cultures are never integrated and “there is no common agreement where the firm should go.” Richard Gary, the former longtime chairman of Thelen Reid & Priest, said any downsides of a merger are generally felt by individuals within the combined firm rather than the institution itself. A practice group may be left out of the deal or lawyers may not have signed on to be part of a national outfit, he said. Gary, who is now an independent consultant based in Tiburon, oversaw the 1998 merger of San Francisco’s Thelen, Marin, Johnson & Bridges and New York’s Reid & Priest, which at the time was the biggest bicoastal law firm union. His one regret, he said, was that he didn’t read William Bridges’ “Managing Transitions: Making the Most of Change,” which describes the impact of change on an organization, until after the Thelen merger. “I’m sorry I didn’t have it as a resource,” he said. “I would have understood the impact of change on people and would have tried to take some different, maybe more aggressive, steps to handle the impact of change. � I would have been more sensitive to issues raised by people and more empathetic to questions raised.” Not everyone is in love with firm mergers, citing the turmoil and displacement they create. But consultants and law firm managers contend market consolidation is good for the legal industry. “Mergers by and large are good for client relations,” Gary said. “They add depth and breadth in the ability to provide client services, enhance the ability to recruit strong lawyers and generally increase profits.” Reporter Brenda Sandburg, Senior Writer Renee Deger and Assistant Managing Editor David Brown prepared this report.

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