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Proceed with caution. This is the strategy many law firms used this year, and one reason for the steep drop in law firm mergers in 2003. Instead of wholesale mergers, many big firms channeled their growth by scooping up practice groups from rivals and defunct law offices. Yet industry observers expect law firm unions to make a comeback in 2004. This year, by the end of the third quarter, the national legal marketplace had witnessed 30 full-fledged mergers and was on pace to end up with around 40 — a significant drop from the 54 unions in 2002 and the 82 in 2001, says consultant Lisa Smith of Hildebrandt International. Many blame the decline on firms’ wariness in a floundering economy that is causing some to focus more on recovering than on expanding. “Firms do not want to merge from a position of weakness,” says William Brennan, a consultant at Altman Weil. H. Edward Wesemann of legal consulting firm Edge International agrees. “It’s not that people aren’t interested in merging. It’s been a tough time to put together deals,” he says. Others point to the dwindling number of merger targets as a reason for the drop, particularly due to the high number of mergers over the last few years. “A lot of the most attractive candidates have been acquired already,” says Jonathan Lindsey, managing partner at the legal search firm Major, Hagen & Africa. But despite the varied justifications for the merger decline this year, consultants predict a marked increase next year. “We are seeing more demands to provide assistance to firms that are considering merging,” says Brennan, who notes that he is currently working on five separate merger transactions at Altman Weil. He declines to name the firms involved. The incentives for firms to merge still exist. For one thing, law firm unions are driven by clients looking for more depth in particular practice areas, says Hildebrandt’s Smith. Merging with another firm is less time-consuming than bringing in a huge number of laterals separately, she says. But mergers are not without their troubles. In addition to resolving client conflicts, merging firms must contend with inconsistencies in compensation systems and management structures, as well as ongoing financial obligations such as leases and pension funds, Lindsey says. Throughout the year, firms seeking to expand pursued an alternative to full-blown mergers — acquiring the practice group. Taking the practice group instead of uniting with the entire organization might be the preferred route for some firms because “they don’t want to take on the old firm’s obligations,” Lindsey says. Morgan, Lewis & Bockius has been particularly adept at this strategy. When merger talks with San Francisco-based Brobeck, Phleger & Harrison fell through in January before Brobeck’s collapse, shortly after, Morgan, Lewis simply hired 153 of the firm’s 500-plus lawyers. Most recently, Morgan, Lewis expanded its intellectual property group this month by adding eight lawyers — seven in its Silicon Valley office — from soon-to-be defunct IP boutique Pennie & Edmonds. (Also shutting its doors this year was 300-lawyer Chicago firm Altheimer & Gray.) Failing law firms such as Pennie, reportedly disbanding by the end of December, and Brobeck were easy prey for their rivals. Houston-based Andrews & Kurth feasted on Brobeck by adding nine lawyers from its technology group in Austin and snagged 15 Dallas lawyers from Cleveland-based Arter & Hadden, which expired in July 2003. “We were happy to get our share,” concedes Howard Ayers, Andrews & Kurth’s managing partner, though he sympathized with firms forced to close their doors. Despite each unique situation, reports cited several common causes for the break-up of the firms. The standard reasons included the debilitating economy, hasty growth during the dot-com boom, slowdown in corporate mergers, and mounting debt. But law firm consultant Wesemann added one more. “Perhaps the culprit wasn’t the notorious debt associated with rapid expansion, but the notorious greed associated with such success,” Wesemann wrote in an article published this past summer on his company’s Web site. Wesemann referred to the haste with which partners depart their firms when times go bad and profits take a dip. At Brobeck, for example, profits per partner declined 38 percent in 2002. And according to reports, the failed 2003 merger with Morgan, Lewis was partly due to the departure of prominent, revenue-generating partners. But for Ayers, whose firm has benefited from others’ collapses, the lesson “emphasized” is for law offices to strike a balance between investment and growth and risk management. “Sometimes it’s easier said than done,” Ayers says, “but that’s everybody’s challenge.”

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