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Highest Grossing SoCal Firms Top Profits In the ’90s, the top Southern California firms were obsessed with crossing the million-dollar profits-per-partner mark. Now they’re closing in on that mark in a more telling — and exclusive — metric: revenue per lawyer. Three firms — Gibson, Dunn & Crutcher, Irell & Manella and Munger, Tolles & Olson — hauled in more than $900,000 per lawyer last year. Latham & Watkins edged above $800,000. The revenue-per-lawyer figures are among the most striking results of The Recorder‘s annual survey of Southern California-based firm finances. As a whole, the region’s highest-grossing firms posted strong revenue gains and, in most cases, even stronger gains in profitability. “These are firms with strong management, focused on high utilization and with very high billing rates,” said Newport Beach-based management consultant Peter Zeughauser. Firm leaders said billing rates and hours were up, while head count wasn’t. “Our rates went up in 2004 consistent with the market,” said Gibson’s managing partner, Kenneth Doran. “Many of our practice groups and offices were more engaged in 2004 than in 2003, resulting in higher hours. And we improved our realization rate, which is largely reflective of the mix of our work.” Latham & Watkins once again led the way with revenue of $1.2 billion, an increase of 17 percent over 2003. O’Melveny & Myers, with $697 million in revenue, edged out Gibson, Dunn for second place for the second straight year. O’Melveny and Gibson were the only two of the 10 firms to record single-digit increases in revenue. The growth and profits-per-partner leader was Quinn Emanuel Urquhart Oliver & Hedges, which saw revenue increase 25 percent. Profits per partner, meanwhile, leapt 39 percent, to a staggering $1.9 million. “We’ve been the most profitable law firm in California for the last decade,” said partner A. William Urquhart. All told, seven of the top 10 firms recorded profits per equity partner above $1 million. Irell & Manella saw average partner profits increase by 32 percent, to $1.54 million. Gibson, Dunn was right behind, with $1.5 million, a 7 percent boost. The rest of the firms saw per-partner profits increase between 2 percent and 19 percent. O’Melveny, which saw just 2 percent growth, to $1.31 million, pruned its partner ranks in 2004 with early retirement packages. But O’Melveny Chairman Arthur Culvahouse Jr. said the effect of those departures won’t be felt until the numbers for 2005 are in. Zeughauser said O’Melveny was “among the last of the leading national firms counseling out under-performing partners.” Zeughauser said competitors Gibson, Dunn and Latham & Watkins had been on the front end of the trend. Consultant Ward Bower, of Altman Weil, noted that New York firms still lead the profit pack. But some California and Chicago firms are catching up — due in part, Bower says, to their success in New York and London. “You can make more money there as a lawyer because of the capital markets, the big deals, the M&A and the big-ticket litigation,” says Bower. Latham & Watkins Latham Managing Partner Robert Dell said 2004 was another “good, strong year,” with demand high across the board for all practice areas. Latham lawyers must be working harder because the firm achieved revenue and profit increases even as it enlarged its equity and non-equity partner tiers and saw its overall head count dip. The number of equity partners grew 5 percent, while the non-equity tier increased 18 percent. The firm snared a few high-profile laterals, including former Treasury Department tax official Julian Kim, Clifford Chance’s Faye Russell, and key hires in Washington, Paris and Frankfurt. Latham’s New York office shrank by 34 lawyers in 2004. Nevertheless, the firm intends to focus on growing there, with plans to move from 285 lawyers to 400 over the next five years. To that end, the firm signed a lease for additional space in the Lipstick Building on Third Avenue. Meanwhile, the firm said it expects a 40 percent hike in the number of first-years it welcomes this year. Among its notable engagements, Latham served as Oracle’s antitrust counsel in its $10.3 billion acquisition of PeopleSoft, a deal that at one point required the production of enough documents to fill the entire cargo hold of a red-eye flight to Washington. And Latham achieved a major victory for Arthur Andersen, its client in approximately 140 Enron-related cases, by persuading the U.S. Supreme Court to review the accounting giant’s criminal conviction. On the corporate side, Latham represented the lenders in a $9.7 billion financing for expansion of gas lines on the Qatargas II project by the Qatar Petroleum-Exxon Mobil joint venture. The firm also counseled ABN AMRO Inc. and Lehman Brothers in connection with a $4.4 billion bank and bond financing to develop the Tengiz oilfield in Kazakhstan, one of the largest in the world. Latham also represents Harrah’s Entertainment Inc. in its pending bid to acquire Caesars Entertainment Inc. for $9.4 billion. O’MELVENY & MYERS With revenue of $697 million, O’Melveny & Myers took the second spot on the revenue rankings. “It was another great year for us, and we feel very well positioned going forward,” said O’Melveny Chairman Culvahouse. Profits per partner were up only slightly, to $1.3 million, explained Culvahouse, because the firm made some considerable investments. It opened a six-lawyer office in Brussels, anchored by partner Riccardo Celli. It moved its office and bulked up its ranks in London with the acquisition of a five-partner private-equity and finance group. And in New York, the firm consolidated its two offices into one space in the 7 Times Square building. (O’Melveny gained a second New York office when it merged with the 140-lawyer private-equity boutique O’Sullivan in 2002.) Despite key hires — such as Timothy Muris, former chairman of the Federal Trade Commission — attorney head count was flat. O’Melveny did raise rates, Culvahouse said, but he added that reduced discounts and write-offs accounted for the greatest revenue growth. Private equity in New York and litigation nationwide led the firm’s practices. The firm represented J.P. Morgan Partners in its participation in a $2.9 billion acquisition of U.K. drug maker Warner Chilcott Inc. It also advised Dynegy Inc. in its $2.3 billion sale of Illinois Power Co. as well as the Macerich Co. in its $2.3 billion acquisition of East Coast-based shopping malls. On the litigation front, the firm mounted former Enron Corp. Chief Executive Jeffrey Skilling’s defense, handled Martha Stewart’s appeal and represented the Walt Disney Co. in a battle over rights to Winnie the Pooh. The firm kicked off 2005 with the acquisition of six top laterals for its mergers and acquisitions practice. Spencer Klein, former head of McDermott, Will & Emery’s M&A practice, joined in New York, along with McDermott partners Gregory Puff and Paul Scrivano. In San Francisco, the firm grabbed Michael Kennedy, head of the M&A practice at Wilson Sonsini Goodrich & Rosati, along with partners Steve Camahort and Michael Dorf. GIBSON, DUNN & CRUTCHER Although Gibson, Dunn may have finished just behind O’Melveny in revenue, it still easily outshined that firm and Latham in profits per partner. The firm’s 245 partners — all with equity — took home an average $1.5 million in 2004 on revenue of $693 million. Doran said the firm saw an uptick for the first time in several years in transactional practices, with renewed activity in capital markets, mergers and acquisitions, and the real-estate practice group. He said antitrust, securities litigation, environmental litigation and corporate investigations also fared well. The firm welcomed the return of partner Theodore Olson, who had served as solicitor general of the United States and now heads a multi-disciplinary crisis management team of lawyers selected from throughout the firm. The firm also built on the opening of its office in Brussels in 2003 with the hire of five partners in London, Paris, Brussels and Munich. Notable work in 2004 included representing Wal-Mart in its appeal of class certification in a suit on behalf of 1.65 million workers, representing SEMPRA Energy in a price-fixing case in Nevada and counseling GE Commercial in a $2 billion acquisition by Boeing Capital Corp. PAUL, HASTINGS Paul, Hastings, Janofsky & Walker was one of the few top-grossing L.A. firms to increase head count in 2004. The firm added 60 attorneys, most of them through its acquisition of Paris-based Moquet, Borde & Associes. One of the 20 largest French law firms, Moquet gave the firm entry into Brussels, the hub for European Commission antitrust work. The investment didn’t seem to harm the bottom line. Revenue increased 13 percent, to $609 million, and profits per equity partner increased 11 percent, to $1.175 million. Chairman Seth Zachary said the firm bulked up in Washington, D.C., moved offices in Tokyo and saw the first year of billings from its Shanghai office, which opened in 2003. Overall, the firm hired 16 lateral partners, Zachary said. Zachary said securities, intellectual property and employment litigation practices thrived. Paul, Hastings represented Shanghai-based chip manufacturer SMIC in a series of patent cases in San Francisco, San Diego, Los Angeles and Shanghai. The firm also handled bankruptcy reorganization and litigation for the South Dakota-based power company NorthWestern Corp. and also represented Wal-Mart in the employment class action at the trial court level. On the corporate side, Paul, Hastings handled deals for Lehman Brothers, Apollo Advisors and Soros Fund Management. Sheppard, Mullin Growth was a theme for Sheppard, Mullin, Richter & Hampton in 2004, with revenue and profits per partner seeing an approximate 15 percent jump, despite expenditures on two new offices and a new practice. “Our general business model is to have very consistent and sustained growth,” said Managing Partner Guy Halgren. Within the lawyer ranks, that meant net gains of six equity partners and five non-equity partners in 2004, and overall growth from 337 to 369 lawyers. The firm engaged in dual efforts to solidify Sheppard’s presence in L.A. and move into new cities and practice areas. In 2003, Sheppard, Mullin started an entertainment and media practice that last year grew to 30 lawyers and generated consistent revenue, Halgren said. The firm also opened a 45-lawyer office in Century City. Sheppard, Mullin opened a 12-attorney office in New York in September. The office is led by James McGuire, a former assistant U.S. attorney who had been with White & Case. He was soon joined by John Gustafsson, a former counsel for Honeywell International and before that a litigator with Simpson Thacher & Bartlett. Halgren said Sheppard, Mullin refuses to fuel its growth with debt. “We do not borrow for any of our expansions,” he said, adding that partners would rather take a one-year profit hit than incur long-term debt. “Our profit would have been materially higher without the expenses.” That profit was largely generated by growth across the firm’s practices, although one deal — a $60 million-plus IPO for cell phone software maker Jamdat — made a big splash, said Halgren. Over the next year, Sheppard plans to continue its expansion. “We’re looking at a couple of new office possibilities, and also some new practice possibilities,” Halgren said. ROUNDING OUT THE LIST Irell & Manella and Quinn Emanuel proved once again that bigger isn’t always better. The two firms, ranked sixth and eight by revenue, led the pack in profits per partner. Irell’s intellectual property, securities and litigation practices all grew in 2004, thanks largely to a heavy load of trial work. “Litigation was the largest contributor to our revenue,” said Managing Partner David Siegel. Most notably, the firm won an $82 million trial judgment for client Immersion Corp. in a patent infringement case against Sony Computer Entertainment America Inc., in addition to successful jury verdicts on behalf of entertainment clients. At Quinn, a 25 percent revenue spike was due in part to contingency fee work. But Urquhart said the firm would have done well even without it, thanks to an explosion of work in New York and Northern California. “Our Bay Area office billed more than any other office, including Los Angeles,” said Urquhart. “That’s the first time that has ever happened.” The intellectual property practice is now responsible for more than half of the firm’s income, he said. Quinn picked up several new clients, including Genentech, Roche Pharmaceuticals and Monsanto, Urquhart said, and is handling big patent cases for them. The firm also became counsel to Enrico Bondi, the bankruptcy trustee hired by the Italian government to reorganize Parmalat Finanziaria S.p.A., the Italian food giant under investigation for financial fraud. Bondi filed suit against Parmalat officials, claiming they manipulated the company’s financial reports. The litigation focus at Munger, Tolles helped that firm climb into the million-dollar profits club for the first time. The firm saw revenue increase 13 percent and per-partner profits grow 9 percent. Over at Manatt, Phelps & Phillips, Managing Partner Paul Irving attributed the firm’s 12 percent bump in revenue to an uptick in transactional work “reflecting the general improvement in the deal economy.” Loeb & Loeb, with revenue of $121 million, knocked 2003′s 10th-place finisher — Allen Matkins Leck Gamble & Mallory — off the list. Loeb’s managing partner, John Frankenheimer, credited growth in corporate and tax practices. But he said the 183-lawyer firm isn’t out to overtake its largest competitors. “Our direction is not necessarily that of most firms,” he said. “We’re trying to create size to handle the biggest matters. But we have no aspirations to be a 1,000-person firm.” This story was reported and written by reporters Marie-Anne Hogarth and Justin Scheck and Senior writer Brenda Sandburg.

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