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In April, 82-lawyer Collier Shannon Scott, one of Washington’s premier midsize law firms, announced that it was merging with New York’s Kelley Drye & Warren. In discussing his firm’s decision to give up its independence and combine forces with a larger competitor, Paul Rosenthal, Collier Shannon’s chairman, cited Kelley Drye’s cultural similarities and “commitment to excellence.” See http://kelleydrye.com/broadcast. The real explanation, of course, was more complicated. Collier Shannon, like many midsize firms, was at a crossroads. It had built highly successful practices in certain niche areas, including advertising, international trade and, until the departure of former name partner James Rill to Howrey, antitrust. Its profits per partner were decent by Washington standards, particularly for a midsize firm, and it was settled in spectacular offices overlooking the Potomac River in Georgetown. But the firm had grappled for several years with the central question facing many firms within its size bracket: how to maintain the advantages of a smaller, more collegial environment while at the same time grow the firm’s business and profits. Following the departure of Rill and his 14-member group in 2000, Collier Shannon embarked on a growth strategy focused on lateral acquisitions. Fiercely committed to maintaining its autonomy, the aim was to expand the firm’s core practices and, at the same time, attract partners and groups in complementary areas such as trademark, IP litigation, government contracts and Food and Drug Administration (FDA) practices. The firm soon discovered that building practice specialties through individual lateral partner acquisitions was extremely difficult, particularly practices such as trademark and FDA, which required an infrastructure and critical mass. Although the firm was able to add some lateral partners, it lost others in the highly competitive Washington recruiting market. Collier Shannon also found that its size and lack of associate leverage hindered its ability to keep pace financially with the larger firms in Washington, where profits per partner were approaching, and in growing numbers passing, the $1 million mark. This not only made it more difficult to attract top lateral talent, it also raised the concern that one or more of Collier Shannon’s top producers might be lured away by the firm’s national competitors. The issues facing Collier Shannon were not unique. Over the past five years, a host of Washington’s top midsize law firms have merged into larger regional or national firms. In 2003, well-known Dyer Ellis & Joseph merged with Philadelphia-based Blank Rome, expanding Blank Rome’s Washington office to more than 50 attorneys. The following year, 70-attorney Shea & Gardner merged with Boston-based, 500-attorney Goodwin Procter. Shea & Gardner had enjoyed a national reputation in regulatory and litigation work, while Goodwin Procter had leading practices in the corporate finance and securities, intellectual property, real estate and litigation. And last year, Burns, Doane, Swecker & Mathis, one of the Washington area’s premier intellectual property firms with 100 attorneys, decided to combine with Pittsburgh-based Buchanan Ingersoll. Various market forces underlie this trend. Midsize firms are finding it increasingly difficult to attract not only lateral partners, but also top associates. In April, the leading national law firms raised first-year associate salaries to $145,000. The increase pushed all associate compensation to new levels. Sixth- and seventh-year associates at top firms are now making $200,000 or more. The major regional firms followed suit, raising their first-year associate salaries to $125,000 to $135,000. Because midsize firms cannot bill out their associates at rates anywhere near those charged by the large firms, they simply are unable to raise their associate compensation to these levels, with the result that they are finding it increasingly difficult to attract and keep top associates. The financial disparities between midsize firms and larger regional and national firms also affect partner recruiting and retention. Although many partners at midsize firms prize their more collegial environment, others find their firms’ egalitarian culture limiting in any number of respects-from partner compensation, to client marketing, to issues concerning practice growth. For example, a partner who controls $2 million of business at a midsize firm may well have reached the outer edges of his firm’s compensation system, not to mention the partner’s ability to continue to grow his practice, both because the firm’s client base is too limited and because the firm lacks the resources to adequately service new business. In explaining his firm’s decision to merge, Patrick Cavanaugh, now the managing partner of Blank Rome’s Washington office, identified two driving factors: Dyer Ellis, which had 44 lawyers at the time of the merger, needed “more resources” and a “larger platform.” Tim Mazzucca, “Dyer Ellis merges with Philly law firm,” Wash. Bus. J., Jan. 10, 2003, http://washington.bizjournals.com/washington/stories/2003/01/06/ daily50.html. The “platform” offered by superregional and national firms is attractive to many partners at midsize firms because it offers the opportunity to turn a $2 million practice into a $5 million practice, with a commensurate increase in compensation. As illustrated by the scores of lateral partner and practice group movements and mergers each year, larger platforms can entice partners from midsize firms by offering a significantly larger client base, greater cross-marketing opportunities, the ability to represent clients in several different regions of the country and broader and deeper resources. They also can help partners retain existing clients by ensuring that they can service them across all business lines. Strategic pairings From the point of view of the acquiring firms, there are several strategic reasons for combining with premier midsize firms. For example, national firms need a substantial presence in each major U.S. financial market. This means that national firms need broad practices in New York, Chicago and Los Angeles, at a minimum. They also need a Washington presence to serve their clients’ regulatory and legislative needs. Rather than build such offices incrementally, which can take years, many firms have decided to merge with top midsize firms to achieve critical mass and local expertise. Firms also have found that by targeting specific midsize firms they can acquire specialties that strategically complement their core practices. This is particularly true in Washington, where since 1998 national and regional firms have virtually swept the city of its IP and regulatory boutiques, and New York, where midsize firms with finance and securities practices have found no lack of national suitors. In Washington, for example, in addition to the Kelley Drye, Blank Rome and Goodwin Procter transactions, Bingham McCutchen recently acquired telecom-focused Swidler Berlin; Boston-based Ropes & Gray merged with IP powerhouse Fish & Neave (headquartered in New York); Howrey and Venable added substantial intellectual practices by acquiring, respectively, IP specialty firms Arnold White & Durkee and Spencer & Frank; and DLA Piper Rudnick Gray Cary acquired 75-lawyer Verner Liipfert Bernhard McPherson & Hand, one of the city’s best known legislative firms. In New York, bicoastal firm O’Melveny & Myers merged with 88-lawyer private equity specialist O’Sullivan; Washington’s Hogan & Hartson merged with Squadron Ellenoff Plesent & Sheinfeld, a 100-lawyer corporate and securities litigation firm with an offices in New York and Los Angeles; Boston-based Bingham Dana (now Bingham McCutchen following its merger with California’s McCutchen Doyle Brown & Enersen) acquired 75-attorney Richards & O’Neil; Washington’s Dickstein Shapiro Morin & Oshinsky merged with corporate and securities specialists and Cravath spinoff Roberts, Sheridan & Kotel; Paul, Hastings, Janofsky & Walker merged with 160-lawyer Battle Fowler; Atlanta-based Troutman Sanders added the 91-lawyer New York office of Dallas-based Jenkens & Gilchrist; and Toronto-based Torys merged with Haythe & Curly. A national wave The shrinking roster of midsize firms has not been limited to New York and Washington. Over the past five years, firms based in the East Coast and Midwest have descended on California, seeking to establish a ready-made West Coast presence by aligning with well-established California-based firms. In the San Francisco area, we saw the Bingham Dana-McCutchen Doyle merger mentioned above. Additionally, Piper Rudnick (now DLA Piper Rudnick Gray Cary) merged with 32-attorney Steinhart & Falconer and technology-based Gray Cary Ware & Freidenrich. Drinker Biddle & Reath, a Philadelphia-based firm with offices in New York and Washington, merged with litigation specialists Preuss Shanagher Zvoleff & Zimmer. And Dechert, which has its largest office in Philadelphia, added 28 attorneys in Palo Alto, Calif., from Oppenheimer Wolff & Donnelly. Although McCutchen Doyle and Gray Cary were somewhat larger than the ordinary midsize firm, the reasons each ultimately decided to merge were the same-greater client breadth and geographic reach, the ability to service clients across different practice lines, enhanced resources and client marketing opportunities, and the prospect of greater compensation growth. In addition, several regional and midsize firms, convinced that they needed scale to break into the NLJ-affiliated American Lawyer list of the top 100 firms, as measured by profits per partner, have fueled their expansion strategies through complementary mergers. Reed Smith, until a few years ago a regional firm based in Pittsburgh, has transformed itself into a 1,300-lawyer global top 20 law firm with offices in 18 cities worldwide. Much of this growth resulted from acquisitions of other midsize firms, including Warner Cranston and the recently announced Richards Butler in the United Kingdom (set to close Jan. 1, 2007), and Crosby, Heafey, Roach & May in Oakland, Calif. The firm added more than 40 lawyers in New York through mergers with Parker Duryee Rosoff & Haft and advertising law boutique Hall Dickler. The addition of these offices not only catapulted Reed Smith onto the international stage, it substantially diversified its practice specialties and client base and helped to raise its profits per partner to $800,000, placing it 66th in the American Lawyer rankings. McGuireWoods, once a midsize regional firm based in Richmond, Va., followed a similar pattern, more than tripling its size over the past 10 years. Now with more than 750 lawyers and 14 offices in the United States, Europe and Central Asia, McGuireWoods has followed an aggressive strategy of growth through mergers with midsize and specialty boutique firms, including 155-lawyer Chicago-based Ross & Hardies, Los Angeles’ 40-lawyer Van Etten Suzumot & Becket and Chicago technology boutique Gordon & Glickson. Buchanan Ingersoll, another Pittsburgh-based law firm, has also adopted an aggressive acquisition strategy, but with a slightly different focus. Merging up the profits-per-partner ladder comes with certain costs, including the problem of continuing to service local, midmarket clients because of higher billing rates. Part of Buchanan Ingersoll’s strategy has been to take advantage of the dislocation caused by the shrinking roster of midsize firms by expanding its market share among local corporations and businesses. Toward that end, Buchanan merged with 130-lawyer and Pittsburgh rival Klett Rooney Lieber & Schorling on July 1, creating the largest law firm in Pennsylvania. According to the consulting firm Hildebrandt International, law firm merger activity has steadily increased over the past four years. There were 49 completed mergers and acquisitions involving U.S. law firms in 2005, up from 47 the year before and 35 in 2003. The key trend, Hildebrandt noted, was the increase in the average size of the smaller firm-from 30 attorneys in 2004 to 67 attorneys in 2005. Continuing the trend of past years, New York, Washington and California were the strongest inbound markets. See www.hildebrandt.com/ Documents.aspx?Doc_ID=2409. Expertise is not enough Another market force driving midsize firms to consider merging with larger national platforms is client retention. Practice expertise alone may no longer be sufficient to retain key corporate clients, particularly clients with extensive regional, national or international businesses. In an effort to control costs and streamline their outside counsel programs, these corporations have developed preferred provider lists limiting the number of law firms they retain and demanding that their attorneys be able to provide legal services across business lines and geographic regions. Midsize firms are ill-equipped to meet these requirements. By teaming up with national firms, midsize firms not only enhance their ability to retain national clients, they also stand to gain new business in their region from their merger partner’s clients. As explained by Francis B. Burch Jr., DLA Piper’s vice chief executive, his firm’s decision to find a partner in Northern California “was driven by increasing demand among our institutional clients for us to establish a strong presence in this dynamic region.” See www.dlapiper.com/es/global/media/detail.aspx?news=108. The success of these mergers depends on a variety of factors-cultural compatibility, effective integration of practice groups, successful cross-marketing to clients and billing rate and pay compatibility. For some midsize firms, the projected benefits of such mergers come at too great an expense. Deciding to maintain their independence and culture, these firms have developed competing models for success. Carter Ledyard & Milburn, a 120-lawyer firm with offices in New York and Washington, has a strategy that combines high-profile niche practices, general mid-cap work and a client service commitment titled “Partners for Your Business.” As a key feature of its commitment, Carter Ledyard boasts a ratio of partners to associates of about one to one, the polar opposite of Latham & Watkins’ leverage model of one partner to five associates, adopted by most national firms. The firm also offers equity-based fee arrangements. Successful niches Other firms have focused on a few highly-profitable practice niches. Wiley Rein & Fielding maintains a very successful communications practice in Washington. Fenwick & West of Mountain View, Calif., and Finnegan, Henderson, Farabow, Garrett & Dunner of Washington have leading intellectual property practices. Phillips Nizer of New York has developed profitable practices around its entertainment and fashion clients, as have a handful of other firms in Los Angeles and New York. And New York firms Kramer Levin Naftalis & Frankel and Herrick Feinstein have high-profile corporate and real estate practices. But for every midsize firm that has been successful at carving out a specialized niche or leveraging client relationships, the merger activity over the past eight or nine years reveals countless others that have attempted to follow similar strategies only to succumb to the market forces that ultimately drove Collier Shannon to give up its autonomy. The legal market seems to be stratifying into two groups: global providers and local providers. There will always be a market for midsize firms that cater to midmarket clients. Indeed, that market can be robust in good economic times. But midsize firms that attempt to compete with national firms for business may well be fighting a losing battle, one that many of their partners are more than ready to concede. C. Thomas Williamson III is the managing partner of Lucas Group’s legal search division in Washington. He helps law firms nationally with partner and practice group placements and mergers and has been involved in some of Washington’s largest practice group transactions and law firm mergers. He holds a J.D. from Washington University School of Law.

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