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The courtship started because a friend told a friend there might be good chemistry. A time and place was set to meet. The two hit it off instantly. Dating and law firm mergers. It’s a running clich� in the law firm world that the managing partners and chairmen intimately involved in a merger romance talk about their wooing in the same jargon a college coed might use. On a winter afternoon in 2005, Paul Rosenthal, the chairman of Collier Shannon Scott, and Brad Mutschelknaus, the managing partner of Kelley Drye & Warren’s Washington office, met for lunch at Sam & Harry’s, an elegant steakhouse in downtown Washington, D.C. For four decades, Collier Shannon had been part of the Washington vanguard, with strong connections to the federal government. Kelley Drye was a New York-based shop lagging behind in the race for big-dollar litigation. Both men knew going in that the other was interested in a merger; a lawyer at Kelley Drye was good friends with Rosenthal and helped broker the date. “We realized pretty quickly that our firms might present solutions to each other’s problems,” says Mutschelknaus, who had been on countless similar get-togethers with other managing partners. From there the relationship intensified. Within a year the firms were married. The resulting firm of Kelley Drye Collier Shannon is emblematic of the recent Washington merger market. An out-of-town dominant player seeking an overnight Beltway presence swallows up a local midsize firm or boutique that has an appealing practice specialty and a compatible (or palatable) economic structure. In turn, the local, typically federally connected firm gets access to the larger firm’s national, and often international, collection of lawyers and clients. That example is one of the two common scenarios that compel a Washington firm to merge. The other can be seen in last year’s merger of Kirkpatrick & Lockhart Nicholson Graham and Preston Gates & Ellis. Both firms already had a Washington presence but were seeking to shed the stigma of being midsize regional players. Overnight, the merged firm had a national presence. But since those mergers, the District hasn’t seen a major D.C.-based firm get acquired. “I think we’re in the pre-earthquake stage,” says the managing partner of a Washington law office. “Certain offices are starting to lose talent, and at some point there’s going to be a seismic shift.” The national picture is a bit different. The industry is consolidating at a moderate pace that started with the economic recession in 2000. That downturn led a lot of firms to assess their vulnerability, leading many to conclude that they’d be better protected being larger. “There were mergers then, where firms were in a weak position and were trying to alleviate the suffering,” says the chairman of a Washington-based firm. “But now firms are generally more specific about what they want out of a merger. The market is more sophisticated.” In 2001, according to numbers provided by consulting group Hildebrandt International, there were 82 mergers nationwide, with Sidley & Austin’s merger with Brown & Wood being the headliner. Since then, the merger trend has slowed and stabilized, with the past few years averaging about a merger every week. This year is no different. After the first quarter, there were 23 mergers. There are two factors driving the consolidation of law firms: clients and the quest for talent. And in recent years aggressive steps have proven fortuitous, from the megamerger of Piper Rudnick and Gray Cary Ware & Freidenrich, which months later merged with U.K.-based DLA, to the continued international expansions of Reed Smith and Bingham McCutchen. “We moved up one spot on the AmLaw 100 after doing the largest merger deal of the year,” says Jay Zimmerman, chairman of Bingham McCutchen, referring to last year’s merger with Swidler Berlin. “It shows me that everyone is getting bigger.” The success those firms have had has only proved more convincing to industry watchers, who talk about future firm mergers with a sense of inevitability rather than speculation. A big bang theory Back to Washington. The national and international mergers seen in the past 18 months haven’t produced a major District headline. There’s some disagreement within the Beltway about why that is. Some say it’s an indication that Washington firms have grown to a point where they can buttress themselves against outside competition and out-of-town players already having District addresses. “Washington is a very different market than any other,” says William Perlstein, co-managing partner of WilmerHale, itself the product of the 2004 megamerger between Wilmer Cutler & Pickering and Boston-based Hale and Dorr. “Most of the national firms have pretty sizable offices here. Many of the local firms are working to branch out.” But many in the industry scoff at a worldview that is anything short of embracing accelerated consolidation. Among the majority of industry players � more than two dozen managing partners and recruiters were interviewed for this article, though few were comfortable going on the record � there’s the belief that Washington firms are biding their time, doing the due diligence all lawyers espouse, before beginning a second round of the dating game; after all, nobody wants to be Pillsbury Winthrop Shaw Pittman, which has seen its public image suffer in the wake of multiple defections. “Washington is such a unique market. The indigenous firms have resisted mergers and even lateral acquisitions to some extent,” says the managing partner of a nonindigenous Washington firm. “Lawyers are typically conservative. So you’ll find an occasional visionary, someone willing to step out there. But most firms will only make a move when they feel things caving around them.” Even then, that’s not always the case. The good people at Miller & Chevalier were at the top of almost every list when managing partners, consultants, and recruiters were asked to name the next District-based firm to merge. Only Miller & Chevalier insists that couldn’t be further from their business plan. That same response is echoed by the more robust Washington elite. “Getting bigger from a bulking-up standpoint doesn’t make sense to us,” says Kent Gardiner, chairman of Crowell & Moring. “We think that practice group depth is the biggest objective.” But consultants are particularly dismissive of the idea that a midsize Washington office can resist the inevitable: that client interest and an increasingly costly war for talent will force firms such as Crowell, Akin Gump Strauss Hauer & Feld, and others to merge with larger national law firms seeking a dominant practice inside the Beltway. “It’s not enough to be a top Washington firm anymore,” says the same managing partner. “We’re convinced that the market is segmenting. There is a positive correlation between size and profitability. Over time it’s going to be harder to be an awkward midsize firm.” An indication that many Washington firms recognize this is the dialogue among managing partners, which has never been more frequent and frank. “It used to be, 10 years ago, that I would be terrified to be seen in public with another managing partner,” says the chairman of a Washington firm. “But now if I’m not talking to other firms, then I’m not doing my job.” Which is why compiling a list of the Washington-based firms most likely to merge in the coming years is so difficult. Everyone is talking to everyone, and in turn everyone thinks everyone else is a merger candidate; there wasn’t a firm on the Legal Times D.C. 20 that wasn’t mentioned as a future merger candidate. Some push the notion that it is the Washington boutiques that are most likely to be swallowed whole. The environmental group at Beveridge & Diamond, a few recruiters say, would be a nice addition to a Washington office. Or the group over at Spriggs & Hollingsworth � almost a mini Howrey, though with reportedly higher profits per partner � would be a great way to foray inside the Beltway for an out-of-towner. But other recruiters and managing partners espouse the belief that it is the pared-down boutique firms with narrow specialties that are best protected in the current market � and that it’s Howrey itself that is ripe for a merger. Or that Arnold & Porter and Covington & Burling would do well to find a large international partner. Mentioned most often as ripe for a merger by consultants and managing partners were Washington’s venerable firms (Steptoe & Johnson, Dickstein Shapiro, Crowell), especially those with a relatively small head count outside the capital that are hovering in the range of being labeled a midsize firm, a pejorative for sure in the current market. “They view themselves as being acquirers,” says a consultant at a national consulting firm. “Now, true, there’s only a handful of firms that could acquire them without diluting the profits of the D.C. firm. But in no more than three to five years, they will come into the target of global players who feel they need a powerful presence in Washington.” What follows is a list of the firms most often mentioned by managing partners, recruiters, and consultants when asked which Washington firms are most likely to merge in the coming years. ARENT FOX “What Arent Fox is doing is either a stroke of genius or a quick path to getting acquired,” says a Washington recruiter. Industry watchers say the firm’s business model, attempting to be a full-service firm while billing clients at comparatively lower rates than the neighborhood competition and having a Washington head count around 215, is an upstream struggle. “Arent is appealing for a lot of national firms because they do great work and have a strong name brand,” says a Washington managing partner. “The ability to have a small office in another city is over. Those days are gone. The firms that do that are regional players that aren’t expecting much. But I’d imagine Arent Fox is still expecting something, which is why a merger wouldn’t surprise me.” Marc Fleischaker, the firm’s chairman, says the firm doesn’t see a merger happening soon: “It’s flattering that people might think we would be an attractive merger candidate. While one can’t really predict the future, our intention is to not be in a merger.” Still, many voices are saying it’s time. DICKSTEIN SHAPIRO Dickstein Shapiro also falls into the category of being the apple of someone else’s eye � which is precisely what Chairman Michael Nannes says the firm has no interest in being. “We are very interested in acquiring good, strong groups that are complementary to what we do,” says Nannes. “We are not interested in being an acquiree by a firm larger than we are because our people are very happy and our culture is very important to us.” The firm opened offices in New York in 1996 and Los Angeles in 2005. But with a head count of roughly 365 lawyers and revenue of $281 million last year, Dickstein Shapiro fits squarely in the category of being a midsize firm without a significant national reach. “They can try to be a unique litigation firm, like a Finnegan is with IP,” says a Washington managing partner (referring to Finnegan, Henderson, Farabow, Garrett & Dunner). “They’re also one of the most desirable firms on the market. That insurance litigation group is something a lot of people want.” That practice strength is also the firm’s greatest weakness when looking at a merger partner. Consultants say any deal will be complicated by potential client conflicts because of Dickstein Shapiro’s heavy insurance litigation practice. “From a perspective of size, they’re in a very awkward spot,” says a Washington recruiter involved in national mergers. “They’re struggling to even be midsize.” MILLER & CHEVALIER In the final scene of “Butch Cassidy and the Sundance Kid,” the title duo is trapped in a small farmhouse, surrounded by most, if not all, of the Bolivian army. Escape seems dim. Confidently and unknowingly, Butch turns to his pal and says, “For a moment there, I thought we were in trouble.” Industry observers say Miller & Chevalier has taken a similar approach. Beset by partner defections from a merger turned sour, the firm is scaling back its practice breadth and fortifying primarily within its tax department. “You’d think they’d be listening to every offer out there, but they’re on lockdown right now,” says a Washington recruiter. “They are afraid to even have the conversation. One can only guess they’re a glutton for punishment.” Because some 15 partners have left the tax boutique in the past year � largely from the government contracts and international trade groups � many observers have speculated it’s not a matter of if, but when, the firm will be acquired. But there’s also been a strong signal sent by new managing partner Marianna Dyson that the firm won’t even break bread with a potential suitor. “We are not interested in a merger,” Dyson says. “We do not need a merger. A merger is not part of our strategy and is not part of our DNA.” But observers are still betting that Miller & Chevalier’s core group of tax lawyers will prove too enticing for a firm not to come in with a sweet deal. “There’s an old Shakespearean quote: ‘The lady doth protest too much, methinks,’ ” a national consultant says. “ Whatever they’re saying, that doesn’t mean they’re not a target.” WILEY REIN The recent years at Wiley Rein have been the most profitable in the firm’s history, even if you don’t count the BlackBerry riches. But industry watchers say they can draw no other conclusion except that Wiley Rein is one of the most attractive merger candidates in Washington. “They’re viewed as a specialty player, which might ultimately hurt them when it comes to who would want them,” says a consultant. “A firm will absolutely want them for their communications practice.” Wiley Rein is appealing because it has a national practice without a national presence; the firm has no offices outside the Washington area. That quality makes them all the more attractive to a firm looking to escape the label of being a regional player by seeking a marriage of equals. Or to an international law firm looking to make noise inside the Beltway. Managing partner Richard Wiley’s response is that he’ll listen to anyone, but there’s a visceral inclination among the partnership to stay away from becoming precisely the Kirkland & Ellis type of law firm that the founding partners extricated themselves from more than two decades ago. “I think we’ve done very well being independent, and we don’t have any current plans to change,” says Wiley. “We’re always willing to talk to anyone who wants to have a conversation.” Some put it more bluntly. “They did great with that BlackBerry money,” says a Washington managing partner. “Now everybody is wondering what’s going to happen once Dick Wiley’s gone.” WILMERHALE In 2004, WilmerHale pulled off a megamerger without word leaking to the public until a halogen sign was flipped on, stating the new firm was open for business. It was a remarkably covert operation. And it’s one Perlstein, Wilmer’s co-managing partner, says isn’t happening again. “I don’t think there’s any likely prospect that we’d do a deal anytime soon,” says Perlstein. “We’re at the size where we’re comfortable to have the infrastructure that we want.” Others disagree. Industry watchers look at WilmerHale as being in the middle of an expansion that won’t stop in Boston. They point to the firm’s relative dearth of lawyers in New York, where WilmerHale has about 130 attorneys, and in California, where the firm has roughly 25, and reason there must be another move coming. “I would call Perlstein one of the industry’s visionaries,” says a Washington managing partner. “For somebody who’s playing at their level of the game, they’re missing significant pieces, and that’s New York and that’s California.” With about 1,000 lawyers and 325 equity partners, according to The American Lawyer, WilmerHale through its merger escaped the precarious position of being a midsize player. According to the 2007 AmLaw 100, the firm grossed $897 million in 2006. And industry watchers say that isn’t a place for it can stop. “That first merger has to be step one in a multistep process,” says a Washington recruiter. “They’re not yet on the radar in New York, the capital of capital markets. And their work in California is not done.” Perlstein says that logic isn’t flawed, but both markets can be grown with lateral additions. “I can understand why people would look at that and say it’s a natural move to merge again. But that is not an approach I’d expect that we will take.” Nathan Carlile can be contacted at [email protected].

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