Thank you for sharing!

Your article was successfully shared with the contacts you provided.
By May word had spread through New York’s elite law firms: Wachtell, Lipton, Rosen & Katz was considering opening a branch office in Silicon Valley. Wachtell had even, it was said, talked about bringing in a lateral partner in Northern California, biotech specialist Alan Mendelson. This was news indeed. Wachtell almost never reaches out to lateral partners. And the firm, founded in 1965 by a quartet of New York University School of Law graduates, is as distinctly a New York institution as the Yankees. Let other firms open offices hither and yon. Wachtell needed only New York. From their confines In midtown Manhattan, Wachtell’s partners always attracted the most exciting deal work in the country and made more money than any other lawyers in The Am Law 100. While Wachtell’s Martin Lipton says the firm has not made a “final, final decision” about Silicon Valley and did not respond to inquiries about Mendelson, it appears that now even Wachtell feels it is important to have a presence in Silicon Valley. There it would join its top-of-the-charts New York brethren Skadden, Arps, Slate, Meagher & Flom; Davis Polk & Wardwell; and Simpson Thacher & Bartlett — all of which launched Palo Alto offices in the last two years — and Sullivan & Cromwell, which opens its Palo Alto office this month. This raises the question: Has the center of the legal universe shifted? Is Silicon Valley the New York of the New Economy? Ten years from now, will New York’s hegemony at the top of the Am Law 100 profitability charts be a distant memory? Not a chance. No way. Never. Or, as we say in New York, fuhgeddaboudit. Sure, one or two Silicon Valley firms may translate their New Economy expertise, their cachet with recent law school graduates, and their fat equity funds into a long-term top-ten spot on The Am Law 100. To get there, however, they have a long way to go. The Am Law 100 ranks firms on revenue from legal work, not good equity investments, and by that measure the biggest players in the Valley don’t even come close to cracking The Am Law 100′s list of the ten most profitable firms. In fact, with last year’s average profits per partner of $855,000, the Valley’s most profitable firm, Brobeck, Phleger & Harrison, would place seventeenth among New York-based Am Law 100 firms alone. And there’s certainly an argument to be made — it’s being made all over New York these days — that the business model the Valley firms have pioneered, with its focus on start-up clients and equity stakes, is inherently short-term. Even the Valley’s popularity with law students is double-edged. Law school graduates who join a firm because of the entrepreneurial opportunities it provides aren’t likely be long-term generators of legal revenue. Will they still be working as lawyers at their firms in four or five years when the firms’ investment in their training begins to pay off? Let’s be bold about this. In the last 10 years we’ve seen an increasing percentage of the highest-end (and best-paying) litigation and deal work consolidating at fewer and fewer elite firms — all New York-based. In fact, throughout the 1990s, just 10 firms — again, all headquartered in New York — dominated our revenue-per-lawyer and profits-per-partner rankings. They are the Winners of the Nineties, listed here in order of their dominance: Wachtell, Lipton, Rosen & Katz; Cravath, Swaine & Moore; Sullivan & Cromwell; Davis Polk & Wardwell; Cahill, Gordon & Reindel; Simpson Thacher & Bartlett; Cleary, Gottlieb, Steen & Hamilton; Skadden, Arps, Slate, Meagher & Flom; Debevoise & Plimpton; and Shearman & Sterling. Past, of course, is not necessarily prologue, and some of the strengths that let these firms thrive in the last ten years may prove to be weaknesses in the next decade. You could argue, for instance, that Cahill, with a heavy reliance on leveraged finance work — and an associate-to-partner ratio that looks increasingly unattractive as associate salaries go up — has a different business model than the rest of the New York elite, and may not prosper so mightily if the economy declines. Shearman and Cleary may prove to be overly focused on their international practices. Debevoise may eventually suffer from its lack of a Silicon Valley office. The glacier-paced growth plans of Cravath and Wachtell could conceivably prove problematic. And there are certainly several firms, in addition to the highfliers in the Valley, making legitimate bids to join the elite. Nevertheless, I think it’s a safe bet that at least six of the Winners of the Nineties will prove to be Winners of the Aughts a decade from now. Complacency can be deadly, but none of the Winners of the Nineties, with the possible exception of Cravath, is complacent. (And Cravath’s brand name is so potent that it may be the only justifiably complacent law firm in America.) In fact, when you look at why the Winners of the Nineties thrived in the last ten years — and, more important, how they’re positioned for the next ten — it’s harder to imagine firms breaking into the top tier of Am Law profitability than it is to envision one of New York’s elite exiting. New paradigms sure sound exciting, especially when they involve California. Forty-two years ago, Walter O’Malley thought he was establishing a new paradigm in baseball when he moved the Dodgers out of New York. And in some ways, he did — nailing down a sweetheart deal from Los Angeles, televising games, and bringing the sport to a whole new audience. But in the long term, O’Malley’s team didn’t gain much just by being first. So watch out Wilson, Brobeck, Cooley, and the rest of you tech-focused Valley preachers of the New Paradigm. New York is coming — and the Yankees have won three of the last four World Series. One important reason is the nature of the New York firms’ client base. Put simply, New York is where the financial institutions are. As long as new businesses need money to grow — and as long as commercial and investment banks and private equity funds continue to rely heavily on the New York law firms that have long enjoyed the cream of their business — elite New York law firms will be connected to developing sectors of the economy. “We’re in the financial center of the country,” says Debevoise presiding partner M. Frederick “Rick” Evans. “That led to some of the most interesting and challenging work in the 1990s, before that, and, I suspect, after it as well. … The corporate, deal-side investment clients we’ve represented have gone into new media, and they’ve taken us with them.” For the elite firms, connections made through financial-institution clients have a way of translating into new corporate clients. “When representing underwriters in a public offering, you get to know the issuer,” says Christopher Mayer of Davis Polk’s management committee. “In certain cirumstances these initial contacts have led to interesting future assignments for us.” Particularly in Europe and Asia, Mayer says, where Davis Polk is sometimes the only U.S. law firm working on an offering, valuable client relationships have developed. So far, financial institutions have shown little inclination to direct their best domestic legal work outside of a tight circle of firms, most notably Wachtell, Skadden, Cravath, Davis Polk, Sullivan, Simpson, and, in some areas, Cahill. Remember the “client revolution” sparked by the recession in the early 1990s? Clients were supposed to be clamping down on legal costs and demanding alternative billing arrangements from their lawyers. Funny how Goldman, Sachs & Co. kept steering pricey work toward Sullivan & Cromwell, and Morgan Stanley Dean Witter & Co. continued to turn to Davis Polk. Cost cutting? What cost cutting? Indeed, Cravath and Sullivan & Cromwell both say that they try hard to turn away the sort of commodity work that clients like to save money on, even when it comes from their blue-chip clients. “You take work from your regular clients, but you don’t take everything,” says Cravath presiding partner Robert Joffe, who adds that one of his firm’s biggest challenges is figuring out what work Cravath should turn away. “You don’t take work that others could do more economically or that’s not cutting-edge.” New York firms also have a depth of practice that Silicon Valley firms can’t match. Ask Ricardo Mestres, Jr., who steps down as Sullivan & Cromwell’s chairman this month after a five-and-a-half-year tenure, if Silicon Valley will supplant New York. “I think not,” he shoots back. “Litigation? I don’t think you’d say Silicon Valley is the center of litigation. Commercial banking? Silicon Valley is not a commercial banking center. Insurance? No.” The list could go on: M&A, antitrust, tax, bankruptcy, real estate. In Mestres’s view, as in the view of his counterparts in the New York elite, a diverse and balanced practice means success in good and bad economies. Look at Skadden, the apotheosis of practice-area breadth. The firm racked up more than $1 billion in revenue in 1999, and unlike less profitable, non-New York revenue leaders like Baker & McKenzie and Jones, Day, Reavis & Pogue, Skadden had average profits per partner well in excess of $1 million ($1.6 million, in fact, compared to $485,000 at Baker & McKenzie and $740,000 at Jones, Day). The New York elite firms are counting on their breadth of practice to make them indispensable to New Economy businesses as the tech industry matures. At Debevoise, for instance, intellectual property partner Bruce Keller was an early convert to the business prospects of the Internet, and he made the firm a leader among new-media clients. (Disclosure: Keller sometimes represents The American Lawyer, which is affiliated with Law.com.) Last year, when Davis Polk wanted to muscle in on the tech revolution, the firm sent Bruce Dallas, who’d developed a specialty in derivatives and sophisticated financial instruments, to its new Palo Alto office. He managed to attract the interest of venture capitalists, tech companies, and paper millionaires who needed to liquidize stock options that weren’t freely tradable — an expertise the Valley firms didn’t have. “[Our] strategy is to focus principally on providing a mix of high value-added legal services,” says Davis Polk managing partner John Ettinger. “As the technology companies have grown and expanded in the United States and overseas … they are looking for an international capability, as well as sophisticated mergers and acquisitions, joint venture, and securities experience.” Simpson Thacher and Sullivan & Cromwell are relying on similar strategies. Says Sullivan & Cromwell’s Mestres: “We’re bringing [in] partners who have significant M&A experience, international transactional experience, sophisticated capital-raising expertise, and litigation experience in both the technology and securities areas.” Already, the New York elite have found that reputations built in the old economy will lure New Economy leaders to their doorsteps. Cravath and Simpson Thacher were on opposite sides of the America Online/Time Warner deal. Wachtell represented Terra Networks, S.A., in its acquisition of Lycos, Inc., while Cravath represented Lycos. Davis Polk represented Network Solutions, Inc., when it was acquired by VeriSign, Inc. Sullivan & Cromwell was counsel to underwriters in a host of high-profile tech IPOs, and, of course, represents Microsoft Corporation in its antitrust litigation. “We’re doing lots of New Economy, new-technology work from right here in New York,” says Joffe of Cravath — which is so confident of its foothold in the New Economy that it doesn’t intend to open a Silicon Valley office. And then there’s the rest of the world — the world outside Silicon Valley. New York firms have a decades-long jump on the Silicon Valley firms when it comes to global reach. Cleary, Gottlieb, Steen & Hamilton opened its Paris office in 1949. Today, a third of its 600 lawyers are based in Europe, and another 20 are stationed in Asia. Cleary may be better known overseas than it is in the United States. Cleary is perhaps the most dramatic example, but almost all of the New York elite firms, with the notable exceptions of Wachtell and Cravath, have invested considerably in their international practices in the last decade. By the time that Shearman & Sterling saw revenue from its most important client, Citibank, begin to wane in the early 1990s, it had already begun directing itself overseas, where it had beachheads in London and Paris. In 1995, under the leadership of Stephen Volk, the firm adopted a formal business plan calling for growth in Europe, and a year later began hiring U.K. lawyers. Shearman is still a half-step behind the rest of the New York elite in profitability, but is also the only firm among them that has been considering merger prospects on the Continent (not in London) that could make it an even stronger player in Europe. Though there’s hardly a firm in The Am Law 100 that hasn’t thought about what to do overseas, the New York elite firms have a head start that will make them hard to catch. “You can’t just go and turn on the lights,” says Sullivan & Cromwell’s Mestres, whose firm was involved in all four of the largest international equity offerings of 1999, for companies based in Italy, Japan, Germany, and Australia. “Getting started outside the U.S. is a long-term prospect.” And in the long term, the New York elite expects its international clients and experience to make it as indispensable to a maturing tech industry as its M&A expertise. No less a sage than Wachtell’s Martin Lipton believes that the New Economy, that elusive catch-all for technology-oriented industry, is not a flash in the pan like the oil and gas boom of the early 1980s or the Pacific Rim craze that infected law firms later that decade. “[Technology] is a new fundamental change of the type reflected by the steam engine and the telephone,” says Lipton. “These are fundamental changes that will have a major impact for decades, if not centuries. … [The New Economy is] the kind of change that every business has to adjust to.” That change means that law firms cannot simply proceed with business as usual. But those who expect New York’s most successful firms to go the way of the dinosaurs are ignoring what their recent history has shown: These firms have the resources and the risk-tolerance to adapt to challenges, whether they’re coming from California, Europe, or Asia. Think of them as T. Rexes who have learned to survive the Ice Age. Actually, think of them as lawyers, for that’s their greatest strength. Most of the men and women who tough it out to become partners at the elite firms of New York aren’t aspiring to be high-tech CEOs or investment bankers or management consultants. They’re lawyers handling the highest-level legal work in the country. That’s why their firms will continue to dominate. Debevoise chairman Evans sums it up nicely. “The people who will succeed in the practice of law in the long run,” he says, “are the people who enjoy practicing law.” Related Chart: The Am Law 100 Am Law 100 Index

This content has been archived. It is available through our partners, LexisNexis® and Bloomberg Law.

To view this content, please continue to their sites.

Not a Lexis Advance® Subscriber?
Subscribe Now

Not a Bloomberg Law Subscriber?
Subscribe Now

Why am I seeing this?

LexisNexis® and Bloomberg Law are third party online distributors of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® and Bloomberg Law customers are able to access and use ALM's content, including content from the National Law Journal, The American Lawyer, Legaltech News, The New York Law Journal, and Corporate Counsel, as well as other sources of legal information.

For questions call 1-877-256-2472 or contact us at [email protected]


ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2021 ALM Media Properties, LLC. All Rights Reserved.