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Large Texas firms waltzed out of the 20th century on a prosperous note. The 25 highest-grossing firms brought in $2.9 billion in revenue in 1999, up 16 percent from the $2.5 billion in revenues posted by those firms in 1998. That’s the largest percentage increase in the history of Texas Lawyer’s Annual Report on Firm Finance, a survey of revenue and profits at the 25 highest-grossing firms. Profits are up, too, by 17 percent. The Texas 25 posted a total of $1.17 billion in net income in 1999, which is $385 million more than in 1998. That $385 million in profits exceeds the combined net income of the Big Three Houston firms. For the second year in a row, Texas’ largest firm, Akin, Gump, Strauss, Hauer & Feld of Dallas, brought in the most money. The firm’s revenue was $360 million in 1999. Houston’s Vinson & Elkins passed Fulbright & Jaworski to take second place on the list, with revenue of $327.4 million in 1999. Fulbright’s revenue in 1999 was $318.5 million. V&E leads the net income list in 1999, with profits of $162.2 million, followed by Fulbright, Akin, Gump, Baker Botts and the pumped up Locke Liddell & Sapp. Locke Liddell & Sapp was formed on Jan. 1, 1999, in the merger of Liddell, Sapp, Zivley, Hill & LaBoon of Houston and Locke Purnell Rain Harrell of Dallas. The combination of the two perennial top 25 firms opened up one spot on the Texas 25 list. A second vacancy was created after Vial, Hamilton, Koch & Knox of Dallas, which lost a net of 46 lawyers between Aug. 31, 1998, and Aug. 31, 1999, dropped off the chart. The two fresh faces are Houston’s Porter & Hedges and Austin-based Clark, Thomas & Winters. This wonderland of riches and good times is due, for the most part, to the robust economy and the surge in the high-tech and dot-com industries in Texas. The 1999 financial results came in just before the wave of huge associate salary increases, so profits weren’t depressed by that overhead cost. And some firms are reaping the benefits of some plans laid carefully over several years. Jenkens & Gilchrist of Dallas is one. For the third year in a row, Jenkens & Gilchrist posted the greatest increase in gross revenue, a whopping 42.7 percent from 1998. Its net income spiked the most as well, increasing by 46.9 percent to $61 million in 1999. “The firm has gone through a lot of growth over the last decade,” says firm executive administrator Roger Hayse. “We really saw it come together in 1999. It gelled.” Hayse says the numbers are due to growth in the firm’s client base, billing rates, billable hours and realization. He says shareholder and associate hours are up about 5 percent, but realization — the percentage of what the firm billed to what it collected — improved to 96 percent in 1999 from 94 percent in 1998. While the firm has been on a growth spurt since 1995, it wasn’t growth in lawyers this time around — the firm gained a net of 10 lawyers from Aug. 31, 1998 to Aug. 31, 1999. Hayse also says performance of no single practice area can explain the increase in profits or revenues, although he says the firm is feeling the benefits of its new Chicago office. Much of the boost from that growing office will show up in 2000 numbers, however, since the firm had only 10 lawyers in Chicago in January 2000, when it picked up about 20 lawyers from the Chicago office of intellectual property firm Arnold, White & Durkee. “We had a year where all parts of the firm clicked,” Hayse says. The intellectual property specialty firm Arnold, White is making its last appearance on the Texas 25 following its merger on Jan. 31 with Washington, D.C.’s Howrey & Simon. Arnold, White’s gross revenue was flat in 1999, improving by less than 1 percent, and its net income of $16.3 million was $500,000 less than in 1998. While Jenkens & Gilchrist is setting the bar in Texas, the Houston Big Three aren’t slackers. Considered together, V&E, Fulbright and Baker Botts brought in $905.9 million in revenue in 1999, up 14 percent from $793.8 million in 1998. Profits went up 16.5 percent, to a total of $403.7 million from $346.5 million. Dallas-based Thompson & Knight also gained some big ground on the charts with healthy improvement in gross and net in 1999. Its profits increased by 31.5 percent on revenue that improved by 31.9 percent. The firm’s merger with Brown, Parker & Leahy of Houston in July 1999 helps to explain the numbers. [See story.] KEY INDICATORS So which statistic is the best indicator of the health of a firm? Profits per partner has been getting a lot of buzz as the true measure of a firm’s financial condition. Dallas-based firm consultant Howard Mudrick says that while PPP has become an industry-recognized standard, he thinks it’s best to consider it along with the profitability index (PPP/RPL). “That is not only how well we have done on a profits per partner basis, but how we’re doing in converting the firm’s revenue into income,” Mudrick says. Both PPP and RPL are somewhat flawed measures, suggests Bruce McLean, the Washington, D.C.-based chairman of Akin, Gump. He says RPL is affected by leverage, and firms can induce higher PPP by reducing the number of equity partners. (Akin, Gump had PPP of $590,000 in 1999 and RPL of $432,000.) “There is a lot of maneuvering going on. We all are competitive and want to provide high profits per partner,” says McLean. But some others, such as V&E managing partner Harry Reasoner, argue revenue per lawyer is the key statistic to gauge a firm’s health. (V&E’s PPP in 1999 was $586,000 while its RPL was $533,000.) “Profits per partner is so much a function of how large a partnership you have. If we wanted like some firms to call them non-equity partners or wanted to structure it where we had far more of counsel and had a much smaller number of equity partners then we could drive that number up without making any more money,” he says. “We have chosen to have an open partnership.” Profits per equity partner in the Texas 25 firms averaged $462,000 in 1999, an improvement from the $440,000 average profits per partner the previous year. That’s a 5 percent increase or an extra $22,000 in each partner’s pocket in 1999. While Susman Godfrey’s profits per partner took a slight dip in 1999, partners in the Houston-based litigation boutique again posted the highest average profits per partner among the 25 firms, a breathtaking $1.16 million each. Texas partners in Weil, Gotshal & Manges, the New York firm with offices in Houston and Dallas, also skimmed over the $1 million mark, with profits per partner of $1,004,000. But three other firms, Akin, Gump, V&E and Andrews & Kurth of Houston, pulled in profits close to $600,000 for each of their equity partners. Another three firms — Jenkens & Gilchrist, Baker Botts and Haynes and Boone — join them in the elite group with PPP above the $500,000 mark. While those numbers are large, the quantity of equity partners in a firm does affect the profits per partner calculation. V&E and Fulbright have relatively large numbers of equity partners, 277 and 297 respectively, but still posted relatively high profits per partner of $586,000 and $488,000 respectively. Andrews & Kurth, on the other hand, has profits per partner of $581,000, but only 75 equity partners. The same situation applies at Haynes and Boone, for instance, which has profits per partner of $502,000, but only 92 equity partners as of Aug. 31, 1999. (In this firm finance report, Texas Lawyer uses a snapshot date of Aug. 31 to exclude incoming first-year associates who are more of a financial drain than income source during their first months at work.) That’s not to say Andrews & Kurth and Haynes and Boone didn’t improve their profits in 1999. Net income was up 27.5 percent at Andrews & Kurth in 1999, and up 17.9 percent at Haynes and Boone. They both improved profitability, as well, which is measured in profits per partner divided by revenue per lawyer. [See chart.] Andrews & Kurth managing partner Howard Ayers says the firm’s lawyers worked close to capacity in 1999, which, along with some higher billing rates, helps to explain the jump in profits. He says lawyers worked an average of 1,950 billable hours in 1999, up by about 50 hours from 1998. GAINING, LOSING Susman Godfrey again is the leading firm among the 25 in revenue per lawyer, but the surging Weil, Gotshal offices in Texas cut the lead in 1999. Susman Godfrey’s revenue per lawyer was $892,000 in 1999, compared to $593,000 for lawyers at Weil, Gotshal. In 1998, Susman Godfrey’s revenue per lawyer was $1,083,000, more than twice the $510,000 for Weil, Gotshal. Nineteen of the firms improved their profits per partner in 1999, and revenue per lawyer was up at 19 of the firms. Gross revenues dropped at only three firms, Strasburger & Price of Dallas, Susman and Porter & Hedges, and all by slim margins. Net income declined at those three firms plus at Winstead Sechrest & Minick and Arnold, White. Some firms fell and some gained higher positions on the master list, which ranks the firms by their gross revenues. Megafirm Akin, Gump leads, followed by the Big Three Houston firms and Jenkens & Gilchrist. The beefed-up Locke Liddell moved into sixth place, pushing Haynes and Boone down a notch. Andrews & Kurth maintained its eighth position, while Gardere dropped back to ninth. Thompson & Knight overtook Bracewell & Patterson of Houston and Winstead to claim the 10th spot. Meanwhile, the two newcomers to the list have been hovering near the cutoff point before ascending to the group of Texas’s 25 highest-grossing firms. Clark, Thomas joins Brown McCarroll Oaks Hartline as the Austin-based representatives among the state’s highest-grossing firms. The other new firm on the 1999 Texas 25 list, Porter & Hedges, finally cracked the chart, but actually posted better gross revenue and net income numbers in 1998. The firm’s 1999 revenues of $26.6 million are down slightly from the $27.1 million posted in 1998. But net income declined by 13.8 percent, to $9.2 million from $10.7 million. T. William Porter, managing partner, says the firm’s financial results were affected in 1999 by heavy investments in two large commercial suits the firm has on contingent-fee contracts. “And we had two or three lateral partners that came on mid-year or later who therefore were cost centers and not revenue centers,” he adds.

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