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The first quarter proved dismal for most Silicon Valley law firms, with one notable exception: Gray Cary Ware & Freidenrich. The 463-lawyer Palo Alto, Calif., firm billed $60 million in the first three months of this year — a record quarter for the firm. And if the good times at Gray Cary continue, firm chairman J. Terence O’Malley predicts 2001 revenues will hit $250 million, up 32 percent over last year. The flush finances come as other tech firms complain of stagnant or declining revenue, ratchet down on hiring, cut discretionary spending and show less productive lawyers the door. And at first glance, Gray Cary should be right there with them. The Palo Alto firm spent the mid-1990s focused more on the long and often troublesome merger that created the firm. The internal focus helped keep Gray Cary from realizing the exponential growth of its tech-law competitors — and as a result, many Silicon Valley lawyers had written off the firm. “We fell further and further behind because we were standing still,” O’Malley said. But a funny thing has happened on the way to oblivion. The issues that have kept Gray Cary from leading the pack — slower growth, stricter client intake and a broader range of practices — are helping expand the firm’s finances. And Gray Cary is exploring expansion on the East Coast and in Los Angeles as other tech players feel the sting of the sagging economy. “I think now is the time for us to execute and deliver on all of the hard work we’ve done in the last few years,” O’Malley said. CULTURE CLASH The hard work involved getting two disparate law firm cultures to work together. Gray Cary was created by the January 1994 merger of 108-lawyer Ware & Freidenrich, a Palo Alto corporate boutique, and the 171-lawyer San Diego litigation firm of Gray, Cary, Ames & Frye. By most accounts, Gray Cary struggled to blend San Diego’s white-shoe culture with Palo Alto’s laid-back entrepreneurial style. And synchronizing procedures, policies, and back-office billing and other financial systems proved to be painful and expensive. But most importantly, neither firm had a culture that stressed productivity, said O’Malley. At the time of the merger, lawyers at both firms billed an average of 1,750 hours, both associates and partners. Last year, the associate average was 2,025 hours and for partners, it was 1,950. Both are comparable to other tech firms — though Gray Cary still struggles with the perception that it’s a lifestyle firm. “Getting rich is a good idea,” said Diane Holt Frankle, a Gray Cary partner. “But we like practicing together.” The firm’s post-merger financial performance seemed to bear out the reputation of valuing warm and fuzzy over cold, hard cash. From 1995 to mid-2000, the firm grew its ranks from 264 lawyers to 380, according to annual surveys of law firm finances. And in the same time, its revenues rose from $85 million to $190 million — a healthy 123 percent increase. But the numbers pale when judged against Cooley Godward, Gray Cary’s nearest-size competitor in 1995. From 1995 to 2000, gross revenue at Cooley climbed 320 percent, from $82 million to $345 million. And its lawyer ranks swelled from 214 to 672. Cooley has indeed been successful, said Gray Cary partners. But in their defense, the partners said their competitor grew unencumbered by a merger that ended up taking a lot longer than anyone expected. “We didn’t grow up as a pure technology player,” said Gregory Gallo, a Gray Cary corporate partner. In its day, the old Ware & Freidenrich had a strong corporate presence and was often mentioned in the same breath with Valley powerhouse Wilson Sonsini Goodrich & Rosati. But Ware partners struggled to make strategic decisions — and the firm was forced to find a strong partner to help it manage its practice. “I felt frustrated because there needed to be some changes at the firm to stay in the ball game, and I wasn’t convinced the firm could make the right strategic decisions,” said Paul Kreutz, a partner who joined Ware in 1969 as its fourth employee. Enter Gray, Cary, Ames & Frye — an old-economy firm looking for a Silicon Valley corporate presence. The firm had struggled to expand its Southern California corporate base and needed to become a statewide player to raise its stature. “Larger, national firms were competing in San Diego for work,” said O’Malley, who was a Gray, Cary, Ames & Frye partner before the merger. SEEING RESULTS The results of the merger, however mixed at first, finally seem to be bearing fruit. Unlike a number of big tech players, Gray Cary enjoys a solid reputation among a cadre of dedicated clients. At other bigger tech firms, “they have so many lawyers you tend not to know who you’re going to work with,” said Tom Tomasetti, who was CEO of two tech companies that used Gray Cary before he joined an executive consulting business. “When things got so hot two years ago, Gray Cary was still in there trying to do good service,” said Jim Timmons, a longtime Valley venture capitalist. “There were still partners there willing to talk to executives.” Despite the explosive growth in the Valley during the last several years, Gray Cary made it a policy to not turn down any existing client. It also strictly controlled new client intake — even turning down coveted IPOs that could have meant a quick buck on the stock market. The policy not only helped keep clients happy, it helped ensure that associates didn’t get burned out. And the firm — by keeping a lid on the number of clients — wasn’t forced to grow its ranks as dramatically as other tech firms. Partners instead limited their hiring of associates to a number they could train and supervise. “We can only hire so many associates and have any hope of supervising them,” Gallo said. In fact, the firm’s 163 corporate lawyers may be stretched a little thin. In the first quarter of this year, the firm worked on 25 mergers and acquisitions. The deals were valued at $1.02 billion, according to Thomson Financial Securities Data. By comparison, the same survey lists Wilson Sonsini as working on 13 deals; Cooley handled 12 and Brobeck, Phleger & Harrison did eight. O’Malley contends Gray Cary’s numbers are the product of careful client management and associate training that helped the firm harvest more revenues from existing clients. “The biggest engine of our growth has been the expansion of services to existing clients,” O’Malley said. The payoff isn’t only evident in the Silicon Valley, but in Gray Cary’s old home base of San Diego. Where once it was a relatively insignificant corporate player, Gray Cary now ranks in third place, behind Cooley and Brobeck. “We weren’t on anybody’s list before” the merger, Kreutz said. Gray Cary also has a handful of bankruptcy lawyers and the firm maintained its tax and employment practices through the merger, even hiring more attorneys that would serve the needs of merging companies. And in mid-1996, the firm started bulking up on intellectual property lawyers and litigators. That year, the firm had 26 intellectual property lawyers and 64 litigators, which included securities and general corporate litigators. Now, the firm has 61 IP litigators as well as 94 general IP lawyers. That’s on top of 60 general corporate litigators. Of the firm’s total ranks, nearly 40 percent are trial lawyers. “We have a lot of specialties that are very useful to companies in a downturn,” said Frankle. Gray Cary is also looking to establish a new office in Los Angeles or on the East Coast — preferably by swallowing a smaller firm. So far, however, the plan has failed to gain much momentum. The firm came close recently to merging with L.A. corporate firm Riordan & McKinzie. But sources close to the talks say Riordan’s numbers just didn’t measure up, and the firm lacked a plan for meaningful growth. BELOW-MARKET PARTNER PAY Gray Cary is familiar with Riordan’s predicament. The firm’s controlled approach to expansion after it cleared the merger exacted a price. For one thing, the firm’s low associate-to-partner leverage, which is about two-to-one, is a drag on the firm’s profits-per-partner. Lower partner pay is one problem O’Malley still wants to solve. On revenues of $190 million last year, Gray Cary reported $530,000 in profits per partner, according to a Recorder survey of firm finances. Cooley, meanwhile, logged $905,000 in profits per partner. “Partners are getting paid below market,” O’Malley acknowledges. “We’re not satisfied with partner economics.” Nevertheless, partners say they are making more money than they would have had Ware & Freidenrich and Gray, Cary not merged. In fact, the old-economy leanings of the San Diego firm have helped keep earnings bright as the new economy dims. Tomasetti, for example, has stuck with the firm for more than a decade — particularly because of the litigation expertise brought to Ware & Freidenrich by the merger. “It certainly made a difference as to the level of service they could give us,” Tomasetti said. “The same firm could bring in new lawyers and handle a case for us, and that’s exactly what they did.”

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