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If bigger is better, then Sidley Austin Brown & Wood is very good indeed. The firm, formed May 1 by the merger of Chicago’s 900-lawyer Sidley & Austin and New York’s 425-lawyer Brown & Wood, is the nation’s fourth-largest, when ranked by head count. The merger itself is the largest ever between two American law firms, and the two firms’ gross revenue for 2000, if combined, would have put the merged entity fourth on this year’s Am Law 100 rankings. The combination gave Brown & Wood, a highly specialized securities firm, the financial platform that it badly needed in a turbulent economy. And it provided Sidley & Austin with a much larger base in New York. But Brown & Wood was a bit behind it in profitability, and it handles little of the premium M&A and equities work that the Chicagoans crave: Its franchise practice, securitization, is more McDonald’s than Morton’s of Chicago. Discussing the merger in a Sidley conference room in early May, Thomas Cole, chairman of the merged firm’s executive committee, and Charles Douglas, head of its management committee, talked mostly about an intangible: momentum. The men, both 52, are from the Sidley & Austin side of the firm, and you could say that since taking over management of the firm two years ago, they have subscribed to a cult of momentum — the idea that a firm risks losing talent unless it creates a compelling story, charts a dynamic course. “You need to be profitable as a firm to recruit and retain the best people, but just as important is to maintain a sense of momentum,” says Cole. That philosophy has driven many of Sidley’s business decisions the past two years, including its sometimes painful effort to strengthen its bottom line — a push that included kicking 25 lawyers out of the partnership in 1999 (they were reduced to counsel status) and demoting 45 partners the following year. That was as much about momentum, they suggest, as profits. And the merger? It feeds into Cole and Douglas’ dynamic strategy: They believe that the merger puts Sidley in a position to become one of the elite international law firms. This is heady stuff for Sidley, which was long known as a hardworking firm, but with a genteel, midwestern veneer. When Cole and Douglas took over the firm’s reins in 1999, it had some premier litigation and corporate practices, as well as blue-chip clients such as AT&T Corp. and General Electric Company. But it was drifting. The merger suggests that those days are over. But is bigger truly better? The Sidley-Brown union may register high on the momentum meter, but will it create a truly top-tier firm? Or is Sidley Austin Brown & Wood destined to be merely a behemoth, known more for size than for sophistication or sizzling profits? Though epic in its own right, Sidley & Austin’s merger with Brown & Wood was part of a much larger plan with an ambitious goal: global pre-eminence. Cole laid out the plan at the firm’s April 1999 partnership retreat in Scottsdale, Ariz. Standing in a hotel conference room, in front of a televised image of a world map, the hard-charging corporate partner told his colleagues, “There will be 10 to 20 serious global [law firms], and we want to be one of them.” At the time, Sidley had more than 850 lawyers and offices in Dallas, Los Angeles, New York, and Washington, D.C. But it had only a scant presence abroad: 40 attorneys in London and a smattering of lawyers in Tokyo, Singapore, and Hong Kong. Some partners weren’t initially taken with the idea of far-flung growth, but Cole cautioned them that Sidley had to keep pace with its corporate clients, which were blazing trails around the world. Step one in Sidley’s global plan was to conquer New York. You need a big footprint there, Cole says, to impress foreign corporations and would-be merger partners that you’re a serious player. He likens foreigners’ perspective of the U.S. to the famous New Yorker cover of a map that features vast wilderness just beyond Manhattan’s skyline. Sidley was also interested in New York for the typical reason that out-of-town firms are attracted to the city — it is the world’s financial capital and the source of much of the best transactions work. Founded in 1866, Sidley had never quite risen to the elite level of corporate firms. Going into the Brown & Wood merger, it had a solid M&A and securities practice but hadn’t made waves in New York. “Sidley shows up now and then [on big M&A deals], but they aren’t particularly powerful,” sniffs one star M&A lawyer with a top New York firm. The numbers bear out that assessment: In our Corporate Scorecard ranking of M&A practices, Sidley ranked 25th in the representation of principals, and it was not lead counsel on any of the 25 largest M&A deals in 2000. Sidley opened its New York office in 1982 with Chicago talent that was eventually supplemented with New York laterals and law school hires. Although it was a full-service practice, most of its work was for big institutional clients from the Chicago office, says a former Sidley partner. By the time of the Brown & Wood merger, Sidley & Austin’s New York office had grown to about 120 lawyers, but it perennially lost talent to more profitable New York shops, where profits per equity partner at top firms exceed $1 million. The New York office “did good legal work,” says Nathan Eimer, a former member of Sidley’s executive committee, who left the firm in 2000 to start Chicago’s Eimer Stahl Klevorn & Solberg. “But if you were a client in New York and were thinking of who the top lawyers are, in most areas you wouldn’t have thought of Sidley.” Sidley started scouring the city for a merger partner in 1999, and at the same time it undertook a dramatic housecleaning to strengthen its bottom line. From 1990 to 1999, Sidley’s profits did not keep pace with Chicago’s top firms, much less New York’s. Its average profits per equity partner increased only 44 percent in the 1990s (from $400,000 to $575,000), compared to 175 percent at McDermott, Will & Emery; 132 percent at Mayer, Brown & Platt; and 113 percent at Kirkland & Ellis. The problem, Cole says, was that Sidley had been more generous than its competitors in partnership decisions and was less focused on billables. “We had always emphasized the other side of life,” he says. So Cole and Douglas started paying attention to the crasser side of life. “They saw [Sidley's relatively low profits] as a sign of a lack of health,” says Eimer. In October 1999 they oversaw the departnering of 25 Sidley lawyers — the most dramatic purge in the firm’s history. Last year, firm management reduced the equity stake of 45 of the firm’s partners. The demotions gave Sidley’s bottom line a sizable boost: Its average profits per partner in 2000 was $680,000, up from $575,000 in 1999. Cole says that Sidley did not clean house to pretty itself up for a merger. But the jump in profits, he concedes, did facilitate the eventual union with Brown & Wood. Brown & Wood had been in the merger market even longer than Sidley & Austin. The New York firm started thinking about large-scale growth in 1996, following a down year in profits. In 1995 the firm’s average profits per equity partner dropped 27 percent to $300,000, thanks in part to a slowdown in the corporate debt market. Debt had always been Brown’s strong suit, and its core practice was in representing the issuers and underwriters of asset-backed securities, a debt instrument that Brown & Wood had pioneered in the late ’70s. At the time of the merger with Sidley, Brown & Wood had about 100 securitization lawyers, and it handled more asset-backed deals, by far, than any firm in the country. Brown’s 1995 profit dip was a brutal wake-up call that it needed to quickly lessen its dependence on capital markets. The firm had tried in the past to achieve diversity laterally by hiring litigators and other attorneys not tied to the markets, but it often ran into a Catch-22 — litigators, for example, would not want to join the firm, because it didn’t have a vibrant litigation practice. “It became self-perpetuating,” says a former Brown & Wood partner. In its search for a merger mate, Brown cycled through many British and U.S. firms, including San Francisco’s Pillsbury Madison & Sutro (which went on to merge with New York’s Winthrop, Stimson, Putnam & Roberts this year) and Los Angeles’ Gibson, Dunn & Crutcher. But it didn’t make headway until 1999, when it reached advanced merger talks with New York’s White & Case. Those talks crumbled after five months of negotiations, in part because White & Case partners grew concerned that Brown leaned too heavily on high-volume, low-margin securities work. Securitization is generally more repetitive than M&A and IPO work. “It is a tough area in which to charge premium fees,” says a former Brown & Wood partner. “The opportunities are more rare than if you do high-yield IPOs and M&A.” Brown, to be sure, handled complex securitization work, for which it earned top dollar, but the premium sector of the securitization market — the most innovative work — has been increasingly captured by such firms as Skadden, Arps, Slate, Meagher & Flom; Cadwalader, Wickersham & Taft; and Latham & Watkins. Despite the efforts to diversify, Brown & Wood remained precariously one-dimensional in 2000. Eighty-five percent of its revenue came from capital markets work, and 15 percent of its revenue came from a single client: Merrill Lynch & Co. Inc., its bedrock client. Says former Brown & Wood managing partner Thomas Smith Jr., who is now vice-chairman of the merged firm’s management committee: “We were worried that we still had too many of our eggs in one basket and that with expenses going up — associate salaries going up, technology costs going up, the cost of our support staff going up — we were going to be more and more leveraged and increasingly vulnerable to the [economic] downturn.” Facing this bleak forecast, Smith feared that well-heeled New York firms, which had long poached Brown’s corporate talent, would declare open season. “We felt that increasingly we would be vulnerable to firms that were doing profits per partner higher than we were,” he says. “If we wanted to continue to grow worldwide and have the wherewithal to build an M&A group, we had to seriously consider merging.” Sidley and Brown were introduced in the fall of 2000 by uber-consultant Bradford Hildebrandt, the chairman of Hildebrandt International. Brown hired Hildebrandt in 1996 to help it right its ship after its down year, and Sidley brought him on in 2000, to help the firm step up its merger hunt. The firms got the merger ball rolling on October 25. Smith hosted Cole at his office, and, over lunch, the lawyers discussed their firms’ business strategies and cultures. There was instant chemistry between the two men and, more importantly, they felt their cultures would mesh. Like Sidley, Brown was a relatively low-key place, especially for a Wall Street firm. “It was very congenial,” says a former Brown & Wood associate, who left prior to the merger. “It was frowned upon for partners to scream at associates or associates to scream at other personnel.” Teams from each firm met in New York several times that fall to work through such issues as the governance structure of the proposed firm. Near the end of 2000, just a few months after his first meeting with Cole, Smith called the Sidley head and said, “We’re ready to go.” On February 20 the firms’ management committees sent memos to their partners indicating that they had endorsed the concept of a merger. The final partnership votes in late April were a foregone conclusion: About 98 percent of the partnership at each firm approved the merger. The merger was consummated quickly, Cole says, because from the beginning, the firms were able to articulate a compelling business case for the deal. Brown saw in Sidley the top-flight litigation practice and diversification that it wanted, and in Brown, Sidley saw the New York platform that it wanted as it geared up for overseas conquests. Learning from the failed White & Case merger talks, Smith insisted that the firms settle the difficult issues, such as figuring out how to integrate the firms’ partnerships, early. At Sidley, every partner had at least a little equity, partners’ draws were set entirely at the beginning of the year, and only the firm’s executives knew exactly how much each partner earned. (In our Am Law 100 charts, Sidley is listed as having nonequity partners, because for that list, only partners who receive less than half of their compensation on a fixed-income basis are counted as equity partners.) Brown, meanwhile, had transparent finances, a sizeable class of partners with no equity in the firm, and a large merit-based bonus pool that was distributed to partners at the end of the year. For the most part, the merger called for Brown to adopt the Sidley system — all Brown partners received some equity in the combined firm, and their participation in 2001 was determined prospectively. But it took some persuading. The former Brown partners worried that a nontransparent system would make them vulnerable to compensation reductions, since only 10 former Brown lawyers were named to the new firm’s 46-member executive committee, which determines partner draws. To try to reassure the New Yorkers, Sidley agreed that no former Brown partner’s participation could be reduced until the end of 2002 without the approval of a majority of the Brown representatives on the executive committee. Cole says that Sidley made this concession because it believes that Brown was a successful firm that had demonstrated its ability to make sound management decisions. “If you have two firms merging from strength and from equal strength, then it becomes a lot easier [to merge],” he says. “If it were a strong firm merging with a weak firm, there’d be much more of a temptation to say, ‘Out of my way, sonny. You haven’t been doing so hot so far.’ “ In the final analysis, however, the Sidley-Brown matchup is not a marriage of equals — at least not as an economic matter. From 1990 to 1999, Brown and Sidley were generally neck and neck in their average profits per equity partner. In 1990 and 1995 Sidley far outpaced Brown, while in 1999 Brown posted a profits per partner of $800,000, compared to Sidley’s $575,000. But Brown was far more leveraged than Sidley that year — Brown had 4.05 associates to each partner, as opposed to Sidley’s 3.18. When the cost of living differential between Chicago and New York is taken into account, Sidley actually topped Brown in 1998, earning average profits per equity partner of $921,150 in “New York dollars”. Again taking the cost of living into account, Sidley outperformed Brown in average profits per equity partner throughout the ’90s. It also did better than Brown in revenue per lawyer, which is unusual for a Chicago firm, since New York lawyers typically command higher rates. In 2000 Sidley bested Brown in both average profits per partner and average revenue per lawyer. (Brown, in fact, suffered the largest decrease in profits per partner of any Am Law 100 firm.) Similarly, the governance structure of the new firm is weighted toward the Chicagoans — Sidley’s Cole and Douglas run the combined firm from Chicago, and Sidley controls the compensation committee by a ratio of 3:1. The question thus remains: Why was Sidley willing to take a step back financially, albeit a slight one, to get bigger? Cole makes a convincing case that a bigger Sidley is better able to shoulder the enormous costs of doing business overseas. The firm, for example, networks its foreign lawyers so that they can share computer files with their American colleagues and can call them by simply dialing four digits. This service runs into the hundreds of thousands of dollars per year, per foreign office. Sidley gains obvious economies of scale by spreading the cost over more lawyers, Cole says. With more fee earners, the new firm has more capital to sink into overseas exploration, Smith adds. “[The merger] is going to broaden our [revenue] base and give us more wherewithal to finance global operations,” he says. The merger gives the combined firm 80 lawyers in London (Brown’s 25 London lawyers are moving to Sidley’s 55-lawyer office there), and 40 lawyers in Hong Kong (both firms had 20 lawyers there). The combined firm also has a token presence in Beijing, Shanghai, Singapore, and Tokyo, and it plans to move soon into Germany. Cole says the firm will follow the lead of London’s globetrotting Magic Circle firms. “They are in a lot of places, but they are there in size and with high quality,” he says. Sidley lawyers believe that the new firm will also be far more formidable domestically. Cole, for example, sees powerful synergies between Brown’s investment banking contacts and Sidley’s litigation and M&A capacity. Brown had a small litigation section — about 35 lawyers — and it was considered one of the firm’s weaker practice areas. Sidley, meanwhile, had about 350 litigators before the merger, including Carter Phillips, one of the country’s top Supreme Court practitioners. Cole says that he has already been approached by a Brown client who said that it was underserved on the West Coast and eager to use Sidley’s litigators in Los Angeles. But how will Sidley’s build-it-in-New York-and-they-will-come strategy play on Wall Street? There, Sidley hopes to parlay Brown’s transactions background into more M&A work. Key to that effort is Brown’s underwriting work. Although it was not a leading firm on the issuer side of equities offerings, Brown did work on the underwriter side. (In our most recent Corporate Scorecard listings, Brown & Wood ranked 15th on our list of underwriter’s counsel to U.S. IPOs and 10th on our list of underwriter’s counsel to other U.S. equities offerings.) Such equity work is a “close cousin” to M&A, Cole maintains. “If you are [an investment bank's] securities lawyer [for underwriting matters], it is pretty easy to move into being their M&A lawyer, if you have the capacity.” In Cole and Douglas’ eyes, though, the biggest plus for the merged firm is its sheer size. They maintain that more work and legal talent will flow to the firm, strictly because it now has a much bigger New York platform — in fact, they repeatedly boast, it has one of the “10 biggest” offices in the city. “The mantra that we had heard from our New York partners over and over again was that they have a wonderful office,” Douglas explains, “but they didn’t have the real critical mass to be a player at that very next, highest level in New York … . [Now] they have the presence they have been asking for.” Still, the prospect of a bulked-up Sidley doesn’t leave members of New York’s M&A elite quaking. The new firm may be slightly more attractive to investment banks, they say, because — unlike the old Brown & Wood — it can give banks entr�e to powerful corporate clients. But on the biggest, most lucrative deals, investment banks won’t stray from the counsel that they’ve used for years, they contend. “Sidley is not buying access to investment banking M&A work with this merger,” scoffs a New York corporate lawyer. “That is a pie in the sky.” Law firms often mistakenly believe that presence automatically equals player status, says Peter Zeughauser, a principal in the Corona del Mar, Calif., office of the consulting firm ClientFocus. (Zeughauser is also of counsel at Claremont, Calif.’s Shernoff, Bidart & Darras and a contributing editor to The American Lawyer.) Firms based outside of New York, he says, often find that their clients, no matter how loyal, will take their most significant corporate deals to top New York City firms. The out-of-towners often delude themselves into thinking that if they can just plant a big flag on Wall Street, such work will come to them. “It doesn’t happen,” says Zeughauser. “The best deals work will still go to Skadden and Wachtell.” In addition, the merger comes at a risky time. With corporate dealmaking in a lull and firms hunting for countercyclical talent such as litigators and bankruptcy specialists, the merger increased the percentage of transactions lawyers at Sidley to 67 percent from a premerger 60 percent. And the economies of scale that Sidley was counting on to boost profitability could easily be eaten away by the new firm’s increased overhead. “All of those lawyers we added — they all have to get paid,” Douglas says. Beyond the balance sheet, Sidley has taken on a huge headache — it has a lot more practices and egos to integrate. Before the firm tries to vault to the next level, it has to work on just holding all of its new parts together. On May 14 the firm lost 14 former Brown & Wood securities lawyers — nearly half of the former Brown & Wood office in Washington, D.C. — to McKee Nelson, Ernst & Young, a Washington tax firm. John Arnholz, the former co-chair of Brown’s Washington office and the top partner in the departing group, says the move was driven by the unique opportunity to combine his group’s corporate expertise with McKee’s complementary tax and accounting competencies. But the subtext of the departure is that Arnholz and company were not enticed by their impending move to Sidley’s litigation-centric Washington, D.C., office. This fall, Sidley’s 120 New York lawyers will face the prospect of being swallowed by a foreign culture when they move from their midtown home to Brown’s Wall Street offices. Faith Gay, a former Sidley partner in New York, says that the New York office supported the merger. “It wanted to be a bigger presence in New York, and it felt that it couldn’t do that by picking off lateral partners one at a time,” says Gay, who is now a partner in White & Case’s Miami office. Indeed, Cole says that the old Sidley’s New York office was a key driving force behind the merger. “Not only do you have to have a sense of momentum firmwide, but, frankly, each office needs it,” he says. “For that reason, we will continue to grow the Chicago office, [and] we’re going to continue to grow everything.” In other words, Cole and Douglas have gotten the Big Mo they were after — both literally and figuratively. There’s no question that Sidley is on the move. It’s just not clear yet whether it’s moving in the right direction.

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