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New York-based Brown & Wood and Chicago-based Sidley & Austin are in advanced negotiations toward a merger that would create the third-largest U.S.-based law firm and one of the 10 largest in the world, with more than 1,300 attorneys. If it comes to fruition, the combination would match 400-lawyer Brown & Wood’s capital markets expertise with 900-lawyer Sidley & Austin’s much broader corporate and litigation practices. Among firms with U.S. headquarters, only Skadden, Arps, Slate, Meagher & Flom and Jones, Day, Reavis & Pogue would be larger. The new firm would have almost 400 lawyers in New York. Brown & Wood, which had a well-publicized dalliance with White & Case before talks of a union collapsed in early 1999, has been down this road before, and leaders at Sidley & Austin said that they, too, had long been in the market for a merger partner. “It really makes a lot of sense for both firms,” said Brown & Wood managing partner Thomas R. Smith Jr. “They were looking for a stronger New York office and stronger capital markets. We are almost a pure play on capital markets, so we were almost ideal for them. And being so dependent on capital markets, it made sense for us to diversify our practice.” The management committee at Brown & Wood and the executive committee at Sidley & Austin each unanimously endorsed pursuing the merger in meetings last week. And in separate memos sent to their respective lawyers on Tuesday, the firms announced that they had come to a preliminary agreement on financial and strategic issues and had even come up with the new firm’s name — Sidley, Austin, Brown & Wood. Said Charles W. Douglas, who chairs the management committee at Sidley, “We have confidence that the full partnerships will want to do this.” Brown & Wood relies heavily on its strong capital markets practice, which includes Wall Street clients such as Merrill Lynch & Co. Inc., Morgan Stanley Dean Witter & Co., and Lehman Brothers Holdings Inc. The firm was ranked as the top counsel for both managers and issuers of U.S. debt, equity and equity-related offerings completed during 2000, according to Thomson Financial Securities Data. But Smith said the firm had concluded that it needed to find a wider range of business, given the volatility of the capital markets practice. Sidley’s corporate and litigation practices boast a stable of blue-chip corporate clients, including General Electric Company, AT&T Corp., and Kimberly-Clark Corp. And the firm had already built a substantial New York presence, with about 110 lawyers. (Those lawyers will move from Sidley’s midtown offices to additional space in Brown & Wood’s World Trade Center offices if the merger is completed.) But Douglas said that Sidley had been looking to bolster its capital markets practice, particularly as a springboard to further expansion in London and Asia. In London, Brown & Wood has an office of about 30 lawyers, primarily U.S.-trained, while Sidley has about 60 attorneys, most of them U.K.-qualified, Smith and Douglas said. Brown & Wood also has offices in Los Angeles; San Francisco; Washington, D.C.; Beijing, China; and Hong Kong. Sidley has additional outposts in Dallas; Los Angeles; Seattle; Washington, D.C.; Hong Kong; Shanghai; Singapore and Tokyo. Meetings between the two firms began late last fall and intensified around the first of the year, with discussions of the financial feasibility of a merger. Brown & Wood had profits per partner of $800,000, and Sidley profits per partner of $575,000 for 1999, according to The American Lawyer, an affiliate of the Law Journal. Douglas said that Sidley’s financial fortunes were rising, noting that the firm had reaped profits per partner of roughly $680,000 for 2000, and that “another significant leap” was projected for 2001. Smith said that for the two firms, “Last year’s figures are very similar. That is no issue whatsoever.” In addition, Smith said that the combined revenue for Brown & Wood and Sidley was about $650 million for 2000, and that they projected around $750 million in revenue for 2001, a figure that would place the combined firm among a select few in the United States. PREVIOUS NEGOTIATIONS Brown & Wood’s negotiations with White & Case in 1998 and 1999 broke down in part over the firms’ different accounting methods. Brown & Wood prepared statements on a cash basis, recognizing income and deductions at the time money is received, while White & Case employed the accrual method, matching revenue to the time period in which it was earned, counting as revenue work in progress and accounts receivable. That issue has arisen in the talks with Sidley as well, Smith said. But he said that the firms had agreed to use Sidley’s accrual method in the combined firm. “We tackled that first and we feel comfortable about going public with this,” he said. Smith and Douglas also said the issue of leadership had been solved, with Brown & Wood scheduled to receive proportional representation with the addition of slots onto Sidley’s existing executive and management committees. The firms said they expected to iron out an agreement sometime in the second quarter of this year. “Both firms have endorsed the merger on basic terms,” Douglas said. “But as you always know, the devil is in the details and we have to work out the details.”

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