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There’s been an upset among California’s top legal heavyweights. Last year, Latham & Watkins became the first firm in the state to crack the $1 million barrier in profits per equity partner. But in 2000, the L.A. leviathan’s partners will have to settle for just $990,000 — not bad, but not enough to overtake the new champ in profitability: San Francisco’s Brobeck, Phleger & Harrison, where partners earned an average of $1.17 million. To be sure, Latham is still the highest-grossing firm in the state. It collected more than $642 million during 2000. But other L.A. firms saw their positions eclipsed as tech-fueled Bay Area firms pulled in more money than at any time in their histories. Brobeck overtook Gibson, Dunn & Crutcher as the second-highest grossing firm in the state. Gibson slipped to No. 3 — a place traditionally held by Los Angeles’ O’Melveny & Myers. And tech helped Wilson Sonsini Goodrich & Rosati and Morrison & Foerster saunter past O’Melveny to claim the No. 4 and No. 5 positions respectively. O’Melveny now ranks sixth. Southern California firms, which last year took home 52 percent of the profits earned by the top-grossing firms in the state, saw their share of the pie slide to 48 percent in 2000. Profits per partner at Southern California firms averaged $652,000, compared with $671,000 in Northern California. The data on revenues and profits was collected as part of an annual survey of law firm finances conducted by The Recorder. The 2000 figures reflect the end of the longtime dominance of the three top-grossing Los Angeles-based firms — Latham, Gibson and O’Melveny — over California’s legal market. While all three continue to be among the state’s premier players, it’s clear they’re no longer alone. In a trend that has been in the making since the advent of the dot-com boom in 1998, Northern California firms have caught up in revenues and have overtaken the trio in profits. But few believe Bay Area firms will hold the title forever. The dive in the dot-economy is sure to hurt the bottom line at tech-oriented firms this year. And all of the big L.A. players have resilient, diversified practices that many firm managers and consultants believe will keep them at or near the top of the pack. “I don’t think Northern California firms will leave Southern California firms in the dust, nor do I think that Southern California firms will re-establish their historical positions,” said Brobeck chairman Tower Snow Jr. “Rather, there will be two or three great firms in both Northern and Southern California, and those six will be the powerhouses on the West Coast.” And several Bay Area firm leaders — especially at firms sure to feel the pinch of the tech bust — are downplaying robust growth that Northern California firms saw compared with their Southern California rivals. “It’s highly speculative and premature to say there’s been a permanent or radical shift,” said Wilson partner Jeffrey Saper, who manages the firm’s strategic planning. “We aren’t breaking out the champagne and saying we’ve got something over L.A. firms.” POWER SHIFT Los Angeles historically has been the West Coast’s leading financial center, giving the top firms in the city a strong base of corporate work and drawing many New York firms into the region during the 1980s. They were also bolstered by the huge defense and entertainment industries that called L.A. home. In recent years, however, many banks have merged and have moved their headquarters out of the city. First Interstate Bancorp., for example, was acquired by San Francisco-based Wells Fargo in 1996. The end of the Cold War also meant tough times for defense contractors, slicing revenue from a key client base. “Los Angeles ceased to be the financial center it once was, at least vis-a-vis Northern California,” said Kenton King, a partner in the Palo Alto, Calif., office of New York-based Skadden, Arps, Slate, Meagher & Flom. “Bigger companies have tended to be technology-oriented and to be in Northern California.” Among the Fortune 500 companies based in California, the top five — Hewlett-Packard Co., Chevron Corp., McKesson HBOC Inc., Intel Corp. and Safeway Inc. — are based in Northern California. The biggest company based in Los Angeles County is The Walt Disney Co., which ranks eighth statewide, according to the Fortune list. Northern California is also home to much of the state’s venture capital — making it the natural home for emerging companies. With this natural home-field advantage, Bay Area firms moved to the top of the charts in numbers of M&A transactions and equity deals. In Recorder affiliate The American Lawyer‘s corporate scorecard for 2000, Wilson, Cooley Godward and Brobeck are the leading firms in the number of IPOs they handled for both issuers and venture-backed companies. In M&A deals for principals, the top-ranked California firms were Wilson, which came in at No. 10, and Morrison Foerster, which was No. 12 based on deal proceeds. But the rollicking good times are over, at least for the foreseeable future. Public offerings now are almost nonexistent, mergers and acquisitions have crashed, and venture capitalists are generally holding onto their money. Alan Mendelson, who spent more than two decades at Cooley before jumping to Latham’s Menlo Park office last year, said this is the worse market he has ever seen. The 1987 downturn “impacted public offerings but people were still doing venture deals,” Mendelson said. In the last 30 days, he has had venture capitalists pull out of two deals he was handling for issuers. “That’s never happened to me before,” he said. DIVERSIFICATION IS KEY While tech-focused firms are suffering from this setback, consultants and some firm leaders say that firms with diversified practices will fare better in the future. Will the market realign toward the top L.A. firms? “Based on what I’m seeing in my consulting work, yes,” said consultant Peter Zeughauser, of Newport Beach, Calif.-based ClientFocus. “The more general corporate practice of L.A. firms will bode well for them next year as opposed to Silicon Valley firms.” But he said it’s “less and less Los Angeles versus the Bay Area and more identification by types of practices that firms have.” William Voge, a partner in Latham’s New York office, agrees that diversification will be key in determining the future success of California firms. He said his firm resisted the temptation to pour resources into the technology area. “More than a few partners in 1998 and 1999 wanted us to invest more than we wanted in technology and the venture market,” Voge said. “We now look like geniuses in management.” He said 5 percent to 7 percent of Latham’s resources are in the venture and tech practice. While L.A. firms were slow to get into the tech sector — O’Melveny set up shop in Silicon Valley just last month — they contend they will be bigger competitors once the market picks up. “New York and traditional blue-chip California firms recognize the opportunity and will get their share of the market,” said David Krinsky, head of O’Melveny’s Menlo Park office. They have “more full-service and international practices than Brobeck, Cooley, Wilson and Venture Law Group.” Despite the downturn in the tech sector, major league firms continue to set up shop in Silicon Valley. New York’s Milbank, Tweed, Hadley & McCloy and Chicago’s Mayer, Brown & Platt plan to open digs in Palo Alto early next month. Skadden’s King said a firm’s geographic diversity will also be an important factor in a firm’s financial success. “Increasingly there will be demand for firms that can represent clients on a global basis,” he said. This will require the ability to “marshal resources in geographically diverse as well as practice-area-diverse areas.” THE BIG FIVE The following firms were the five highest-grossing in California during 2000: 1. Latham & Watkins Los Angeles Lawyers/Equity Partners*: 951/288 Gross Revenue: $642 million Net Income: $285 million Profits Per Equity Partner: $990,000 2. Brobeck, Phleger & Harrison San Francisco Lawyers/Equity Partners*: 724/146 Gross Revenue: $476 million Net Income: $171 million Profits Per Equity Partner: $1.17 million 3. Gibson, Dunn & Crutcher Los Angeles Lawyers/Equity Partners*: 647/215 Gross Revenue: $469 million Net Income: $210 million Profits Per Equity Partner: $977,000 4. Wilson Sonsini Goodrich & Rosati Palo Alto Lawyers/Equity Partners*: 812/133 Gross Revenue: $450 million Net Income: $124 million Profits Per Equity Partner: $932,000 5. Morrison & Foerster San Francisco Lawyers/Equity Partners*: 809/193 Gross Revenue: $437 million Net Income: $129 million Profits Per Equity Partner: $665,000 * Lawyers and partners figures are as of 8/31/00.

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