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San Francisco Bay Area firms where wingtips never went out of vogue rode recession-proof practices like litigation to record returns last year just as their once-hot tech law competitors saw profits pounded by a poor economy, The Recorder‘s annual survey of law firm finances shows. Boosted by big-ticket litigation, life sciences and energy work, firms like San Francisco-based Heller Ehrman White & McAuliffe and Thelen Reid & Priest saw double-digit growth in both gross revenues and net income. And San Francisco financial district mainstays like Morrison & Foerster and Pillsbury Winthrop held their own as they capitalized on diverse practices and an international reach. And though technology titans like San Francisco-based Brobeck, Phleger & Harrison and Palo Alto, Calif.-based Wilson Sonsini Goodrich & Rosati saw revenues decline in 2001, the Bay Area’s 10 highest-grossing firms still managed to best the record $3.1 billion in revenue they collectively captured last year — increasing their take by 10 percent, to $3.4 billion. In large part, the boost in revenues was driven by the firms that shied away or had limited success capturing a significant share of the tech law market. As the recession stymied startups, slashed stock prices and crushed venture capital, it made those firms look prescient for not putting all their eggs into the Internet basket. “The emerging growth practice was slow and impacted by the economy, but it didn’t have the same kind of impact at Heller Ehrman as at other firms,” said Heller Ehrman Chairman Barry Levin. “We have not limited ourselves to technology.” Heller Ehrman saw the biggest boost in profits per partner in 2001, increasing 15 percent, from $560,000 to $645,000. Per partner profits also made a healthy jump at Thelen — climbing 12 percent, from $500,000 to $560,000. But those were among the few bright spots in last year’s profitability picture. Last year, the top 10 firms managed net income of $946 million; this year that figure slipped to $906 million. Though Wilson Sonsini led the Bay Area with profits per equity partner of $830,000, that figure represented a $100,000 decline from 2000. And the news was about as bad or worse for other techcentric players: Brobeck’s per partner profits dived 44 percent, Palo Alto, Calif.-based Cooley Godward’s fell 21 percent and Gray Cary Ware & Freidenrich’s dipped 3 percent. MoFo recaptured the title of the Bay Area’s highest-grossing law firm, pulling in just under $500 million in 2001. The 12 percent increase in gross revenue pushed it above last year’s Bay Area champ, Brobeck, Phleger & Harrison, which saw revenues decline from $476 million to $447 million and profits per partner fall from $1 million-plus to $660,000. Pillsbury — the product of a merger last year between San Francisco’s Pillsbury Madison & Sutro and New York’s Winthrop, Stimson, Putnam & Roberts — appeared at No. 3, eclipsing Wilson, which slipped to No. 4. Rounding out the top 10 were San Francisco-based Orrick, Herrington & Sutcliffe at No. 5; Cooley Godward, No. 6; Heller, No. 7; Gray Cary, No. 8; Thelen, No. 9; and San Francisco-based Littler Mendelson, No. 10. Littler returned to the top 10 after a two-year absence, replacing tech-heavy, Palo Alto, Calif.-based Fenwick & West. Fenwick’s grosses, like those of other Silicon Valley players, stagnated in 2001, while the employment specialists at Littler saw revenue rise 10 percent. The two firms were virtually tied with another former top 10 player, San Francisco-based McCutchen, Doyle, Brown & Enersen. But Littler’s grosses exceeded McCutchen’s by $2 million, giving it a berth in the top 10. Top 10 Highest-Grossing Bay Area Firms in 2001 Revenue per Lawyer Profits per Partner MORRISON & FOERSTER Morrison & Foerster credits a diversified practice and its geographic reach with helping to lift the firm back to its No. 1 ranking in Bay Area gross revenues. The firm’s chairman, Keith Wetmore, said practices in Southern California and Japan remained strong: “The Southern California market does not appear to be affected by the downturn and our practice there is busy across the board.” And while the firm saw a severe drop in startup technology work, as well as licensing and corporate work, Wetmore said litigation, bankruptcy and environmental/land use remained busy, and the real estate practice held up quite well. M&A transactions were also “surprisingly strong for us,” he said. The firm handled 37 M&A deals valued at $56.5 billion in 2001. Among the biggest transactions, MoFo represented JDS Uniphase Corp. in its deal to acquire SDL Inc. for $41 billion and Coca-Cola Co. in its $181 million acquisition of Odwalla Inc. It also represented Digimarc Corp. in its successful $56.5 million bid to buy assets from Polaroid Corp.’s bankruptcy proceedings. On the litigation side, the firm represented Altera Corp. in its long-running patent dispute with fellow semiconductor giant Xilinx Inc. In May a federal judge tossed out most of a jury verdict against Altera. MoFo is also representing Echostar Communications Corp. in a major patent tussle with Gemstar-TV Guide International Inc. over technology worth billions of dollars in licensing and advertising revenues. During the year MoFo continued to expand its presence in London and Tokyo. It rejuvenated the London office by hiring several laterals and bringing the attorney head count up to 13. MoFo formed a joint venture with Tokyo’s Mitomi & Ito, increasing the type of work the firm can do in Japan. And MoFo closed its eight-attorney outpost in Buenos Aires, instead forming a strategic alliance with a local firm. Like other firms, MoFo undertook belt-tightening measures, shedding associates through stricter performance review standards. “We spent a great deal of time on a compensation evaluation system for associates,” Wetmore said. The firm eliminated the traditional lock-step base pay, replacing it with a range of base salaries for each class of associates with individual compensation based on an annual performance evaluation. In the coming year, Wetmore said MoFo is positioning itself to be competitive when the economy rebounds. “We’re looking for which practice areas will not come back and those that will come back but in a different place,” Wetmore said. “I don’t want to give away what we think — that’s proprietary — but it’s not going to look like the last growth period. It will be different.” BROBECK, PHLEGER & HARRISON Brobeck’s performance rocked the Bay Area for the second year in a row. But this time its tumble from the top is the big news. The firm’s profits per partner plunged 44 percent, from $1.17 million in 2000 to $660,000, and its gross revenue slid 6 percent, from $476 million to $447 million. As a result, Brobeck fell from the No. 1 spot it held in both revenue and profits the previous year. Brobeck’s phenomenal growth in 2000 — it added 308 lawyers for a total of 950 — became a financial drain when the economy tanked. Richard Parker, Brobeck’s firmwide managing partner, said the corporate side grew from 26 percent of the firm in 1998 to more than 40 percent in 2001. When the recession hit, the firm remained at excess capacity. Brobeck initially shed associates through stricter performance reviews, and then in December 82 associates in the business and technology group agreed to take a buyout to leave the firm. Though profits spiraled in 2001, Parker tried to put a positive spin on Brobeck’s performance: “Income is way down but $660,000 is not bad. It’s an income most people are very happy with.” While the business and technology group took a beating, Parker said all of the other practice groups did well, with securities litigation and IP leading the way. And despite the turmoil in the technology sector, Brobeck does not plan to change its focus. “We are strong believers that the tech [area] is where we want the corporate practice to be,” Parker said. “We think it will come back sooner rather than later.” PILLSBURY WINTHROP Pillsbury Winthrop managing partner Marina Park describes 2001 as a year of highs, lows and many surprises. The January merger between Pillsbury Madison & Sutro and New York’s Winthrop, Stimson, Putnam & Roberts instantly created a 733-lawyer powerhouse. The firm took in $445 million in revenues, which is roughly 8 percent higher than each of the separate firm’s combined 2000 revenues. However, combined net income was down roughly 5 percent compared with 2000. Park attributes this to the costs of the merger and downtime in its New York office after the Sept. 11 attacks. Yet the drop-off in net income didn’t crush partner profits. Pillsbury, with its large nonequity partner ranks, managed to keep profits per equity partner steady at $615,000 — the same number Pillsbury Madison & Sutro posted in 2000. Pillsbury also fortified the bottom line by laying off about 20 associates in its New York and Silicon Valley offices. The layoffs came in the wake of the terrorist attacks. Despite that setback, Pillsbury relied on its institutional contacts to get a piece of a few of the year’s bigger mergers and acquisitions. The biggest deal of the year came from longtime Pillsbury client Chevron, in its $43 billion merger with Texaco. But the firm also grabbed international deals like the Cable & Wireless acquisition of Digital Island that would not have been possible without joining forces with Winthrop Stimson. WILSON SONSINI With the market for initial public offerings virtually nonexistent, Wilson Sonsini simply couldn’t pull off another year of dramatic revenue growth as it did when the stock market was soaring. Wilson partners anticipate the firm will collect $425 million in revenue, a 6 percent decline from the $450 million the firm collected in 2000. The firm’s fiscal year ends Jan. 31. The firm expects overall profits to drop by 6 percent as well, to $116.6 million from $124 million in 2000. Partners stand to take home an average of $830,000, an 11 percent decline from the $930,000 they took home in 2000. Meanwhile, the overall ranks at the firm have shrunk. Wilson has 104 fewer lawyers this year than the same time last year. The firm managed to skirt an outright layoff in 2001, primarily with more aggressive performance reviews and through attrition. Donna Petkanics, Wilson’s managing director of operations, said a cache of more than 300 publicly traded clients needing general corporate and intellectual property work helped generate some 75 percent of the firm’s revenues. The remainder comes from litigation. “With litigation to complement the corporate work, the business model held,” Petkanics said. Wilson did manage to bag several significant mergers and acquisitions, including representing Hewlett-Packard Co. in its pending merger with Compaq Computer Corp. It even managed to score a handful of IPOs, including the highly touted debut of Loudcloud Inc. ORRICK, HERRINGTON & SUTCLIFFE Orrick, Herrington & Sutcliffe’s steady performance pushed the firm to the No. 2 spot in partner profits among Bay Area firms in 2001. The firm posted $765,000 in profits per partner, a mild 2 percent increase over the previous year but a stark contrast to the tech-focused firms that saw their profits dive. Gross revenues jumped 14 percent, to $365 million. “Our balanced portfolio of practice areas enabled us to do well in a very challenging year,” said Chairman Ralph Baxter Jr. The firm’s finance practices — structured finance, global energy and communication, and public and private finance — as well as its IP practice and high-stakes litigation, were particularly strong in 2001, Baxter said. Lawyers and staff from less busy areas pitched in and helped, which “enabled us to make modest gains in profits per partner.” Orrick invested millions of dollars in technology and expanding its office space in New York, Silicon Valley and Seattle. Baxter said the firm also spent a substantial amount of time organizing its so-called Global Operations Center, which is to open in Wheeling, W.Va., in May. The new facility will house portions of Orrick’s technological and finance operations, which are primarily handled by the firm’s San Francisco and New York offices. Baxter said in September that the center would save Orrick $1 million annually. In the coming year, Baxter said Orrick will continue to expand in San Francisco, Silicon Valley and New York City and is likely to open at least one additional office in Europe. He said the firm also would increase its Tokyo presence, currently its largest international outpost with about 20 lawyers. COOLEY GODWARD Cooley Godward’s rocket ride up the revenue charts hit a wall last year as gross revenue inched up a mere 3 percent and net income slid 12 percent. But Mark Pitchford, Cooley’s chief operating officer, said, “We’re pretty pleased by [the revenue growth] given all the factors going on. It’s a year that will nicely exceed 1999″ when revenue jumped 24 percent from the previous year, to $213 million. In 2000, the firm saw a 62 percent hike in revenue, fueled by the booming technology market. Pitchford said the decline in net income in 2001 was largely due to the imbalance between incoming work and attorney head count for three-quarters of the year. The firm dealt with this by laying off 86 associates in August. It was the first Bay Area firm to cut lawyers en masse. The firm suffered from a fall-off in corporate transactions and public offerings, but Pitchford said Cooley’s litigation practice did well, handling a steady flow of IP cases, as did its life sciences and immigration practices. The firm is also representing underwriters charged with stock market manipulation during the boom in high-tech initial public offerings. Pitchford said Cooley is ranked third or fourth in the country in terms of the number of such cases it is handling. Cooley created a new management structure early in the year. In place of a firmwide managing partner, the firm split the leadership between the new posts of chairman and CEO — held by Stephen Neal — and chief operating officer. The major event of the year, however, was the reduction in associate ranks. Pitchford said the firm spent much of the last third of the year executing the layoff and dealing with the aftermath. “If there was any silver lining in 2001 in the management of the organization, it was getting a handle on expenses,” Pitchford said. HELLER EHRMAN While many Bay Area firms contracted in 2001, Heller Ehrman White & McAuliffe grew its ranks by 80 attorneys and opened up a pair of new offices. “It’s been a really strong year for us,” said Levin, Heller’s chairman. Revenue climbed from $262 million to $331 million, and profits per partner grew faster than at any other firm. Not bad in a year where many firms were celebrating flat growth. Heller’s litigation group kept busy representing new, high-profile clients like Microsoft Corp. and the Wisconsin Alumni Research Foundation, which owns the rights to five of the 60 stem cell lines that President Bush limited federal-funded research to last summer. And Heller’s life-sciences practice bolstered its corporate group, with big deals like Johnson & Johnson’s $12 billion Alza acquisition. Levin concedes that his firm has not been completely immune to the country’s economic malaise, with its technology group taking a hit. But Heller’s long-held goal of being about more than just technology kept the firm growing in a difficult year. Levin said the energy practice continued to grow, and litigation, antitrust, securities, products liability and insurance coverage were busy all year. The litigation practice was particularly strong. The American Lawyer magazine, an affiliate of The Recorder and law.com, listed Heller as one of the best litigation practices in the United States; it was the only Northern California firm to make the list. GRAY CARY A fat payroll and a lean supply of corporate transactional work put the squeeze on profits at Gray Cary Ware & Freidenrich in 2001, even though the firm managed to plump its revenues by 18 percent. The firm racked up $224.5 million in revenue last year, a tidy jump from the $190 million the firm generated in 2000. But underperforming associates ate into the firm’s profits, partners said. Profits per partner slid from $530,000 to $515,000. And while the firm’s lawyer ranks grew 18 percent in 2001, revenue-per-lawyer was virtually unchanged from 2000. “Our headcount was significantly higher than at the beginning of the year,” said J. Terence O’Malley, Gray Cary’s chairman. “The costs of our growth were roughly equal to the increase in revenue.” The firm addressed some of the over-capacity last week by laying off 46 associates and 68 staff. To help revenues, Gray Cary leaned on its litigators to drum up revenue, O’Malley said. Litigators comprise some 45 percent of the firm’s lawyers, yet last year they contributed more than half of the firm’s revenues, he said. A handful of big-ticket litigation clients plumped the bottom line, including Hewlett-Packard Co., Rambus Inc. and Crossroads Systems Inc. THELEN REID & PRIEST In 2000, Thelen posted a 13 percent increase in gross revenues — news that hardly made a blip as tech-focused firms posted between 30 percent and 60 percent gains. Last year, Thelen saw a 12 percent jump in gross revenue, an increase that makes the firm a powerhouse as other Bay Area firms see their revenues and profits flag. Not only did revenue experience a double-digit increase, but Thelen pulled off a tidy jump in profits as well. The firm logged net income of $56 million last year, which translates into $560,000 in profits-per-partner — a 12 percent increase over the $500,000 of 2000. The key to Thelen’s success? An old-line client base of energy companies, public utilities and construction and engineering firms. The mix kept the firm busy on all fronts, said Richard Gary, Thelen’s chairman. And California’s energy crunch helped the firm as it put more pressure on its client base to expand. “Many of our clients were building new generation [plants] and transmission capacity, and we advised and assisted them,” Gary said. And finally, nearly three years after the firm was created in a merger, Thelen was able to capitalize on its larger, bi-coastal presence, Gary said. The credibility of being a larger player encouraged many of the firm’s clients to take advantage of other practice areas, Gary said. As a result, the firm was able to cross-sell to transactional clients the services of its roughly 150 commercial litigators and some 50 construction lawyers, he said. LITTLER MENDELSON When the economy sours, business picks up for employment law firm Littler Mendelson. “We predicted over a year ago that this would be the year of the employment lawyer,” says Managing Director Wendy Tice-Wallner, “And it has.” But while the firm posted a good return, it wasn’t a breakout year. With a gross of $153 million, Littler grew its revenues by 10 percent, slightly bettering its 7.7 percent revenue growth in 2000. Profits per partner were virtually flat, increasing 1.4 percent. Unlike practices such as M&A or bankruptcy, which experience drastic boom and bust cycles, says Tice-Wallner, Littler’s employment defense practice is on a more gradual growth track. Among the busier groups at Littler in 2001 were the class action and labor law groups. Littler continued its nationwide expansion, opening new offices in Philadelphia and Pittsburgh, while its attorney headcount rose from 365 to 380. Recorder reporters Alexei Orsekovic and Brenda Sandburg, Senior Writer Renee Deger and Assistant Managing Editor David Brown contributed to this story.

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