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Call it the Icarus year. After a period of sensational growth, Silicon Valley’s highest fliers crashed to earth in 2001. All of the largest tech-focused firms saw profits per equity partner slip. At most, gross revenue declined as well. San Francisco-based Brobeck, Phleger & Harrison — which had trumpeted its tech expertise most conspicuously — suffered the most stunning fall, recording a 44 percent plunge in per partner profits. But the news from the Bay Area isn’t all bleak. Old-line, diversified firms such as Morrison & Foerster; Pillsbury Winthrop; Orrick, Herrington & Sutcliffe; and Thelen Reid & Priest turned in good results, all things considered. Litigation stronghold Heller Ehrman White & McAuliffe even managed to have a great year in this depressed economy: Its revenue soared 26 percent and its profits per equity partner rose 15 percent, which was the highest increase among the 10 biggest Bay Area firms [see "The Tech Tumble"]. Tech firms were victims of their bold, expansionist dreams. “We grew very dramatically … so we built up a substantial cost structure,” Brobeck’s new managing partner, Richard Parker, told The Recorder, the American Lawyer Media newspaper in San Francisco, explaining the decline in profits. (The firm’s officials weren’t available for further comment at press time.) Indeed, Brobeck added more than 300 lawyers in 2000. Last November the firm offered buyouts to associates, and more than 80 took the package. By then other firms had been forced to resort to humiliating layoffs. They included Palo Alto, Calif.-based Fenwick & West (which fell off the Bay Area top 10 list this year); Cooley Godward, also based in Palo Alto; Venture Law Group, based in Menlo Park, Calif.; and Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, the Menlo Park-based firm that sparked 2000′s round of associate salary increases. Although Silicon Valley’s biggest tech-oriented firm, Palo Alto-based Wilson Sonsini Goodrich & Rosati, never announced layoffs or buyouts, its ranks have shrunk by more than 100. And the bloodletting continues: In early January, Gray Cary Ware & Freidenrich gave pink slips to 46 associates, and both Gray Cary and Pillsbury lopped $10,000 off first-year salaries, lowering them to $125,000. (VLG and Gunderson also cut associate salaries last year.) At Wilson Sonsini, where revenue declined by 6 percent, managing partner Donna Petkanics says that the firm is still “very committed” to its focus on technology. “We think technology will be the key to the productivity of the U.S. market,” she says. “We think it’s a long-run plan and we want to stay focused.” But even faith in technology doesn’t always keep anxiety at bay. “I wake up every morning in a panic,” says Jorge del Calvo, Pillsbury’s biggest rainmaker in the Valley, only partly in jest. His Silicon Valley office had hoped for growth of 30 percent to 40 percent in 2001 and ended up with only about a 10 percent increase. Says del Calv “I was glad to see the year end.” Firms that aren’t heavily tech-focused congratulated themselves for their business savvy. “We made a conscious decision not to focus just on technology,” says Heller chairman Barry Levin. “It’s been a really strong year for us.” Although the firm’s corporate work is down more than 10 percent, upward of 60 percent of Heller’s practice is litigation. Morrison & Foerster’s broad-based strategy propelled it back to the top of the Bay Area’s revenue chart, after it had been eclipsed by Brobeck and Wilson in the prior year. The firm also benefited from its presence in Southern California, where it has more than 225 lawyers. Morrison & Foerster chair Keith Wetmore says that even though his firm overhired during the tech boom — “everybody overhired,” he says — it rejected layoffs, reasoning that leaner ranks might be unable to capitalize on the next economic upswing. “We have battled for market share in Silicon Valley for a decade,” he says. “I’m not sure we want to surrender it when the rebound comes.” Along with litigation, another bright spot for Heller, Thelen and Pillsbury was the boom in energy work. “The energy story is a huge story on the West Coast,” says Pillsbury managing partner Marina Park. Substantial work from California’s energy crisis, the Pacific Gas & Electric Company bankruptcy and the Enron Corp. debacle helped these firms compensate for slumps in other areas. Heller represents PG&E in several regulatory and litigation matters. At Pillsbury Winthrop, clients such as Dynegy Inc. have helped double revenues in the firm’s energy practice. But if a firm’s specialty is working with startups or doing IPOs, how does it keep its lawyers busy? Initial public offerings, which drove the engines of many of the Valley’s firms, all but dried up last year. In 2000, Wilson Sonsini represented 34 companies that went public; Cooley represented 25; and Brobeck, 17. (The numbers were even higher in 1999.) Last year, Wilson had to settle for six company-side public offerings; Cooley had three; and Brobeck, two. “We’re simply spending more time with clients we have,” says Mark Tanoury, who heads Cooley’s business group. “Our public companies and bigger clients are getting more of our time.” That’s a switch from two years ago, when Cooley and others viewed big companies as less desirable clients than startups, with their lure of equity riches. Tanoury says that even though partner hours at Cooley are down by 20 percent to 25 percent overall, the firm hasn’t shifted partners to other practices. “We do think this is cyclical and will change,” he says. “By the time they get up to speed in another practice, we will try to recruit them back to this [work].” Are Cooley’s corporate partners nervous? “Absolutely,” Tanoury says. “Especially the younger partners.” But he says that he tells them that in six to nine months it will be busy again. Gray Cary Chairman J. Terence O’Malley sounds less optimistic. “As we looked to the first half of 2002, our judgment was that things are not going to get better soon,” he says, explaining why the firm laid off associates in January. This conclusion came from discussions with clients, especially investment banking firms who produce in-depth economic forecasts. “We’re a trailing indicator,” notes O’Malley about the legal business. “Our results usually trail [the economy in general] by three to six months. Even if the general economy were to come back in midyear, I don’t think we’d see significant benefits until the fourth quarter, and that wouldn’t translate into cash flow until ’03.” O’Malley admits that his and other firms were overly ambitious. “I think the aggressiveness of the late ’90s went on too long,” he says. “We didn’t see the train wreck coming soon enough. But we’re in a big club. And nobody could have predicted the impact of Sept. 11.” Related Chart: The Tech Tumble With reporting from David Brown, Renee Deger, Alexei Oreskovic and Brenda Sandburg ofThe Recorder.

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