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By most measures, these are not the best of times for the New York City economy. That economy has lost more than 100,000 jobs since last summer. While the rest of the nation talks of recovery, New York looks forward to more belt-tightening. Wall Street, the media and other major city industries are all facing slumps unseen in generations. And then there is the whole matter of Sept. 11. All in all, it may not be the most auspicious moment to be talking about New York emerging as the world capital of a multibillion-dollar industry. But that is precisely what is happening in the legal profession. Without question, New York is now the No. 1 destination for expansion by large law firms across the country. Out-of-town firms are banging on doors midtown and downtown looking for merger partners. Firms that already have a substantial New York presence are committed to becoming larger still. Since the beginning of last year, more than 10 New York firms have been swallowed up by out-of-town firms of 300 lawyers or more. “In the last 10 years, the legal profession has actually become more New York-centric, not less,” said Robert Winikoff, managing partner of the New York office of Chicago-based Sonnenschein Nath & Rosenthal, which Monday announced its acquisition of RubinBaum, a 55-lawyer New York firm. This is the case despite the sharp drop in major corporate transactions, the pride of top New York firms’ practices. If anything, the weak economy has only increased out-of-town firms’ eagerness to break into the New York market, as smaller New York firms and practice groups are never more receptive to merger offers than in a down economy. At the same time, the appeal of other markets for firm expansion, foreign and domestic, has waned. In particular, the promise of Silicon Valley has proved illusory to many lawyers as well as investors. And many firms are channeling their desire for overseas expansion into the New York market, the natural point of origination for international transactions. The result is that New York now is becoming the center of an increasingly concentrated legal profession, a development that cannot fail to have far-reaching repercussions for the future of the law and its practice throughout the nation. In the coming weeks, the Law Journal will be taking a close look at those law firms at the leading edge of the charge, those firms from Chicago, Los Angeles, Washington, D.C., Miami and elsewhere that have found their way to New York. The experience of these firms has been by no means identical. They have approached New York at different times and in different ways, bringing their own strengths and weaknesses to the table. The success they have achieved thus far and their prospects for future success vary wildly. PROFIT MOTIVE But the basic motivation for all firms entering the New York market is the same: profit. The profitability of the New York legal market is one of the major reasons New York already has a substantial claim to being the center of the profession. The top-tier New York firms consistently have been the most profitable and prestigious in the nation, and their proximity to Wall Street investment banks has allowed them to maintain a stranglehold on virtually all premium mergers-and-acquisitions and capital markets work. By most accounts, that stranglehold has not really budged in the face of market penetration by out-of-town firms. There are some non-New York firms ambitious to steal high-profile, high-value transactional work from the likes of Sullivan & Cromwell and Cravath, Swaine & Moore, but moving to the very top of the pyramid remains a distant dream for most. Simply moving up, though, is a more realistic goal. Premium work or otherwise, the New York market supports the highest hourly rates in the nation, and a firm that can sustain a reasonable level of activity in its New York office will receive a boost to its bottom line that can grow enormously over time. The experience of firms that first entered the New York market in the ’80s and early ’90s and expanded steadily bears that out. While partners at some top New York firms may still consider firms like Mayer, Brown, Rowe & Maw and Morgan, Lewis & Bockius a step behind in the pecking order, partners at what were once considered top firms in Chicago and Philadelphia now stand in awe of their former peers. According to the American Lawyer‘s AmLaw 100 from 1991, the 1990 profits-per-partner for the big Chicago firms mostly fell in the $300,000-to-$400,000 range. Mayer Brown had profits-per-partner of $305,000; Sidley & Austin had $400,000; Jenner & Block had $325,000 and Sonnenschein Nath & Rosenthal came in at $315,000. Fast forward to 2000, and Mayer Brown and Sidley Austin count profits-per-partner of $725,000 and $685,000, respectively. Jenner & Block and Sonnenschein Nath have respective profits of $405,000 and $370,000. “Our competitors [in Chicago] expanded in New York,” said Winikoff of Sonnenschein Nath. “We didn’t, and our profits were flat for a decade.” That decade of flat growth may have ended. Winikoff said Sonnenschein Nath had firmwide profits for 2001 of $510,000. He attributed much of the improvement to the New York office, which has tripled in size in the last two years. With Monday’s merger, Sonnenschein Nath’s New York office has grown from 26 lawyers to a little over 130 in the last decade. Sidley Austin and Mayer Brown; McDermott, Will & Emery; Winston & Strawn; Kirkland & Ellis; and KMZ Rosenman are the other Chicago firms that now count more than 100 lawyers each in New York. This disparity in profits between firms that expanded heavily in New York and those that did not is true of other markets as well. Morgan Lewis’ 2000 profits-per-partner of $705,000 were about twice those of onetime Philadelphia peers Pepper Hamilton and Drinker, Biddle & Reath. The lesson for the firms left behind has been that they need to get in on the action or consign themselves more or less permanently to the lower ranks of firms. SIZE MATTERS It is also clear that size matters. “Firms are realizing it’s not enough to have 30 or 40 lawyers in a New York office,” said Ward Bower, a principal at law firm consultancy Altman Weil. “They’ve got to have enough critical mass to take on significant matters.” The need of out-of-town firms to be not just in New York but also big in New York is creating tremendous pressure on the markets for both firm mergers and lateral partners. On the merger front, many of the best partners have already been taken. Jonathan Lindsey, a partner with Major, Hagen & Africa, the legal recruitment and consulting firm, said out-of-town firms frequently have unrealistic expectations. “They want small firms that do a lot of premium corporate work,” he said. “Well, small firms don’t get premium corporate work.” But firms eager to break in can be quite flexible, Lindsey noted. “They come for corporate and they settle for litigation,” he said. The weaker economy actually may be helping firms seeking New York mergers, as the downturn has left many substantial New York firms feeling vulnerable and looking for the security of a larger and more diversified organization. The past five months have already seen two proudly independent New York firms folded into larger out-of-town firms. In January, New York’s 104-lawyer Squadron Ellenoff Plesent & Sheinfeld merged with Washington, D.C.’s 800-lawyer Hogan & Hartson. In April, Chicago’s 435-lawyer Katten Muchin & Zavis merged with New York’s 240-lawyer Rosenman & Colin to form KMZ Rosenman. “They’re not deals New York firms might have listened to in years past,” said Bower. MIDSIZE FIRMS WARY Midsize general-practice New York firms have a lot to lose in direct competition with out-of-towners. Clients obviously may opt for an aggressive pitch from a bigger non-New York firm but a more gnawing and persistent fear is that a New York firm’s most productive partners will accept generous offers from, say, Chicago and Los Angeles firms. Indeed, many already have. Those generous offers to New York-based laterals are not always easy to make, though. On average, New York lawyers, partners and associates alike, are the highest-paid in the nation. For firms with greater presence in cities where average attorney compensation and hourly rates are lower, breaking into the New York legal market can represent a daunting and controversial investment. Indeed, senior associates at New York firms frequently earn more than partners in other markets, a fact that does not often sit well with those particular partners. In many if not most cases, Lindsey said, the increased profits brought in by New York lawyers are not shared widely across the firm. “It has no impact on most of the other partners,” he said. Rather, he noted, firms often are interested primarily in boosting average profitability and moving up in rankings like the American Lawyer‘s AmLaw 100 or AmLaw 200. A higher ranking makes a firm more attractive to clients, lateral partners and other firms looking for mergers. But New York lateral hires, facing more opportunities and options than laterals in perhaps any other market, can be an unpredictable lot. Many firms have planted their flag in Manhattan by securing the services of big-name partners or practice groups, only to see those lawyers drift to other firms, often within a year or two, or otherwise fail to deliver on their initial promise. Of course, from those partners’ perspective, it is the firms that failed to live up to their promise, and partners with better options will swiftly abandon firms they do not perceive to be succeeding. For both partners and their firms, the pressure is on to succeed and succeed fast. UPHILL BATTLE Coming to New York will be an uphill battle for most firms. Charles E. Engros Jr., the managing partner of Morgan Lewis’ roughly 280-lawyer New York office, said he recognizes the “competitive imperative” that is driving so many firms to try to expand into New York. But he noted the competitive landscape is much tougher now than when Morgan Lewis first entered the market 28 years ago. “This is a very well-lawyered market,” he said. “To come in and start a standalone New York office competing with very strong firms, it’s a losing proposition.” It may still be a better proposition than other markets firms have considered lately. Through the late ’90s and well into 2001, Silicon Valley and the San Francisco Bay Area seemed to be where the future of the legal profession lay. With their equity investments, casual dress policies and revolving door to management positions with dot-com clients, West Coast technology lawyers momentarily appeared to have found a model of individual enrichment and satisfaction that lawyers everywhere, particularly associates and younger partners, envied. That moment is gone, and if Wall Street seems stuck in a slump, the Silicon Valley of 1999 vintage seems to have disappeared into the sea. The firms that once appeared to represent the future of the profession now face uncertain futures themselves. San Francisco’s Brobeck, Phleger & Harrison; Palo Alto, Calif.-based Wilson, Sonsini, Goodrich & Rosati and Cooley Godward have all laid off scores of associates in the last year, with Brobeck’s most recent cut coming just two weeks ago. There is no doubt the tech sector will eventually recover and flourish, but the unprecedented buoyancy of the recent tech bubble appears lost to history. Bower said he expects firms to continue to expand into California but at a slower pace. Few lawyers, he said, expect the technology sector to experience a boom of ’90s magnitude again in their lifetimes. Moreover, Silicon Valley may not be the predominant beneficiary of any future tech boom, as a number of competing technology corridors have emerged across the country and around the world. By comparison, a recovery for Wall Street and New York is a pretty safe bet, Bower said. American companies made increasing use of capital markets over the last decade and activity is likely to pick up again when corporate results improve. Similarly, New York seems a much safer place for firms to launch international transactional practices. Compared to the early ’90s, when emerging markets were all the rage, overseas expansion today is concentrating much more in international financial capitals, particularly London. But London’s attraction for U.S. firms is of a piece with their attraction to New York. There is a recognizable nexus between Wall Street and its British equivalent, the City of London, and firms cannot exploit the full potential of their London presence without having substantial New York operations. Moreover, for most American firms, London expansion has thus far proven even more difficult and expensive than New York expansion. As out-of-town firms race to build New York offices as big or bigger than their other offices, they are transforming the landscape of the industry. Many law firm managing partners believe the legal profession will eventually be dominated by a relatively small number of super-firms with global reach. Thomas Cole, the Chicago-based chairman of Sidley Austin Brown & Wood, said he believes there could be as many as 20 such firms. Among the clear contenders are the existing top-tier New York firms and the five firms of London’s so-called Magic Circle. The rest of the field, he said, will consist of the best of those firms now racing to expand in New York. Cole is determined that Sidley Austin will emerge as one of those global players. The firm’s blockbuster merger last year with New York’s Brown & Wood, which gave Sidley Austin one of the largest law offices in New York, was a major part of that strategy. “Any firm that has aspirations to being a global firm has to be in New York,” Cole said. Bower also sees the profession segmenting. Large general-practice firms who fail to expand significantly will remain regional players at best. Future growth outside of the emerging super-firms, he said, will likely be strongest among highly specialized firms focused on single practice areas like litigation or specific industries like technology. But successful firms sticking to regional or specialized models will always be subject to raiding of their client and partner base by larger firms prowling for new profit centers. Given the current rush to expand, it seems that most firms would like to be the diner, not the dish. And everyone knows the best restaurants are in New York. “For a while, a lot of firms thought they could grow without being in New York,” said Bower. “Now they realize they can’t.”

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