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These are lean times for mergers and acquisitions specialists. According to the most recent statistics from Thomson Financial, worldwide M&A activity has fallen to its lowest volume since 1995. Sidelined investment bankers and M&A lawyers are now spending quality time with their families, scrambling for other work or just wondering where the big deals and boom times went. But for those M&A specialists whose specialty is combining law firms with one another, the boom times have only just begun. “Our merger business has never been busier,” said Bradford W. Hildebrandt, head of law firm consultancy with Hildebrandt International. According to a survey conducted by Somerset, N.J.-based Hildebrandt, 2002 may prove a record year for firm merger activity. There were 24 major firm mergers in the first quarter alone; the previous record year for mergers was 2000, which saw 76 firm mergers. The accelerating law firm consolidation trend is good news for consultants at Hildebrandt, Newtown Square, Pa.-based Altman Weil and other firms that have traditionally worked on firm combinations. But the merger boom is also bringing in aggressive new competitors, particularly from the legal recruiting world, eager for a piece of the action. Exactly how much action is out there, and how much individual consultants can capture, is difficult to ascertain. There are a wide variety of compensation models, and the consultants’ roles can be limited or expanded at the direction of the firms, whose level of interest in and sophistication about mergers is also changing. To begin with, though, even the biggest law firm mergers are pretty small potatoes relative to M&A deals in the larger corporate world. “The biggest firms would still only be considered small- or mid-cap companies,” said Peter D. Zeughauser, chairman of the Zeughauser Group, a law firm consulting group based in Newport Beach, Calif. And the fact that firms mostly operate as partnerships obviates the need for highly sophisticated financing. Which means Goldman Sachs is not exactly eyeing this market covetously. But if law firm M&A is not the domain of Masters of the Universe, the top players can still do very well. “You can make a million dollars a year in this business,” said Zeughauser. Which is one reason why Zeughauser, who has long consulted in the profession on strategy and management issues, is eager to expand his role in the law firm M&A arena. He scored a coup recently with a role in the high-profile defection of a passel of partners from San Francisco’s Brobeck, Phleger & Harrison to the new West Coast offices of London’s Clifford Chance Rogers & Wells. Though he declined to specify any fees, Hildebrandt is almost certainly someone who has made millions in the firm merger business, if for no other reason than his company has worked on more combinations of major law firms than has any other consulting group. Probably still the largest player in the firm merger business, Hildebrandt facilitated the recent merger between Boston’s Bingham Dana and San Francisco’s McCutchen, Doyle, Brown & Enersen, as well as the planned acquisition of New York’s Robinson Silverman Pearce Aronsohn & Berman by St. Louis’ Bryan Cave. The firm has also previously worked on the blockbuster mergers that created Sidley Austin Brown & Wood, Pillsbury Winthrop and others. Hildebrandt said his firm worked under a variety of financial arrangements, including billing by the hour, retainer fees and “success fees” paid upon completion of a deal or some time after. Such contingent fees are usually a pre-negotiated percentage of a combined or acquired firm’s revenues or profits, capped at a certain level. Rivals speculate that Hildebrandt made anywhere from $500,000 to $1 million or more from its work on the Sidley Austin merger. Such hefty success fees are the grail of many would-be firm merger advisors and the bane of others. Straight consulting firms often prefer to work on an hourly basis, which can prove extremely costly for law firms, where such expenses cut straight into partners’ profits. High hourly rates have limited the role of the big-name, super-premium strategic consulting firms, though McKinsey & Co. has worked on high-profile management restructuring projects for firms such as Los Angeles’ O’Melveny & Myers. The professional services consulting wings of the large accounting firms perhaps have had more success. J. Mark Santiago, who heads the law firm consulting group for Deloitte & Touche, said his firm now works on at least two law firm mergers a month, always on an hourly basis. Santiago said he believes contingent fees create a fundamental conflict of interest for anyone in a merger advisory role. “It’s not something we would do, ever,” he said. “We want to play an educated mediator role.” Santiago said the least his firm ever made on a law firm merger project was $5,000 for handling some correspondence. The most, he said, was $500,000, which was earned on two months of due diligence work on a merger deal that ultimately fell apart. On the other hand, legal recruiters are accustomed to contingent fees on attorney placements. They see no difference in a situation, which, in many respects, amounts to a large-scale placement. “If [success fees] are good enough for investment bankers and M&A lawyers, I don’t see any reason why this should be any different,” said Lynn Mestel, the president of Mestel & Co., a legal recruiting firm that has increasingly sought work in the law firm M&A area. “To me, it’s unconscionable to take hundreds of thousands of dollars for a deal that doesn’t work out.” For Hildebrandt, the main issue is not how fees are structured but whether an advisor can evaluate merger possibilities with a critical eye, particularly when confronted with law firms that desperately want to expand by merger but may not be ready for it. “I’ve advised against more mergers than I’ve encouraged,” he said. “Having aspirations and having a business case are two different things.” The way Hildebrandt sees it, those “recruiters who muck around in consulting” generally lack perspective and are just out for a quick buck, as opposed to consultants who also are willing to work to improve firms’ businesses without merger. Zeughauser agreed, saying, “If they’re a search firm, they’re dependent on a business model that depends on the deal going through.” That may be true of many search firms, said Mestel, but the most successful recruiting firms depend on strong long-term relationships with law firms built on trust. Managing partners come to her firm, she said, because they know she will objectively evaluate whether a partner, practice group or another firm are a good fit with a client. Moreover, search firms are closer to the ground and can act on information that consultants may not be aware of, said Jay Horowitz, the chief executive of Strategic Workforce Solutions, a legal placement firm that focuses particularly on the temporary market. Knowing where and how many temporary attorneys are needed is an especially useful piece of intelligence, he said. Almost all consulting or search firms that operate in the firm merger area now have a stable of staff dedicated to analyzing the logistics and economics of combining firms. Hildebrandt has 40 staff members. Santiago boasts of the 4,000 Deloitte & Touche accountants he said he can call upon. But it is a measure of both how lucrative and how competitive the market is becoming for law firm M&A advisory services that consulting and search firms are increasingly looking to former law firm partners to help bring in business. Horowitz recently brought aboard Richard Zakin, a former New York managing partner for Bryan Cave, to spearhead a firm merger practice. The Hildebrandt firm now counts two former firmwide managing partners, Carl A. Leonard from San Francisco’s Morrison & Foerster and James W. Jones from Washington, D.C.-based Arnold & Porter. At the beginning of the year, Ronald Beard, the former chairman of Los Angeles’ Gibson, Dunn & Crutcher, joined the Zeughauser Group. Most of the bigger search firms also count former partners within their ranks. With such a universe of choices, firms do not always maintain exclusive relationships with merger advisors. Frequently, various consultants are brought in to handle discrete pieces of a deal or even review another consultant’s work. Hildebrandt said his firm conducts deep strategic analyses of firms before any merger discussions. Thomas R. Smith Jr., the former chairman of Brown & Wood and the current vice chairman of Sidley Austin, said Hildebrandt conducted such an analysis for Brown & Wood back in 1995. He also made the introductions with Sidley & Austin, as well as White & Case, with which Brown & Wood had also discussed a merger. In the Bryan Cave merger, chairman Walter L. Metcalfe Jr. said Hildebrandt played a similar role, making introductions and conducting initial analyses of the firms’ finances. The firm brought in Deloitte & Touche towards the end of the deal, he said, mostly to review the initial analyses conducted by Hildebrandt. There were no major inconsistencies, he said. Mestel brought together Chicago’s Katten Muchin & Zavis and New York’s Rosenman & Colin, said Howard Jacobs, the partner who led negotiations for Rosenman on the merger. Previously, Rosenman had retained Altman Weil to perform strategic analyses and explore some merger candidates, but the consulting firm faded into the background when Katten Muchin entered the picture. Zeughauser said that the Clifford Chance West Coast move got off the ground when Clifford Chance partners contacted him after reading an article he authored in the January American Lawyer magazine, in which he opined that the San Francisco Bay Area was a must-have market, along with New York, for overseas firms looking to expand into the U.S. (Zeughauser is a contributing editor at The American Lawyer, a New York Law Journal and law.com affiliate.) James N. Benedict, Clifford Chance’s regional managing partner for the Americas, said Zeughauser’s role was more limited; he provided analysis of the California market to help sell the deal internally. Benedict said the firm’s own strategic planning staff had identified a need for California expansion well before Zeughauser’s article appeared. Benedict also said Tower Snow Jr., the former Brobeck chairman who led the defections, was an old friend who called out of the blue in January, without any prompting from Zeughauser. The approach of Clifford Chance highlights the fact that law firms today are much more conscious of the competitive challenges they face and the consolidation under way throughout the rest of the industry. Many firms said there was less need for consultants to make a case for a merger or otherwise walk firms through. ARE CONSULTANTS NECESSARY? Charles K. O’Neill, the managing partner of New York’s Chadbourne & Parke, whose 270-lawyer size and high level of profitability have inspired constant calls from firms interested in a merger, said he did not think it was necessary to use a consultant to identify merger candidates. “I know what our strong practice groups are, and I know the firms that are compatible,” he said, adding that firms’ own M&A and other corporate lawyers should be able to handle due diligence and negotiations. Indeed, Robert L. Winikoff, the New York managing partner of Chicago’s Sonnenschein, Nath & Rosenthal said his firm did not use a consulting or search firm in its recent acquisition of New York’s RubinBaum. “I spend three-quarters of my time counseling clients doing M&A in industries I don’t know nearly as well as I know ours,” he said. Most people in the field agreed that firms they talk to now are much more aggressive about expanding or merging than they were in prior years. If consultants previously played an important role in proselytizing the consolidation of the legal industry, there is little need for such cheerleading now. “We don’t have to pour more gasoline on this,” said Zeughauser.

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