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William Payne likes to keep the tops of the tablelike desks in his office completely bare. When expecting visitors, he’ll clear off all the files he’s working on and stuff them into a large drawer in his wood-paneled file cabinet. These days, unfortunately, tidying up is not as hard as it used to be. Payne heads the 250-lawyer mergers and acquisitions practice at Minneapolis-based Dorsey & Whitney — the largest multidisciplinary group in the 750-lawyer, 22-office firm. It is geared to churn out a high volume of midsize M&A transactions worldwide. Firm chairman Peter Hendrixson makes no apologies for the niche his firm has targeted: “It’s not as if we are doing a bunch of cookie-cutter work. There’s just not as many zeroes involved.” Especially last year. And especially in hard-hit Minneapolis. Despite the firm’s aggressive expansion, including office openings in Toronto and Northern Virginia in 2001, most of the M&A group’s clients are still in the Twin Cities. Among its peers, Dorsey bet heaviest on growing beyond Minneapolis and concentrating on corporate transactions. Because of that two-sided bet, it suffered disproportionately when Minneapolis deal work declined by at least as much as in the rest of the country. The impact on its year-to-year financial comparison is clear. While revenue for 2001 was a respectable $288 million — a $34 million increase over 2000 — the corporate group’s revenues were down slightly, and firmwide profits per partner in 2001 dropped by 6 percent, to $352,000. The firm’s reaction was swift. No expense was immune from scrutiny. Dorsey froze associate salaries and clamped down on non-client-related travel. It trimmed its budget for continuing legal education by $1 million by creating an in-house program. The savings weren’t enough, however, to keep Dorsey’s policy committee from asking partners in November to make capital contributions for the first time in generations. That wasn’t the only precedent-setting move. Dorsey’s upper management is also considering scaling back in Hong Kong and Northern Virginia to save money, says Hendrixson. Dorsey closed its 10-lawyer Billings, Montana, office last November (it still has two others in Missoula and Great Falls, Montana). “The fact that we’re working on a plan is a positive,” says Payne. Not that Dorsey has gone completely into contraction mode: The firm added five bengoshi, or Japanese lawyers, to its Tokyo office in January and agreed at the end of April to merge with 27-lawyer Flehr Hohbach Test Albritton & Herbert, a San Francisco and Palo Alto, Calif., intellectual property firm (bringing Dorsey’s office count to 22). The heart of last year’s profits problem was Minneapolis. After nearly a decade of rapid growth and enviably low unemployment, the city took more than its share of punches. Three of the largest companies headquartered in Minneapolis lost their independence in mergers: Honeywell Inc. was acquired by Morristown, N.J.-based AlliedSignal Inc.; Norwest Corp. merged with San Francisco-based Wells Fargo & Co.; and ReliaStar Financial Corp. was taken over by Dutch concern ING Groep N.V. And that was just for starters. Two Minnesota-based companies, General Mills Inc., and The Pillsbury Co., merged, making 300 jobs redundant in the Twin Cities, and a handful of other notable locally based companies fell upon hard times. Northwest Airlines Corp. furloughed thousands of workers in the weeks following September 11. ADC Telecommunications Inc.; managed network service provider WAM!NET Inc.; and bankrupt brokerage firm Stockwalk Group Inc., all had layoffs. Class ring maker Jostens Inc., couldn’t make the grade on the public markets and turned itself back into a private company. There wasn’t even a significant short-term lift in the legal business from all of the local mergers. Much of the lucrative deal work was handled by out-of-town firms — New York firms in particular. Not all the local companies were Dorsey clients to begin with, but the tumult contributed to the instability of the Minneapolis economy and the slowdown in deals overall. If local companies were lucky enough not to be in play, they were simply hunkering down. As Payne explains: “Large corporations [tend to] pull their horns in when there is uncertainty on the horizon.” Even so, most of Minneapolis’ largest law firms — including Faegre & Benson; Robins, Kaplan, Miller & Ciresi; Leonard, Street and Deinard; and Gray, Plant, Mooty, Mooty & Bennett — did well last year, at least compared to their coastal counterparts. Some of these firms have chosen to be aggressive about sticking with a regional strategy. “We’re regional and proud of it,” says Leonard Street’s managing partner, Lowell Noteboom. What else sets these firms apart from Dorsey? They never got hooked on deal work in the first place. Philip Garon, the gravelly-voiced chair of Faegre & Benson — Dorsey’s closest hometown competitor — says that his firm had its most profitable year ever in 2001. Faegre, unlike Dorsey, was able to rely upon the uptick in bankruptcy, litigation and labor and employment work to counterbalance the slowdown in corporate transactions. “Staying full service … we tout it like a religion,” says Garon, adding, “I think [Dorsey's] practice strategy did them in more than their geography.” Perhaps, but geography mattered a lot, too. Dorsey’s expansion, it is clear, burdened the firm’s once-low-cost structure, and consequently weakened its bottom line. As Michael Trucano, managing partner of Dorsey’s Minneapolis office, tells it, the firm’s strategy evolved from a regional one to a “Northern Tier” outlook and then to a national one. Today, its Web site touts the grandest of all visions: a global one. That kind of vision costs dearly. To make matters worse, Dorsey felt compelled to keep up with skyrocketing associate salaries in markets such as New York and Washington, D.C., where it has offices. The increases were made firmwide. Betting on continued growth, Dorsey committed to a larger office space in the Wells Fargo Building. By last September, when the space was finally ready, the market had crashed, and Dorsey’s fortunes had begun sinking. Without raising capital, the firm risked running into bank credit limitations, says Trucano. Partners, after being asked to cough up capital, started grumbling. Trucano says he often was told, “Management overspent and is now coming back to us to bail [the firm] out.” In its effort to get bigger faster — and without partner contributions on an annual basis — Dorsey hadn’t saved many pennies for last year’s rainy days. Besides slashing expenses and closing money-losing operations, Dorsey plans to boost profits by improving associate leverage, which Hendrixson, the chairman, says has already increased by 50 percent in the last five years (it now stands at 1.7 associates to one partner). Revenue growth remains a priority. One way to do that is for the firm to upgrade its client base, and wean itself from some of the small-company commodity work it does. “The future is to have law firms looking to provide value, to do the complicated, complex matters that mean a lot to clients. We’ll do fine if we can do that,” says Hendrixson. Dorsey also is banking on continued momentum in its health care and intellectual property groups, investing in larger marketing budgets for those practices as well as for the more sluggish M&A group. It’s enough, says Payne, for him to long for the days when his desktop was, well, a mess.

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