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With partnership approval from both firms, Reed Smith has culminated an aggressive period of growth by completing a merger with California-based Crosby, Heafey, Roach & May — in the process creating one of the 20 largest law firms in the world at roughly 1,000 attorneys. Both firms held partnership votes Tuesday and Wednesday. Reed Smith would have needed 75 percent of its partners to approve the merger of its 780-attorney firm with 220-attorney Crosby Heafey, which needed 80 percent partnership approval to seal the deal. Crosby Heafey managing partner Kurt Peterson said all of that firm’s partners who voted approved the merger, which becomes official on Jan. 1 and creates a firm that, according to a Reed Smith press release, will have annual gross revenues of nearly $500 million. Reed Smith Chairman Gregory Jordan made moving into the California market his top strategic initiative when he assumed the reins of the firm in January 2001. Once the firm beefed up its New York presence with a merger earlier this year, Jordan felt Reed Smith was ready to tackle the West Coast. Jordan said he is not concerned about any perceived financial difficulties at Crosby Heafey that might have initiated that firm’s interest in merging into a larger firm. “We did our due diligence, and we feel confident that this is going to work for both sides,” Jordan said. “From our perspective, California is a huge legal and business market where if we had the right operation, [we] would be able to speed up the process of transforming Reed Smith from a large, regional firm to an international firm. This is a great match for our two biggest industry focuses, life sciences and financial services, and it will allow us to enhance the work we do for existing clients and attract new ones. “It will also allow us to enhance the perception of the firm. There are not many firms in the country that have offices in the East Coast, West Coast and London. And now we are one of them.” Crosby Heafey managing partner Kurt Peterson said he has focused almost all of his time over the course of this calendar year on finding a merger partner. Crosby Heafey is more than 100 years old and is traditionally based in Oakland, Calif., but has expanded in the past five years into San Francisco and two offices in Los Angeles. While its bread and butter used to be insurance defense and medical malpractice, the firm transformed its litigation focus into more upscale areas such as life sciences, intellectual property and commercial work. During the past few years, Crosby Heafey has absorbed several smaller firms, with the most recent addition being Oakland boutique firm Bay Venture Counsel, in an effort to ramp up its corporate practice. Meanwhile, the firm has trimmed less profitable practice groups such as media law, and that change in direction has motivated some of the departures. The firm suffered through the loss of 13 partners in the last 20 months and was forced to lay off 13 attorneys and 40 other staff members last year. Peterson said that the firm’s executive committee determined late last year that it would need to merge to compete for top legal talent and top institutional clients. The firm first figured out its objective, which was to have the platform of a large firm with institutional clients that did not have a California presence. It narrowed its list of prospective partners down to about 10 and held discussions with each. After comparing financials and client conflicts, he said the firm determined that Reed Smith was its best option by late spring. Along with director of strategic planning Michael Pollack, a corporate partner in the Philadelphia office, Jordan scanned all California-based firms with between 75 and 300 lawyers and weeded out those that didn’t have the right financial, practice or cultural fit as well as those that did not have an interest in merging or had insurmountable client conflicts. That left several firms, the names of which Jordan declined to identify. Jordan said Crosby Heafey became the most attractive candidate because of its presence in both Northern (140 lawyers) and Southern (80 lawyers) California as well as synergies in practice, financials and culture. San Francisco-based legal recruiter Robert Major of Major Hagen & Africa said Bay Area midsize firms like Crosby Heafey have had a harder time competing for business with the influx of mega-firms from other markets opening branch offices in Northern California. “These firms are well-funded and household names,” Major said. “And they have reduced the market share for midsize firms. So what this merger will do for Crosby Heafey is allow them to compete for top-flight litigation and corporate work with the bigger platform from Reed Smith.” To make the merger work from a financial standpoint, 15 Crosby Heafey partners will join Reed Smith as either non-equity partners or counsel. And in the months leading up to the merger, 15 additional Crosby Heafey partners left the firm in what Pollack said was accelerated by the talks in many cases. In the end, only 55 of 85 Crosby Heafey partners from earlier this year will have equity status in the newly combined firm. While the two firms appear to have compatible financials, Reed Smith and Crosby Heafey have been headed in opposite directions in recent years. According to The American Lawyer‘s Am Law 200 survey, Reed Smith’s profits per partner and gross revenue both increased in 2001. The firm’s profits per partner went from $335,000 to $400,000. Conversely, Crosby Heafey saw its profits per partner tumble from $352,000 in 2000 to $314,000 in 2001. Crosby Heafey partner Jack Nelson, who runs the day-to-day operations, recently acknowledged to The Recorder, an affiliate of The Legal Intelligencer and law.com, that partners took home about 20 percent less than they expected in 2001. But Jordan said that both firms are on the upswing in PPP for this year. Reed Smith projects its PPP to be at $450,000 for 2002, while Crosby Heafey’s will exceed its 2000 numbers. And any discrepancy in PPP, Jordan said, is offset by revenue per lawyer numbers, which are just under $450,000 for both firms and show an almost identical rate of improvement. In addition to its thriving financial services and litigation practices, Reed Smith has improved its Am Law financials by de-equitizing some of its own partners. And Jordan said for the Crosby Heafey deal to work out financially, there had to be a restructuring of the California firm’s partnership ranks. Peterson said the firm’s low PPP are deceiving because unlike other large firms, Crosby Heafey does not “fudge” its financials so it can improve its placement in the Am Law rankings. “I think only having 55 partners out here will dramatically affect our profitability,” Peterson said. Reed Smith’s practice “pie” is divided into one-third litigation practice, one-third corporate practice and one-third other practice areas, while Crosby Heafey leans heavily toward litigation (accounting for two-thirds of its practice) with the remaining one-third composed of corporate and other practice areas. Jordan said Reed Smith is interested in adding Crosby Heafey litigation power in the life science, IP and appellate areas. Crosby Heafey has 20 IP lawyers, many of whom handle litigation matters. San Francisco partner Scott Baker secured a $200 million IP litigation verdict against telecommunications company Qualcomm, which ironically is a Reed Smith client. “Needless to say he won’t be doing that any more, but it just shows what kind of capabilities they have,” Jordan said. “Hopefully, he’ll be representing Qualcomm now.” In the life sciences area, Jordan said Crosby Heafey is one of the leading California firms in representing pharmaceutical companies. While Reed Smith does some of that work, it focuses on representing those companies on a host of matters nationally. Last year, Crosby Heafey acted as California counsel for Sulzer Corp. in the $1 billion hip implant case. In addition, Peterson said the firm is currently national counsel to St. Jude Medical of Minnesota in major heart valve litigation. And Jordan said the firms are already representing the same client in fen-phen litigation. On the transactional side, Jordan said Crosby Heafey offers Reed some presence in life science, mid-market corporate and venture capital work. He said Crosby Heafey has an IP group based in Century City (one of the two Los Angeles offices) and mid-market capabilities out of Century City and San Francisco, and has brought in the Bay Venture Counsel to its other Northern California offices to handle venture capital work. The firm has small offices in Palo Alto and Westlake Village — a technology center located an hour north of Los Angeles — that focus on venture capital work. But Peterson said the Palo Alto office might not be necessary anymore because of the firm’s increased venture capital presence in San Francisco. Westlake Village, on the other hand, is still an emerging technology center that has room for growth. Jordan said that while the Bay Area venture capital economy is in bad shape now, the firm will be poised to have a piece of that pie when the economic cycle runs its course. The firm managers also talked about a cultural fit. Jordan and Pollack claim to have met with each Crosby Heafey lawyer while more than 100 lawyers from each firm have met with their soon-to-be colleagues. Jordan said the firm is convinced that it understands how to integrate merger partners into its firm culture. Most notably the firm added 85-attorney Virginia firm Hazel & Thomas in 1999 and 75-attorney London firm Warner Cranston in 2000. It also put itself on the map in New York last December with the addition of 26-attorney Parker Duryee Rosoff & Haft to its 35-attorney New York office. To speed up the integration process, Jordan and Peterson said at least two Reed Smith partners are planning to relocate to the West Coast and two Crosby Heafey partners will relocate to Reed Smith’s East Coast offices for up to a year and possibly on a permanent basis. Crosby Heafey lawyers will also occupy three additional spots on Reed Smith’s now 15-member executive committee. Century City-based Peterson will hold one of those spots, while one will be reserved for a partner from Northern California and another will go to an at-large partner. Oakland-based partner Jack Nelson, Crosby Heafey’s CEO who runs the daily operations of the firm, will serve as managing partner of the six California offices. Jordan said because of the geographic reach and distance from other Reed Smith offices, Nelson will have more authority than other office managing partners. The firm will be known as Reed Smith Crosby Heafey in California for at least a year to smooth out the branding transformation, Jordan said. Nelson and Pollack will lead the integration efforts. According to Jordan and Peterson, news of the merger has piqued the interest of lateral partner candidates from other established California firms. In fact, Peterson said he, Jordan and Pollack had breakfast Thursday with two candidates. Reed Smith’s 780 lawyers are spread over its 11 offices as follows: 238 in Pittsburgh, 112 in Philadelphia, 13 in Harrisburg, 12 in Wilmington, Del., 60 in Princeton, N.J., 20 in Newark, N.J., 71 in New York City, 88 in Washington, D.C., 63 in Falls Church, Va., 14 in Richmond, Va., nine in Leesburg, Va., 56 in London and 24 in Coventry, England. Crosby Heafey’s 220 lawyers include about 80 in Oakland, 60 in San Francisco, 55 in Los Angeles, 25 in Century City and one lawyer apiece in the Palo Alto and Westlake Village site. In addition to being one of the 20 largest international firms, the merger between Reed Smith and Crosby Heafey will create one of the nation’s 10 largest firms. Such a large addition would allow Reed Smith, which scoffs when labeled a Pittsburgh-based entity, to call itself a national firm — which by The American Lawyer‘s standards means having no more than 45 percent of a firm’s total attorneys located in one region of the country.

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