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The water cooler buzz around Cooley Godward’s San Francisco office was that the firm was ready to close the outpost and move attorneys and staff to Palo Alto, Calif., where the firm is based. The rumors were so prevalent they even reached Cooley Chairman Stephen Neal, who felt compelled to meet with San Francisco attorneys to assure them that the firm had no plans to close the 120-lawyer office at One Maritime Plaza. “We had heard the rumor and part of the meeting was to forcefully dispel it and to unequivocally communicate our determination not only to maintain, but to build the San Francisco office on both the litigation and business side,” Neal said. It’s not surprising that Cooley’s ranks are jittery. The legal community has been speculating about Cooley’s future, as well as that of other Silicon Valley technology firms, since the tech sector crashed two years ago. Cooley bet heavily on the tech boom and still brands itself as one of the leading technology firms. Even without the recent demise of tech powerhouse Brobeck, Phleger & Harrison, a firm that has stuck to its technology focus was bound to raise questions. But despite the dismal economy and decline in technology-related work, Cooley has managed to increase its profitability, retain most of its partnership and avoid a quicksand of debt. At the same time, the firm is looking to the future and trying to answer a key question: Will it continue to go it alone as a solid regional player with a few outposts, or will it merge with another firm to create a national, or perhaps international, legal force? “We’re going to build and diversify our client base by size and industry segment” without giving up our preeminence in technology, Neal said. “We’re absolutely committed to achieving that on a go-it-alone strategy. But we’re also fully open to considering a strategic combination.” The question is whether Cooley can find an appropriate merger partner. Legal consultants and former partners say that during the tech craze Cooley could have hooked up with a top-tier New York firm. But these days the suitors that come calling won’t be as wealthy. “A few years ago they might have been able to attract Davis Polk and that kind of crew,” said legal consultant Peter Zeughauser, of Newport Beach, Calif.-based The Zeughauser Group. “Now the bloom is off the tech rose and they are more likely to do a deal with a firm that has profits per partner in the $800,000 to $900,000 range.” COOLEY’S ALLURE Cooley, meanwhile, has taken steps that make it a more attractive marriage partner. It slimmed its ranks through two major layoffs in August 2001 and November 2002, dropping from a high of nearly 700 lawyers in 2001 to its current level of 514. In November, the firm closed its Menlo Park, Calif., office on Sand Hill Road to keep down real estate costs. And in January, Cooley shut down its 4-year-old Kirkland, Wash., office, which hadn’t achieved success in tapping the Seattle-area tech market. The firm also has protected its leverage. While some partners have opted to leave Cooley in the last few months, the firm has nudged others out the door, keeping the partnership level at 165. And Cooley has benefited from being frugal. Its bank debt is approximately $10 million, its paid-in capital is $32 million, and only 10 percent of its leased space is unoccupied, according to Neal. By comparison, Brobeck’s debt reached nearly $90 million, due in large part to its excess space. In January, Brobeck renegotiated its lease to shed 66,000 square feet of office space in San Francisco alone. Cooley’s layoffs and belt-tightening helped the firm boost its profitability in 2002 despite the tough economic times. While gross revenue dropped 14 percent to $301 million, profits per partner inched up 3 percent to $735,000. Cooley ranked third in profitability among Bay Area firms last year. Cooley’s financial performance was so strong that it caught the eye of prominent big East Coast firms. Neal acknowledged that after Cooley released its revenue and profit figures in January, he received calls from several East Coast firms interested in discussing a possible merger. While firms are eyeing what the firm has to offer, Cooley has its own set of criteria for a marriage partner. Neal rattled off the qualities Cooley is looking for: a firm with a substantial New York presence; cultural values similar to Cooley’s; substantial litigation and corporate practices; either current capabilities in Europe or an interest in developing them; strong finances; a good balance sheet; and little or no bank debt. Cooley expects to make a decision about its marriage options fairly soon. “We want to evaluate opportunities in the next few quarters and either decide there is a firm that meets the criteria or there isn’t,” Neal said. NEW YORK STRATEGY Whether or not the firm merges, Neal said Cooley needs to open shop in New York. While a strategic combination would be the preferable way to do so, he said if that doesn’t happen Cooley will open an office itself. Cooley last had serious discussions with New York intellectual property firm Pennie & Edmonds. Those talks broke off in October. Neal said he would not comment on recent speculation that the firm is talking to New York’s Proskauer Rose. But Zeughauser said such a merger would be unlikely. “It would be a surprising match because of the difference in core practice areas,” he said. “Proskauer’s strong employment law core practice doesn’t take Cooley in the direction they’ve historically been aiming at.” Even if Cooley finds an appropriate partner, it may be difficult to get the partnership to approve a merger. Current and former Cooley lawyers say some partners, particularly those in the emerging companies group, are resistant to a merger since it would further dilute their influence in the firm. But Neal and Mark Tanoury, a senior partner in the emerging companies group and former head of the business department, pooh-pooh such talk. “I certainly have seen potential combinations that have gotten me very excited,” Tanoury said. “For a lot of emerging company lawyers, as clients mature and grow and become big companies there is a real advantage and benefit to adding expertise the firm doesn’t have.” Tanoury said the partnership is committed to becoming a national, and ultimately international firm. “A merger is one path to get there,” he said. “We feel we can also get there by growing, by adding groups of attorneys.” While the emerging companies group has historically been the centerpiece of the firm, during the current doldrums the litigation practice has helped bolster the firm’s finances. Now about 42 percent of Cooley’s ranks, litigators are handling a slew of high-profile cases. Last year Neal represented Walter Hewlett in his unsuccessful effort to block Hewlett-Packard Co.’s merger with Compaq Computer Corp. Currently, the firm is lead counsel for PG&E Corp.’s bankruptcy trial, and also lead counsel to Pacificare Health Systems Inc., one of the plaintiffs in a class action against major national managed care companies on behalf of doctors and patients. The firm is also representing AT&T Corp. in a major patent infringement suit against Microsoft Corp. The corporate side handled 68 merger and acquisition transactions valued at $6.5 billion in 2002. CHANGING CULTURE Meanwhile, Cooley’s efforts to cope with the economy and position itself to be a national or global player have continued to strain the firm’s once-vaunted collegial culture. A handful of partners have left the firm in the last four months, including veteran corporate partner Deborah Marshall, who jumped to Howard, Rice, Nemerovsky, Canady, Falk & Rabkin. Former partners and other industry sources say Marshall was an important element of Cooley’s culture, known for her open communication style. “Deborah’s departure is really symbolic,” a former partner said. “She was in many ways considered the standard bearer of heart and soul.” “Cooley became a less inclusive place” when Marshall stepped down as head of the business department in 1999, another former partner said, adding that the firm has “a very opaque management system and people have gotten frustrated with it.” But Neal dismissed such comments, noting that the firm has monthly communications with partners and multiple meetings with partners, practice groups and all attorneys throughout the year. “The bigger you get, inevitably there is some sense of diminished involvement,” he said. The firm has lost relatively few partners in the last year. Departures cluster around the beginning of the year, when compensation is evaluated and bonuses given out. Since bonuses can be greater than a partner’s base pay, partners have an incentive to stay through the end of the year. In addition to Marshall, other partners who’ve recently left include corporate lawyer Michael Sullivan, who joined Marshall at Howard, Rice; and litigator Tharan Lanier, who joined Jones Day. Harry Rubin, who headed the firm’s global technology transaction group out of San Diego, went to Heller Ehrman White & McAuliffe. Michael Plumleigh, of the technology transactions group, and corporate partner Karyn Tucker have also left. Plumleigh is now associate general counsel at Critical Path Inc. The technology transaction group in San Francisco has also been cut back in the last couple of years. And after dropping from a high of about 18 lawyers to five, the group was moved to Palo Alto in August. That move, as well as the recent loss of some San Francisco partners, may have fueled the rumor that the firm’s historic base was about to close. But Neal said the office remains critical to the firm, as does the firm’s technology focus. “We’re going to maintain our preeminence in technology and continue to expand our client base of all sizes and shapes of tech companies and other types of companies,” Neal said. “The challenges we face are challenges of opportunity rather than challenges arising from difficulties.”

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