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San Francisco’s Orrick, Herrington & Sutcliffe and Menlo Park, Calif.-based Venture Law Group are engaged in ongoing talks about a merger, but sources say the talks are still very preliminary and no offer has been made. The absence of a formal proposal, however, doesn’t mean that VLG is not in play as the corporate boutique struggles to maneuver the deep economic downturn in Silicon Valley. VLG partners have said they are entertaining merger talks that in prior years they had eschewed. But when pressed, Craig Johnson, VLG co-founder, refused to comment on the prospect of pulling the plug on the firm he started in 1993 to cater to technology startups. Johnson was quoted earlier this month in a U.K. trade publication that a merger “is a possibility” and has become a topic of discussion when Orrick and VLG partners meet monthly as part of a 1999 client-sharing agreement. VLG sends clients to Orrick when they need areas of expertise, like bankruptcy and litigation, that the firm does not provide. Ralph Baxter Jr., Orrick’s chairman, declined to discuss a potential VLG deal despite reports he is trying to woo the firm. “We are proud of the groundbreaking relationship and client service model we have created with VLG, but we don’t comment on rumors such as this,” Baxter said. Sources familiar with the negotiations, however, say the talks are more than a rumor — though the firms are still far from a deal. “In the ongoing course of the 4-year-old relationship between VLG and Orrick there have been discussions about expanding the relationship, including combining operations, but those discussions are preliminary and no offers have been made,” said one source familiar with the situation. Another source close to the talks said the two firms are exploring scenarios for combining their lawyers without diluting VLG’s cachet in Silicon Valley. At its peak during the tech boom, VLG had more than 100 lawyers and was a go-to shop among tech executives willing to pay the firm with an equity stake in their companies in exchange for its expertise. Since the downturn began three years ago, the firm has shrunk to about 65 lawyers. Donald Keller Jr., a VLG partner who handles the firm’s day-to-day operations, said the firm has received a handful of merger inquiries in recent months, and partners are listening now. “We’re not turning them away automatically, saying [to ourselves] if there’s a compelling opportunity we’re willing to sit down and listen,” Keller said. Keller also refused to comment on any Orrick talks, saying that if there were merger discussions under way, “it would be a mistake on our part to talk about them.” Silicon Valley has been rife with speculation about VLG’s chances of survival since many Internet startups died off after the Internet bubble burst in 2000. “I think VLG will eventually fold up,” said Peter Zeughauser, a partner at Zeughauser Group in Newport Beach, Calif. “Their business model doesn’t work anymore.” But Zeughauser said he questions what Orrick would get out of a deal if business is bad for VLG. “If [VLG] had a booming practice, this is the last thing they would do,” he said. “And that’s what they said when they had a booming practice.” William Nason, a recruiter with Watanabe Nason & Seltzer in Southern California, said talking about merger options could be damaging for the firm. “By pursuing the potential lifeline, often times when firms are struggling with a new direction, they unwittingly undermine their own self interest,” Nason said. And VLG is particularly vulnerable, he said. “There are two distinct camps, one that says ‘there’s nothing broken’ and another camp that says ‘we ought to consider the prospect of a larger firm.’ “The question is whether they will be able to resolve it amicably,” Nason said, “or whether it will be so divisive that it will cause the firm to splinter.” Reporter Brenda Sandburg contributed to this report.

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