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Pillsbury Winthrop is poised to make its most ambitious attempt yet to crack the D.C. market by swallowing Shaw Pittman — a move that could instantly transform the San Francisco-based firm into a top-tier Washington player. Sources with direct knowledge of the negotiations confirmed last week that the two firms were in advanced merger discussions, though partners had not yet voted on the deal. The merger could catapult Pillsbury into the top five highest-grossing firms in the region. It would also give the firm a 250-attorney office in the District and another 150 lawyers in Northern Virginia. In sheer revenue and head count, Pillsbury would be on a par in D.C. with firms like Skadden, Arps, Slate, Meagher & Flom and Covington & Burling. But Pillsbury would also be taking on a firm that has had its share of problems in recent years. Shaw Pittman’s revenue has stagnated since 2001, attorney head count has declined by 15 percent, and profits per partner have lagged substantially behind those of the District’s other top-grossing firms. Though consultants, competitors and former partners call Shaw Pittman a well-respected D.C. firm, they say it lacks the name recognition outside the Beltway of a Hogan & Hartson or a Covington. Last week, the firm lost two of its outsourcing rainmakers in New York to Morgan, Lewis & Bockius, and in December, three outsourcing partners in London jumped to Morrison & Foerster. Yet for Pillsbury, Shaw Pittman possesses some key strengths, consultants say. Despite the recent losses, the outsourcing practice is highly prized and profitable. Its technology, banking and real estate work complements Pillsbury’s, and it gives Pillsbury instant size and credibility in Washington — particularly in the Northern Virginia tech corridor where the firm has invested substantial resources over the years. And a merger could move Pillsbury closer to its longstanding goal of becoming a truly international player. “Our chair, Mary Cranston, has said before that ‘the ultimate goal is to be one of the very biggest, strongest global firms,’” says Crystal Rockwood, a Pillsbury spokeswoman. “She has also stated that ‘the big will get bigger, and there will be more defined niches emerging regionally and in smaller practice areas.’” Pillsbury is the product of a 2001 merger between San Francisco’s Pillsbury, Madison & Sutro and New York’s Winthrop Stimson Putnam & Roberts — a deal designed to make the firm national in scope. But, says Ward Bower, a consultant with Altman Weil Inc., “to be credible as a national firm, you need to be credible in three places — New York, Washington and California. They have San Francisco because of the Pillsbury legacy, New York with the Winthrop Stimson merger, and this would make them much more credible on the ground in Washington.” ONGOING NEGOTIATIONS First, however, the two firms have to strike a deal. Representatives for both firms declined to comment directly on a possible merger. But a source close to the discussions says the firms have been in talks for at least three months and are well into the due diligence phase of negotiations. The source says the firms have agreed on management and compensation issues, but are trying to work out client conflicts. The source also says Shaw Pittman lawyers would retain a certain amount of management control in the D.C. office. But the source declines to comment on the compensation structure. Shaw Pittman has 105 equity partners, and it’s not clear how they would be integrated into Pillsbury’s partnership. To maximize its profit per partner, Pillsbury has made a concerted effort in recent years to limit the number of equity partners at the firm and has significantly expanded its nonequity ranks. Shaw Pittman has a single tier of partners. Profits are also lower at Shaw Pittman. Profit per partner at Pillsbury hit $775,000 in 2004, according to The Recorder, Legal Times’ San Francisco affiliate. Shaw Pittman’s firmwide profits per partner in 2003 were $550,000. Numbers for 2004 are not yet available. There’s also a question of meshing firm cultures. Pillsbury has a reputation for being more bottom-line-oriented than Shaw Pittman and has a stronger management committee structure that controls firmwide decision making. “Pillsbury’s a much more intense place,” Bower said. Though the marriage has long been the buzz in the legal business community, the firms have tried to keep the talks under wraps. On Nov. 22, Pillsbury managing partner Marina Park told a Legal Times reporter that her firm was not engaged in merger talks with Shaw Pittman. When The Recorder and Legal Timesreported last week that talks had begun in late October, Park responded via e-mail that Pillsbury had been in “discussions” with other firms, but that she considered “discussions” to be “quite different” from “talks.” For its part, Shaw Pittman has made no secret of its desire to find a merger partner. In 2003, the firm was in negotiations with Akin Gump Strauss Hauer & Feld, but those talks broke down. Robert Zahler, a Shaw Pittman outsourcing partner, says the firm wants to expand in California, New York and London, as well as in certain core practices like litigation. “The firms that are becoming more successful are those with national and global footprints,” Zahler says. A merger, he says, is a way to reach that objective, though he declined to comment on the Pillsbury talks specifically. “We’re proud of our firm,” Zahler says. “But we’re not as well known as we should be.” CONQUERING THE CAPITAL Pillsbury would fulfill Shaw Pittman’s ambition for a much larger national presence. It has 700 lawyers firmwide — including 328 in California, 141 in New York and small offices in Tokyo, Sidney and London. The firm is best known for its banking, real estate and corporate work, and has long maintained ties to institutional clients like Bank of America and ChevronTexaco. Twice in the last decade, the firm has tried to build a substantial office in Washington, first by acquiring 60-lawyer intellectual property boutique Cushman Darby Cushman in 1996, then by investing heavily on the Northern Virginia technology market. But it has struggled to make its mark. Over the last three years, the firm has lost a third of its Washington-area attorneys. Former Pillsbury attorneys say the firm’s 2001 decision to move most of its D.C. lawyers to Tysons Corner, Va., was a key reason. A handful of attorneys couldn’t manage the longer commute. And some felt it was more difficult to attract business and recruit attorneys in the new location. Others disagreed with the underlying business strategy that propelled the office’s suburban migration: a shift away from international clients that had been the centerpiece of Cushman’s patent work. Instead, the firm emphasized focusing on a few large clients. Sidelined by the realignment, many lawyers who had built their patent practices with international businesses left the firm, former attorneys say. “I always thought it was a mistake moving out there for the patent litigators, because our practice wasn’t going to be out there,” says former Pillsbury partner Arthur Wineberg, who is now at Akin Gump’s D.C. office. Now, Pillsbury’s Washington group is comprised of 27 lawyers in D.C. and 50 in Northern Virginia, down from a high of 120 just after the Winthrop Stimson merger. FADING FORTUNES Shaw Pittman’s fortunes have also been linked to Northern Virginia. The firm set up shop there in the 1980s, becoming the largest office in the area before Northern Virginia was on most firms’ radar screens. But as the 1990s tech boom faded, Shaw Pittman’s ranks thinned. The firm’s head count peaked at 413 lawyers in 2001 and has since dropped to about 350. Partners and consultants stress that the firm is no danger of collapse — particularly because of its 100-lawyer outsourcing team. But Shaw Pittman faces the same long-term pressures as most midsized firms: increased competition from mega-firms, as well as from highly specialized boutiques. A merger with Pillsbury could give the firm muscle to fend off competitors and become a truly international firm. To compete, says Peter Zeughauser, a California law firm consultant, “you need a certain critical mass.” Reporter Jason McLure contributed to this story.

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