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It began, perhaps appropriately enough, at Arabelle, a romantic Manhattan restaurant best known for its role as a “Sex and the City” set. Mary Cranston, the chair of San Francisco’s Pillsbury Winthrop, was having a get-to-know-you lunch with Stephen Huttler, managing partner of D.C.’s Shaw Pittman. The December 2003 meeting was supposed to be casual — and outwardly it was. The two had the usual law firm manager chitchat about legal industry consolidation and talked a bit about their firms. Neither made any offers about joining forces. They simply agreed to meet again. “It was kind of like a first date,” Huttler recalls. But behind the pleasantries were serious business realities. Pillsbury, a firm with big offices in New York and California, needed D.C. and the regulatory work it represents. “We were just too small there,” Cranston says. And 350-lawyer Shaw Pittman was too small to effectively compete for national and international work. “We want to be a truly global top-tier firm,” says Huttler. Last week, after 13 months of courting, the two firms announced they had agreed to merge. Partners are expected to sign off in the next several weeks, and the new Pillsbury Winthrop Shaw Pittman should be operating by the end of spring. By combining, the firms will create a 900-lawyer giant with combined revenues of more than $600 million. Pillsbury instantly gets a Washington office of 300-plus lawyers, and Shaw Pittman becomes part of a firm with a national reach and international ambitions. The merger also continues the rapid evolution of the D.C. market from a province of politically connected midsize firms to one dominated by mega-firms that see a large Washington presence as part of a full-service strategy for clients. Shaw Pittman is the third major D.C.-based firm to merge in the last 11 months, following Wilmer Cutler Pickering, which combined with Boston’s Hale and Dorr, and Shea & Gardner, which was acquired by Boston’s Goodwin Procter. “Washington has become hot,” says Ward Bower, a legal management consultant with Altman Weil Inc. “To be a bona fide national firm, you’ve got to be credible in New York, California and D.C. A lot of firms are weak in D.C.” That suggests more big firm leaders will be looking to set up lunches with managers at midsize Washington shops. And the Pillsbury pact is already generating buzz about which firms may be next on the merger block. But if mega-firms — or those that hope to become mega-firms — are looking to expand in the District by emulating Shaw Pittman and Pillsbury, the list of likely midsize partners is relatively short. “Washington has a lot of big firms and a lot of small firms but not many firms in the middle,” says Bradford Hildebrandt, a law firm management consultant with Hildebrandt International. “There isn’t a long list of firms you can say, ‘These are gonna merge.’” PLAYING THE FIELD Consultants and managing partners say the midsize D.C. firms that appear to be the most likely merger targets are 400-attorney Steptoe & Johnson, 325-attorney Dickstein Shapiro Morin & Oshinsky, 390-attorney Venable, 277-attorney Arent Fox, and 140-attorney Swidler Berlin. Of these, Swidler Berlin and Arent Fox are both recovering from internal instability caused by failed merger bids. Swidler’s stunted 2004 talks with San Francisco’s Orrick, Herrington & Sutcliffe and Dickstein Shapiro precipitated the Jan. 1 departure of nearly all of its New York office to Philadelphia-based Dechert. In the wake of the exodus, managing partner Barry Direnfeld repeatedly stated that Swidler was no longer looking to merge. As for Arent Fox, the firm twice pursued a marriage with Philadelphia’s Pepper Hamilton in recent years, and the instability caused by the abortive talks led to the defection of a number of key partners over the past two years. Among the departures was health-care-practice anchor William Sarraille, who left for Sidley Austin Brown & Wood, and former managing partner Christopher Smith, one of more than a dozen Arent Fox attorneys to join Sonnenschein Nath & Rosenthal in recent years. Despite the recent spate of mergers, Arent Fox Chairman Marc Fleischaker says that two weeks ago the firm reiterated to its partners that it would pursue a go-it-alone strategy. “It’s disappointing that another D.C.-based firm is merging,” Fleischaker says. “[But] it’s not going to persuade us that a middle-sized firm can’t be successful.” Steptoe & Johnson, Dickstein Shapiro and Venable all appear to be more actively in the market. Steptoe recently opened a New York office, and managing partner Roger Warin says the firm is seeking to grow its presence there by merging with a small or midsize New York firm. Is Steptoe looking for a mega-merger? “It’s not on the front burner,” Warin responds. “If we got the right call, we’d date. But we’re also making calls.” Dickstein remains an attractive, if problematic merger partner, according to legal consultants, recruiters, and D.C. managing partners. With a large Washington presence and 2003 firmwide profits per partner of $1.935 million (a number enhanced by the firm’s contingent fee windfall from the settlement of a $2 billion suit against a group of vitamin manufacturers), the firm could complement a large international practice or acquire another midsize regional firm. But its large insurance practice representing policyholders and its contingency practice for corporate plaintiffs give it numerous client-conflict problems with firms that represent insurance companies. “We’re not looking to merge,” says the firm’s managing partner Michael Nannes. “But we’re consistently looking for strategic opportunities.” As for Venable, its size and finances (profits per partner of $510,000 in 2003, the lowest for any on the Legal Times D.C. 20 survey of most profitable local law offices) are similar to Shaw Pittman’s. Is the firm seeking a major merger? “Our priority is continued growth in D.C.,” says D.C. managing partner William Coston. “No law firm rules out anything.” THE SUM OF ITS PARTS In Shaw Pittman’s case, the move toward a merger has been obvious for months. Not only have the negotiations with Pillsbury been long rumored, but also the firm was in serious discussions with Akin Gump Strauss Hauer & Feld in 2003. And after investing heavily on the Northern Virginia high-tech corridor, Shaw Pittman was hit hard by the dot-com bust. Since then, profits per partner have lagged behind other top D.C.-area firms, attorney head count has slid 15 percent, and firmwide revenue has flat-lined at about $192 million for the past few years. Given those issues, the question remains whether the combined firm will see dramatic increases in D.C. revenue and profits. Aside from Shaw Pittman’s outsourcing practice, its other regulatory practices are not market leaders. And Cranston acknowledges that the firm will need to expand its antitrust and securities regulatory practices. Competitors, at least for the moment, don’t seem concerned about losing business to the newly merged firm. “I just don’t think that the combined firm will grow in expertise and stature wildly above where it is today and to a point where it’s now going to start to take work from other firms in town,” says Alan Kadden, co-managing partner at Fried, Frank, Harris, Shriver & Jacobson’s D.C. office. The new firm also has some sticky internal issues to resolve before the merger deal is closed. Chief among them is how many attorneys will be forced to exit because of client conflicts or other issues. In the press release announcing the merger, the firms said that Cranston and Huttler “remain circumspect” about putting “exact numbers to the final composition of the combined firm.” The two firms, as presently constituted, employ more than 1,000 lawyers. But the firms are expecting to have roughly 900 aboard once the merger is completed.It’s not clear where the cuts will come from, but legal recruiters say Shaw Pittman’s 30-lawyer insurance practice is already on its way out. And at least a few other partners are sure to follow. The firms declined to comment on the insurance group or on other possible departures.How to reconcile differing compensation structures may also prove challenging. Although both firms have tiered partnerships, neither is exactly like the other, and a number of Shaw Pittman’s partners will shift to income-based compensation, Huttler said. The two firms have worked out management issues, adding a place at the table for Shaw Pittman’s Huttler as firmwide vice chair. But Pillsbury partners will continue to occupy the other top management positions: Cranston will stay on as chair. Partner David Snyder will also be a vice chair. And Marina Park will serve as firmwide managing partner. Pillsbury has been through this process before. The firm was formed in 2001 after a merger of San Francisco’s Pillsbury, Madison & Sutro and New York’s Winthrop, Stimson, Putnam & Roberts. It has tried previously to break into the D.C. market, acquiring the Washington intellectual property boutique Cushman Darby Cushman in 1996. Both mergers produced mixed results. Pillsbury’s D.C. head count steadily declined following the Cushman acquisition, and the firm has seen its New York office shrink from 200 attorneys after the Winthrop merger to 141 today. Revenue at Pillsbury Winthrop was relatively flat in 2004, rising just 2 percent to $432 million, according to The Recorder, a Legal Times sister publication in San Francisco. Still, Cranston sees little choice but to aggressively expand: Either a firm grows, or it’s unable to provide a broad array of services to top clients, she says. By merging, Pillsbury Winthrop is looking to Shaw Pittman’s regulatory practices — nuclear energy, the Federal Trade Commission and banking — to boost its business with its corporate clients. And it hopes that Shaw Pittman’s outsourcing practice will complement its West Coast corporate needs. “When you’re thinking of providing absolutely full-client service, you almost always need a regulatory piece … and D.C. is where most of the regulatory expertise resides,” Cranston says. “So it’s one of the few markets that brings a different mix of services to the firm.”

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