The Walt Disney Concert Hall in Los Angeles was filled with national political figures, including former vice president Al Gore, foreign dignitaries, and much of the sprawling metropolis’s ruling establishment on March 28. The metal-skinned venue, winter home of the Los Angeles Philharmonic, was the setting for former U.S. secretary of State Warren Christopher’s memorial service. Christopher had died ten days earlier at the age of 85 after battling kidney and bladder cancer.
Also attending the service were hundreds of attorneys and staff members at O’Melveny & Myers, where Christopher practiced law for 50 years and was chair from 1982 to 1992. For them Christopher, or “Chris,” as they referred to him, wasn’t a larger-than-life civic leader or international statesman, but a treasured colleague and mentor. “For all of us at the firm today, Chris has been the heart and the soul of O’Melveny & Myers,” eulogized firm chair Arthur “A.B.” Culvahouse, Jr.
During Christopher’s tenure as chair, he solidified the Los Angeles firm’s expansionist trajectory by opening offices in New York, London, Tokyo, and San Francisco. Christopher’s community involvement, including leading a commission that investigated the Los Angeles Police Department following the beating of Rodney King, “brought the firm’s sense of service into the modern era,” says Christopher Brearton, managing partner of the Century City office. In 2002 Christopher oversaw an O’Melveny task force that defined the firm’s core values: uncompromising excellence, distinctive leadership, and superior citizenship. “Chris’s memorial service had the effect of reminding people what’s great about O’Melveny,” says former partner Steven Olson.
The 126-year-old firm’s greatness has, at times, seemed forgotten in recent years amid faltering profits and partner departures. Now the responsibility for reminding O’Melveny of its storied past and leading it into the future falls to Bradley Butwin. The 51-year-old will become chair at the close of the current fiscal year in January 2012, ending Culvahouse’s third term roughly a year early.
Butwin, a New York–based partner, joined the firm as part of its controversial O’Sullivan, Graev & Karabell merger in 2002 and has led the litigation department for the past two-and-a-half years. A former Davis Polk & Wardwell associate, Butwin opted to become a lawyer instead of joining his family’s insurance business.
Butwin takes over at a challenging time for the firm. O’Melveny has seen a big churn in its partnership ranks. More than 100 equity and nonequity partners have left since the beginning of 2007. About three dozen partner departures occurred in the last 12 months alone. Some attorneys were incentivized to leave through early retirement packages, while others left for firms with a better fit for their practice areas, or for individual reasons. During that same time frame, O’Melveny brought on about 50 lateral partners, but only three this year. Currently, the partnership head count is down 16 percent from 2007.
Some of the defections, including the loss of 60 transactional attorneys, have dealt a blow to the firm’s corporate ambitions and further called into question the wisdom of O’Melveny’s merger with the New York private equity boutique O’Sullivan.
Additionally, the firm’s short-term financial metrics show mixed results, especially when compared to averages for The Am Law 100. O’Melveny’s profits per partner are still below their 2007 peak of $1.64 million. Profits were down 7 percent in 2010 versus 2007. Over the same three-year period, The Am Law 100 averaged a 5 percent increase in partner profits.
And O’Melveny’s gross revenue has slipped; it dropped 16 percent while the gross revenue of The Am Law 100 increased 5 percent in the last three years.
The firm says that a Great Recession–induced downturn in corporate work, collection issues, and the conclusion of several litigation matters were partly to blame for the recent financial results and that it is currently on track for its most profitable year ever. Moreover, a longer-term look at the firm’s financials point to more favorable results. O’Melveny’s ten-year financial metrics show huge gains in profits and revenue per lawyer.
Firm leaders also point to other strengths: a top-tier litigation practice (including a high-profile appellate group), novel uses of alternative fee arrangements, a roster of new clients, and an ambitious Asia strategy.
Revenue per lawyer is also up almost 8 percent compared to 2007, due largely to a drop in attorney head count. The firm’s lawyer ranks shrank 19 percent in three years; as of 2010 it had 884 lawyers. O’Melveny’s head count drop is the second-biggest in The Am Law 100 during that time frame. (Cadwalader, Wickersham & Taft experienced a 25 percent drop in head count over those three years.)
Butwin says the firm has a multipronged strategy for expanding its corporate and litigation work. O’Melveny plans to “focus on practices that tie into one another rather than on [recruiting individual partners with] large books of business.” For corporate, he says the firm is in a “building period” and is setting its sights on more work in Silicon Valley, the entertainment industry, and Asia (all bright spots for the firm in recent years) and leveraging litigation-client relationships for transactional assignments. For litigation, Butwin says O’Melveny is handling increasing numbers of massive matters for Fortune 500 companies that are billed under alternative fee arrangements. (One thing Butwin doesn’t see: a splashy merger. “I don’t think that is something that is necessarily in our best interest,” he says.)
And the partner churn doesn’t faze him. “We kind of view [the partner] departures as an opportunity,” says Butwin. “There is a greater sense of unity at [O'Melveny] than I’ve seen in recent memory because everyone who’s here now has a high degree of confidence in the firm.”
O’Melveny’s search for parity between its litigation and corporate practice defined the firm, in many respects, during Culvahouse’s decadelong tenure.
While Warren Christopher may have been the heart and soul of O’Melveny, Culvahouse, who was counsel to President Ronald Reagan from 1987 to 1989, could be described as the firm’s brain. The strategy he mapped out for O’Melveny has defined it more than anything else. He continued the firm’s international expansion with new offices in Beijing, Brussels, and Singapore. In recent years he spearheaded a series of early retirement plans that were meant in part to jettison partners and practices that were drags on the firm’s profitability, say three former partners interviewed for this story.
In a statement, Culvahouse said, “I was selected by my partners in 2000 to be a change agent,” adding that the initiatives he spearheaded “increased the performance expectations of most partners and practices.”
Most notably, he led the firm’s merger with O’Sullivan, seeing the combination as an answer to the long-standing issue of O’Melveny’s lagging corporate practice. O’Melveny’s merger with O’Sullivan didn’t offer the firm a traditional bank-centric capital markets practice. But it dramatically increased O’Melveny’s corporate practices and expanded the New York office, which went from 118 attorneys to about 200 at its peak.
O’Sullivan, which also conducted merger talks with Kirkland & Ellis, brought prized relationships with private equity firms, including Apollo Global Management, LLC, to the merger. “Part of the plan was to have a much more substantial presence in New York and in our transactions department,” says former O’Melveny partner Mark Easton, who is now deputy general counsel at Warner Bros. Entertainment Inc. “At that point in time, private equity was really very hot, and that looked like a place where we wanted to invest.”
But there were problems from the beginning. O’Melveny’s clubby culture clashed with O’Sullivan’s aggressive style. Little was done to integrate the New York–based O’Sullivan lawyers, many of whom, according to some former O’Melveny partners, had no desire to integrate.
Butwin puts it more diplomatically. “My sense is that they were a little more siloed,” he says. “The work didn’t expand much . . . so there wasn’t the same level of connectivity [with the rest of the firm].” Adding to the animosity, according to former partners, was the pay guarantees doled out as part of the merger to O’Sullivan lawyers, including firm leaders John Suydam and Harvey Eisenberg, who each got pay packages that guaranteed $3 million a year for three years. (Suydam left the firm in 2006 to become chief legal officer at Apollo.) “At the time of the merger, everyone understood we had to integrate two compensation systems, and the O’Melveny heritage partners were very accepting of having to give guarantees to heritage O’Sullivan partners,” says O’Melveny vice-chairman Mark Samuels, who did not confirm the amount of the guarantees. “After those initial guarantees ended, a small number of O’Sullivan heritage partners had their guarantees extended. That was controversial, and I don’t think we would do that again.”
The guarantees ultimately weren’t successful at keeping the O’Sullivan lawyers around for the long haul. Eisenberg, one of the architects of the merger on the O’Sullivan side, was among nine New York–based corporate and transactions partners who left O’Melveny in May. He went to Weil, Gotshal & Manges.
Also part of the recent exodus were longtime O’Melveny partners on both coasts who were disgruntled by changes at the firm or who wanted to take advantage of the early retirement packages. The firm, aiming to increase profits, offered generous benefits to lawyers as young as 50 in 2005 and 2008. Partners also left for other reasons. On the West Coast, O’Melveny partners took real estate and public finance practices to firms that included Nixon Peabody and Manatt, Phelps & Phillips. Other partners have taken corporate jobs (Steven Olson became president at Aletheia Research and Management, Inc.), or government positions (Sri Srinivasan left to be the principal deputy solicitor general). To its credit, O’Melveny has added 50 lateral partners since 2007 (though only three this year), bolstering the partnership, which as of this fall is currently at 201: 185 equity partners and 16 income partners. All told, the firm has seen a 16 percent drop from 2007 in overall partners and a 17 percent decrease in equity partners during that period.
But the internal dissension over the O’Sul­livan acquisition played out in other ways. When Culvahouse ran for a third term as chair in 2008, he was challenged by four partners: John Beisner, head of the firm’s class action group and a partner in the Washington, D.C., office; Robert Siegel, a labor and employment partner in the Los Angeles office; Gary Singer, a partner in the Newport Beach office and cochair of the transactions department; and Darin Snyder, a San Francisco–based partner who headed the firm’s intellectual property and technology practice.
When the partnership was polled, Culvahouse garnered support from 33 percent of the partners on a per capita basis and Beisner, the strongest of the challengers, received support from 21 percent of the partners on a per capita basis. However, Culvahouse received support from a plurality of the partnership shares and twice as many as Beisner, so Culvahouse’s name was the only one put forward by the policy committee for ratification by the whole partnership.
As a consolation, Beisner was asked to sit on a newly created strategy committee. But less than a year after the election, Beisner, who represented Merck & Co., Inc., in Vioxx litigation, moved his practice to the Washington, D.C., office of Skadden, Arps, Slate, Meagher & Flom. Two other O’Melveny partners accompanied Beisner to Skadden. (Culvahouse’s three other challengers remain at the firm.)
Culvahouse’s defenders point out that the firm was going through a rough patch when he became chair. At a meeting in a downtown Los Angeles hotel in March 2000 (before Culvahouse became chair), the firm’s partnership voted in favor of changes that were meant to make O’Melveny more profitable and competitive, including jettisoning the lockstep system and a compensation process that limited the number of shares that partners were awarded each year. Even one of Culvahouse’s detractors describes the firm before Culvahouse became chair as “a happy place, but it was lagging economically.” That attorney adds, “We knew we had to change to not slip out of the top tier of Southern California.”
During the course of Culvahouse’s tenure as chair, O’Melveny’s financial metrics have dramatically improved. In 2000, the year Culvahouse became chair, the firm reported $705,000 in profits per partner and $400.5 million in overall revenue. From 2000 to 2010, O’Melveny’s profits per partner increased 116 percent, and RPL increased by 63 percent. O’Melveny’s percentage of lawyers based in foreign offices has grown from 4 percent to 15 percent.
Culvahouse also had to steer O’Melveny through a tough period after many of the firm’s Los Angeles–based clients, such as Security Pacific Corp. and First Interstate Bancorp, merged out of existence. In fact, 60 percent of O’Melveny’s current top 50 clients were not clients in 2000.
While the firm has improved its finances over the long term, the short-term picture is more mixed. Since 2007, the height of the firm’s profitability, O’Melveny has outpaced The Am Law 100 in revenue per lawyer. Over that period, average RPL for The Am Law 100 has declined 1 percent, while O’Melveny’s RPL has increased 8 percent. But in other metrics, such as gross revenue and profits per partner, the firm’s performance versus the pack has steadily worsened since 2007. Profits per partner are down 7 percent over this period, while average profits for The Am Law 100 are up 5 percent. O’Melveny’s gross revenue also hasn’t kept pace, falling 16 percent, while gross revenue for The Am Law 100 has increased 5 percent in the last three years.
In March, as Culvahouse neared the concluding year and a half of his final term (O’Melveny’s mandatory retirement policy would prohibit him from completing a fourth term as chair), the firm brought in RHR International, a Chicago-based consulting firm, to assist it in selecting the next chair.
This time, the selection process was slightly different and included a detailed job description. O’Melveny’s policy committee chose Butwin and two other litigators, Thomas McCoy and M. Randall Oppenheimer, as candidates for chair in mid-July. Two weeks later, the policy committee picked Butwin as its choice for chair, and partners voted to ratify the selection. Butwin’s tenure begins in February, a year before Culvahouse’s term officially ends. A former O’Melveny partner says Butwin is “really respected by everyone at the firm.” He goes on, “People thought [Butwin] did a very good job as head of the litigation department, and that is the principal basis for why he was chosen as chair.”
Butwin, a tall, thin securities litigator, prefers to look forward. The core of O’Melveny’s new strategy, he says, is to focus on its strengths, including litigation and specific corporate practices—such as Silicon Valley. O’Melveny opened an office there in 2001, making the firm somewhat late to Northern California’s start-up mecca. But two years later it got a boost with the addition of Warren Lazarow and four other partners who joined from the collapsing Brobeck, Phleger & Harrison. During the past five years, O’Melveny has handled an average of 175 venture capital transactions each year. In the past three years, the firm has been involved in four dozen IPOs or sales of venture-backed companies, including the sale of Apache Design Solutions, Inc., to Ansys, Inc., for $310 million earlier this year.
Deal activity involving the firm’s long-standing entertainment practice has also increased in recent years and grown in complexity. The practice has expanded over the years from film financing deals for single pictures to include much more complex multipicture financing and media licensing deals. “We used our Hollywood pedigree to start doing large-scale [motion picture] slate financing, licensing, and mergers and acquisitions,” says Century City partner Brearton. Those matters include representing the International Olympic Committee in television rights negotiations with China Central Television.
Then there’s Asia, where O’Melveny now has 102 attorneys in five outposts, handling about a third of the firm’s corporate work. O’Melveny’s presence in the region has grown steadily from the opening of a Tokyo office in 1987—Singapore was the most recent addition, in 2008—partly because of high demand for work involving equity and debt capital markets transactions, restructuring, private equity, mergers and acquisitions, and investment funds. (In November the firm announced the launch of a formal association with Indonesian law firm Tumbuan & Partners.)
According to Bertie Mehigan, a lateral addition from White & Case who colaunched the Singapore office, the Asia presence has succeeded in part because of firm management’s openness to alternative fee arrangements. “Flexibility with fee arrangements is critical in Asia,” he says. “That has always been a part of our struggle, but at O’Melveny this is something senior management understands and accepts.”
O’Melveny’s senior management also views alternative fee arrangements as key to the future success of the stateside litigation practice, which has defined the firm for much of its history. In recent years O’Melveny has handled textbook examples of bet-the-company litigation for a wide range of major corporations, such as Apple Inc., for which the firm works on intellectual property and securities matters; Exxon Mobil Corporation, which it has represented in claims stemming from the Exxon Valdez oil tanker spill, and Bank of America Corporation, for which the firm has been go-to counsel on much of the litigation connected to mortgage lender Countrywide.
On any given day, as many as 100 attorneys at the firm could be handling a wide variety of matters for Bank of America, including ERISA matters, securities litigation, antitrust litigation, and regulatory matters. O’Melveny has been able to grow this relationship in part thanks to an alternative fee arrangement that dates back to 2004 and includes blended rates and discounts if certain results aren’t achieved. “We’re comfortable doing [dozens of] matters on a fixed-fee arrangement,” Butwin says.
Currently O’Melveny is involved in over 50 litigation matters, including a case headed for trial early next year that pits the Hollywood Foreign Press Association (awarder of the Golden Globes) against Dick Clark Productions, Inc. The firm’s recent cases include representing the home builder Lennar Corporation in an 11-month trial that began in 2009. Los Angeles–based partner Daniel Petrocelli, well-known for his defense of Enron chief executive Jeffrey Skilling, also represented Lennar in 2011 in a matter involving Barry Minkow, who accused the company of being a Ponzi scheme. That accusation resulted in a $583 million-drop in Lennar’s market capitalization. Lennar general counsel Mark Sustana lauds the firm’s attorneys for “being incredibly attentive to details, thinking strategically, and delivering outstanding results.” Sustana adds, “They helped us defend our corporate reputation against a slanderous attack.” (The company received a $583 million judgment against Minkow, who also pled guilty to securities fraud and was sentenced to five years in prison.)
Butwin also sees opportunity in growing the corporate practice by leveraging litigation relationships with Fortune 500 companies. It isn’t a strategy that has worked consistently for the firm in the past (which is why O’Melveny merged with O’Sullivan), but the possibilities are too attractive for Butwin to ignore. “We have strong relationships with financial institutions on the litigation side,” Butwin says. “We are not [now fully] leveraging those relationship to grow capital markets, but we will.” It’s apparent that firm leaders still believe this is the only way to achieve parity between corporate and litigation. The latter represents 60 percent of annual revenues and consists of 459 attorneys (120 of them partners). “Would I rather [have a] fifty-fifty split between litigation and corporate?” Butwin asks rhetorically. “Yes.”
What Warren Christopher, who kept an office at O’Melveny’s Century City branch until his death and was described as a “senior partner” by the firm, truly thought about the leadership fight in 2008 and the partner departures isn’t entirely clear. In the past he had been known to have lunch with key partners, sometimes at the exclusive California Club, to express his thoughts as the firm faced critical challenges. But in recent years he was more guarded in his views, according to one former partner. In one of his last interviews, Christopher attributed O’Melveny’s longevity to its dynamism. In 2010, in a Los Angeles Business Journal article commemorating the firm’s 125th anniversary, Christopher said, “We were never prepared to stand pat with what we had.” Now it’s up to Butwin to carry on that tradition.