Kaye Scholer’s financial performance took a remarkable beating in its last year as an independent law firm. But managing partner Michael Solow called the 2016 declines a natural result of strategic pruning ahead of the firm’s merger with Arnold & Porter at year’s end.
Gross revenue at Kaye Scholer in 2016 fell 13.5 percent to $320 million. Profits per equity partner dropped 25.4 percent to $1.03 million, as net income plummeted 31.8 percent to $90 million.
The figures are the lowest for the firm in at least a decade, according to financial reporting by New York Law Journal affiliate The American Lawyer.
Solow, however, said focusing on the financial trend lines wasn’t useful. He said the firm deliberately cut back on lateral hiring last year, and it willingly shed attorneys whose practices didn’t fit the combined firm’s strategy.
“But for our efforts to prepare ourselves for the merger, we would have presented much different numbers” in 2016, said Solow, now a partner at Arnold & Porter Kaye Scholer. “We would have taken a much different approach to 2016.”
As the Arnold & Porter deal began to take shape, Solow said, the firm made it clear to partners that some practices “would not be core” to the combination. That sparked some departures of equity partners, counsel and associates. Solow said some exits also meant fewer potential conflicts or mismatches in billing rates, target clientele and regional focus for the combined firm.
“There were some regrettable losses,” Solow said, “but by and large, we did not make every effort” to retain lawyers. The firm ceased lateral partner hiring by the first quarter of last year, he said.
“Ultimately it affected the bottom line for our partners,” he said of the shrinking head count. But he added, “they were aware of it and knew what was going on.”
Meanwhile, expenses rose suddenly last summer when Kaye Scholer followed other firms in boosting associate salaries, affecting profits.
The firm’s full-time equivalent attorney head count dropped to 351 from 370, about a 5.1 percent drop, while its equity partner ranks declined to 87 from 96, about a 9.4 percent drop. At the same time, Solow acknowledged, the impending merger took a toll on productivity.
“I can’t tell you that I anticipated all of that,” he said, adding that he would advise other law firms going through mergers to be aware of attorneys who may not bill as they normally would.
Still, there were practice bright spots. Solow said litigation and bankruptcy remained very strong for the firm last year, with its financial services and pharmaceutical litigation practices performing “extremely well.”
Private equity and corporate work held steady with past years, while the firm saw fewer real estate and corporate finance deals, he said.
The firm could have survived without a merger, he said.
“We would have pivoted, we would have held onto people who we otherwise may have encouraged or not discouraged from leaving, and we also would have looked more closely at opportunities presented to us in the lateral market,” Solow said.
He added that the firm’s performance in 2016 didn’t affect the terms of the merger. He said negotiations were based on where Kaye Scholer partners’ performance stood in early 2016, and both firms’ partners voted on the deal before 2016 financial results were in.
“We had a long-term strategic goal for our partnership and most importantly for our clients, and we saw where the marketplace was headed,” he said, adding that Arnold & Porter’s practices, especially in Washington, D.C., complemented Kaye Scholer’s financial services and life sciences practices well.
In the end, he said, “it was more than worth it.”
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