Having set the agenda last year on associate pay Silicon Valley firms are this year leading the way in redundancies and cutbacks. Richard Tromans asks what lessons can be learned – and opportunites grasped – in the Valley
“The arrogance of that world has taken a knock, the masters of the universe’s time is over,” says Don Keller of the Venture Law Group (VLG), a firm founded in 1993 and a standard bearer of the tech boom.
Young lawyers at tech-based firms such as VLG thought they were on a fast track to becoming millionaires, using their inflated salaries to pay off huge student loans and gambling fat bonuses on the Nasdaq to make a killing.
They did not see the crash coming. Nor did their management have much of a plan to deal with one when it came.
That is not so surprising when one considers that the average partner age in VLG is 37 and its associates in their early-20s do not remember the last recession.
Now VLG and its compatriots such as Gunderson Dettmer are laying off associates, dropping bonuses and praying for a market rally, while partners receive calls from head-hunters eager to spirit them away to East Coast firms looking to gain a credible technology practice at bargain rates.
VLG, for example, has laid off nine associates, and moved six others into non-fee earning work.
That is more than 15% of its associate workforce.
The firm admits turnover and partner profits will be down at least 30% for 2001.
Like all Silicon Valley firms, it is having to find a way of paying its associates the massive salaries it doled out last year in a climate where less than a tenth as many IPOs are getting off the ground than the year when it broke the pay records.
It was Gundersons that set the salary war raging last year when it pushed first year salaries up 25% to $125,000 (£88,000). It was a move New York firms felt obliged to follow. But unlike the tech specialists, they are in a better position to maintain these salaries because of the size and diversity of their practices.
Last month Gundersons scrapped its $20,000 (£14,000) fixed bonuses for associates.
The rapid change in fortunes of the Valley firms has not been lost on their Ivy League cousins on Wall Street.
This crowing message from a white shoe associate placed on a Silicon Valley bulletin board says it all: “For all those that were laid off, I have one word for you: looooosssseeeers. Next time, try to get a job with real firms such as Cravath or Davis Polk. HAHAHAHAHAHAHAHAHA I hope you default on your 6 digit loans!”
Or as another West Coast bulletin board posting puts it: “I don’t know what happened to lawyers who specialised in polyurethane or microwaves in the 70s, but some of today’s tech lawyers had better ask themselves that question.”
To understand how badly exposed start-up-led Silicon Valley firms are, you only have to look at the value of the Nasdaq.
Currently the Nasdaq dollar volume is around $46bn (£32bn). In January 2000, when Gundersons set its 25% pay, that figure was $87bn (£61bn).
Technology spending in the
US has also fallen through the floor as companies hold on before updating their computer systems.
And the telecoms sector has also taken a beating. Nortel, the telecoms hardware giant, shed 10% of its workforce this month and 3Com, another tech champion of 2000, has laid off 30% of its staff.
At the same time private equity funds are running a cash surplus because they are too scared to invest. IPOs that appeared a sure thing 12 months ago are now on hold indefinitely.
This combination of factors has left many West Coast firms vulnerable to partner raids and takeovers.
For leading New York firms such as Shearman & Sterling that are embarrassed by their lack of credible tech nous, there may never be a better time to make a major move on the West Coast.
Silicon Valley insiders report that a number of full-service US firms are on the look out for acquisitions.
Milbank Tweed Hadley & McCloy, for example, wants to hire teams of Valley partners this year in preparation for the next upsurge.
There are already more than a dozen major East Coast firms with small offices in Palo Alto.
They will also be suffering from the dotcom crash. But these offices will also make good vantage points from which to seek out potential partners. Management consultants Hildebrandt International has received enquiries for advice on West Coast acquisitions from both City and New York firms.
Just how vulnerable many of these Silicon Valley firms are depends on how long the IPO and venture capital slump continues.
The optimists are hoping to see a revival of the Nasdaq in the last quarter of this year, but others believe the final quarter of next year is more likely.
One US tech partner estimates that an average IPO brings in about $400,000 (£282,000) in fees. He estimates that most West Coast firms will have at least 10 prospective IPOs on their books that will not be happening this year at best.
And it is not just this lucrative work that has suffered. The dotcom slump has seen a sharp decline in other funding and general corporate work.
Some Silicon Valley partners estimate that their firm’s fee income will decline by 30%, and in some cases by 50%.
But not all firms are in such dire straits. Firms such as Wilson Sonsini Goodrich & Rosati and Brobeck Phleger & Harrison will also suffer, but not as badly. Their businesses are more diverse; they do not focus all their energies on technology fund-raising and start-up companies.
Brobecks, for example, has a respected product litigation practice and Wilson Sonsini has maintained a healthy M&A practice that saw it advise 69 principals on $108bn (£76bn) worth of merger deals last year.
These better-hedged firms are also likely to be older and wiser. Brobecks was founded in 1924, Wilson Sonsini in 1961.
But the younger firms are sticking to their guns.
Scott Dettmer, name partner of Gundersons, which was founded in 1995, says: “There will be no change in our business model or business plan.”
He also rules out any chance of a merger with another firm to reduce its reliance on the start-up sector.
Nor will he admit that bumping up pay by 25% four months before the stock market crashed in April 2000 showed a lack of foresight.
“Hey, if we were good at predicting the market we would be stockbrokers,” Dettmer says.
VLG’s Keller is equally defiant. He scoffs at the thought of breaking into new practice groups such as bankruptcy or litigation. He says VLG’s culture is start-up oriented and would be undermined if the firm started to put the interests of creditors over that of start-ups. “We have put in place the appropriate expense controls and we can sit this out as long as we need to,” he says confidently.
Like Dettmer he is optimistic and believes the worst is behind him. He says a couple of successful IPOs will kick-start market confidence.
Like Dettmer he is adamant
that his firm is not for merging – although it has started doing work for clients once they have gone public, something it pledged not to do.
The firm had, for the last year, been referring all its public company work to large full-service West Coast firm Orrick. Now it will do some of this work in-house when it has the capacity.
Keller also sees the firm bulking up its finance practice and he wants to get more work from the larger, more robust tech companies.
But further practice diversification is a no-no.
Although VLG is seen as a radical firm, its conservative approach to practice development could not be more different to that of broader service West Coast firms such as Morrison & Foerster (MoFo), Brobecks and Latham & Watkins.
All three firms have embarked on an ambitious programme of international expansion.
Lathams has taken a slice of Gaedertz in Germany, and is poised to merge with the Paris office of Dutch firm Stibbe.
Brobecks has offices in London, Oxford and Munich through its joint venture with Boston firm Hale and Dorr.
Not only does this allow these firms to service those Silicon Valley clients such as Cisco that have outgrown their Valley kindergarten, but it also makes them better-hedged operations.
The European technology market is running at a different pace to the US. Spending on software is still growing as European companies rush to match the earlier IT investment of US counterparts and tech centres such as Munich, where Brobecks has a presence, still hold great potential for the venture capital and private equity markets.
Research published by Microsoft found that 93% of European companies had either increased or maintained tech investment this year, unlike in the US. And 78% of European businesses say technology is their primary business driver.
MoFo London partner David Naylor says the firm’s Hong Kong and Tokyo offices are well positioned for the global tech market.
He says diversity is the firm’s strength.
“If you draw a target of the tech market and say venture capital for dotcoms is at the centre, then that is where people have been hurt most,” he says.
“The idea for MoFo is to cover the whole area of the target, not just the centre, both geographically and with practice capability.”
A select band of tech-oriented Silicon Valley and West Coast firms such as MoFo and Brobecks are giving City firms a run for their money both in the UK and Europe.
Why then, don’t City firms take them on their home territory?
So far just one UK firm, Osborne Clarke, has opened an office in the Valley – and it is a liaison office albeit one with some of the firm’s top corporate names.
The current economic climate in the Valley gives City firms a unique opportunity to address the balance.
Both UK and New York firms can offer Silicon Valley partners something they did not think they needed – security.
Jeff Golden, the co-head of Allen & Overy’s US operation, will not comment on whether the firm is looking to open up in the Valley.
But he says the firm is interested in what Silicon Valley lawyers have to offer and hints that if a cultural match could be found, tech hires to its New York office may happen.
He says his firm can offer long-term stability through its lockstep. Its offices in more than 20 countries and myriad practice areas mean only a truly global recession will hurt.
Surprisingly, there have been few major partner moves in the Valley from new to old firms to report.
One example outside the Valley is in Washington DC’s Tyson’s Corner emerging technology centre. John Sullivan, a senior tech partner at Venable Baetjer and Howard, has just joined New York’s LeBoeuf Lamb Greene & McCrae.
Sullivan says he knew people at Wilson Sonsini and had always kicked himself for not joining the firm during the boom times. Now he feels differently.
“I picked LeBoeufs because it is not a one-legged stool, like some of the tech firms,” Sullivan says.
All the ingredients for a major shake-up of the Silicon Valley market are certainly in place.
A little over a year ago, firms in the Valley were so successful they were able to spark off a global pay war. Now many of them are on the back foot – hoping against hope that the IPO market will rise from its prolonged torpor sooner rather than later.
The Silicon Valley has never been more vulnerable to an East Coast – or even City – invasion than it is now.
