By Jennifer Smith
The pace of mergers is picking up in the legal business. The
question is: Do they actually work?
There were 88 mergers of law firms in the U.S. last year--the
most since legal consulting firm Altman Weil Inc. began tracking
such deals in 2007. Most of last year's combinations involved
relatively small acquisitions.
The activity comes as firms maneuver to boost revenues and
corral new clients amid a long-running slump in demand.
One possible union has drawn particular attention: a proposed
merger between Washington, D.C.'s Patton Boggs LLP and the much
larger Squire Sanders that would create a 1,700-lawyer entity with
offices in 22 countries. Global law firm Dentons also has made
overtures to Patton Boggs, which is known for its lobbying clout
but fell on hard times in the past two years.
Mergers can provide law firms with instant access to new markets
or help them bulk up in high-profile practice areas. But not every
combination lives up to its promise.
The 2008 merger that produced New York's Dewey & LeBoeuf LLP
created a firm with 1,300 lawyers world-wide. But both sides went
to the altar saddled with debt, including more than $140 million in
combined retirement obligations. As demand for legal services
dropped during the economic downturn, the new firm failed to make
headway, then sank further into debt amid sweetheart compensation
deals meant to keep rainmakers from leaving.
Dewey & LeBoeuf sought bankruptcy protection in 2012--the
largest U.S. law-firm failure in history. Prosecutors last month
indicted the firm's former chairman and two top executives on
charges relating to the firm's demise. All three denied the
charges.
While such spectacular flameouts are rare, industry experts say
there are a several ways that mergers can go south.
Teaming up with a weaker firm can drag down both sides if
underlying problems, such as runaway expenses or unproductive
partners, aren't addressed quickly. On the other hand, a merger
between two firms with equivalent financial strengths can devolve
into power struggles.
"Clients don't automatically say, 'We will give you all our
business,' " says legal consultant Brad Hildebrandt.
As clients expand operations and push into emerging economies,
more firms nevertheless are teaming up with rivals in hopes of
grabbing a bigger piece of the global market for legal services,
which is estimated at $277 billion, according to BTI Consulting
Group Inc.
Some mergers have created sizable and successful firms,
including Wilmer Cutler Pickering Hale and Dorr LLP, which is known
for its expertise in litigation, regulatory and white-collar
matters. And Sidley Austin LLP was among the 10 top-grossing firms
in 2012, according to American Lawyer magazine. DLA Piper, the
world's largest and highest-grossing firm, was created through two
large mergers in 2005 and has engaged in several subsequent
tie-ups.
But integrating staff and lawyers is costly and can take years
to complete. A challenging postrecession legal market could slow
the pace further. Law-firm revenues rose about 2.5% last year,
compared with compounded annual growth of 9.8% between 2004 and
2008, according to Citi Private Bank, a major lender to law
firms.
"I think it takes longer for the benefits [of mergers] to
manifest themselves in your financial performance than it did in
the past," says Warren Gorrell Jr., co-chief executive of Hogan
Lovells. The 2,300-lawyer firm was created in a 2010 merger between
U.S.-based Hogan & Hartson LLP and Britain's Lovells LLP.
Performance at some merged firms have sagged. Revenue at Edwards
Wildman Palmer LLP, which was created in 2011, dropped last year to
$311.5 million--down more than 11% since its postmerger debut. The
firm last week said it was laying off 42 staff and 10 lawyers. A
spokesman for the firm called the decline "a foreseeable,
short-term development" as the firm positions itself.
San Francisco's Thelen LLP dissolved in 2008, two years after a
merger with a smaller New York firm. The merged firm's 2007 revenue
of $345 million was $12.5 million lower than the two firms grossed
the year before.
At postmerger Hogan Lovells, revenue averaged $1.65 billion for
the first three years, dipping slightly in 2012--a drop the firm
said was because of exchange rates. Business picked up last year,
when the firm notched $1.72 billion in revenue, up about 5%.
Mr. Gorrell says other benefits of the combination--"getting
more meaningful work from a client, in more practices and more
markets"--showed up early on, such as representing Exxon Mobil
Corp. in the $3.9 billion sale of its Japanese subsidiary in
2012.
Two new megafirms were created through tie-ups last year:
Dentons and 3,500-lawyer Norton Rose Fulbright. The firms reported
revenues of $1.26 billion and $1.9 billion, respectively, last
year.
Legal consultant Peter Zeughauser says it is difficult to assess
some of the supersize combinations based on a year or two of
financial data because they tend to be long-term strategies, "10-
to 15-year plays, maybe longer."
In the case of Patton Boggs, a tie-up with Squire Sanders could
give the former an international platform in Europe and Asia and
provide the latter the luster of Patton Boggs's reputation in
public-policy work. It could also provide a path to fiscal
stability for Patton Boggs, which laid off dozens of lawyers and
staff over the past year and has hired restructuring advisers.
One potential sticking point: liability questions over Patton
Boggs's work to enforce a $9.5 billion environmental judgment
against Chevron Corp. that a federal judge this year ruled was
obtained through fraud. Patton Boggs says it acted properly.
Patton Boggs and Squire Sanders say their talks are continuing.
Dentons said this month that it hadn't received an official
response to its offer.
Write to Jennifer Smith at jennifer.smith@wsj.com
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