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Pearlstein

Law Firm Merger Mania

Steven Pearlstein
Washington Post Business and Economy Columnist
Wednesday, April 21, 2004; 11:00 AM

Washington Post columnist Steven Pearlstein was online earlier today to talk about merger mania in the legal profession and what it means for the future of mid-sized law firms. His latest column was prompted, in part, by news this week that two large firms -- Wilmer Cutler Pickering and Hale and Dorr -- have agreed to merge.

Steven Pearlstein was online on Wednesday, April 21 at 11 a.m. ET to discuss this topic. A transcript is below:

_____Past Columns_____
China's Confounding Contradictions (The Washington Post, Sep 15, 2004)
Choice Is Overrated (The Washington Post, Sep 10, 2004)
Getting Out Of Biotech's Second Tier (The Washington Post, Sep 8, 2004)
Column Archive

About Pearlstein

Steven Pearlstein writes about business and the economy for The Washington Post. His columns on the economy appear every Wednesday and Friday.

Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.

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New York: There have been a number of international mergers in recent years - one example Mayer Brown Rowe. Do you see this trend increasing and do you think such mergers are viewed as preferable to a large form opening overseas offices?

Steven Pearlstein: The question I think you have to ask is whether merger is better than organic growth overseas to serve existing clients or teaming arrangements, either on an ad hoc basis or some more permanent arrangement. These latter choices are more flexible and involve lower risk. So the question is what you get by buying that you can't get from renting, to use an analogy. Clearly more legal problems that corporations will be facing will have a global quality about them. And I suspect some globalization of firms, through mergers, will be the solution for some firms. But where I differ from the consultant/cheerleaders for mergers is that they argue that all firms must do it to remain competitive. That's where I get off the merger train.

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DC: One of the really nice perks at Wilmer was that every 7 years every employee (not just attorneys) got a 3 month sabbatical; do you know if this perk has survived the merger?

Steven Pearlstein: No idea.

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Alexandria, Va.: How different the the experience of the legal world compared to the accounting industry?

Steven Pearlstein: That's a good question. Basically, market forces reduced the accounting industry to five firms in the U.S., and the Justice Department reduced that to four with the Andersen prosecution. Why shouldn't the legal profession follow the same path. And the answer is that there aren't the same economies of scale in legal as there are in accounting, and there aren't the same conflict rules that stand in the way of that kind of consolidation. Also, I think there is a big difference in the practice of law versus accountants. Accountants basically do what clients ask them to do and don't ask too many questions. Lawyers, one hopes, are more counselors who try to serve clients but also have a role as stewards of an important public institution known as the court system. You want lawyers who can tell clients what they don't want to hear, even if it means losing business (see Enron). And that kind of thing is promoted in a more fragmented and decentralized organizational structure, in my opinion.

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DC: disclosure: which law firm is the Washington Post's lawyers?

Steven Pearlstein: I have no idea which firm provides general corporate advice. Williams & Connolly represents us when we get in big trouble journalistically, but that's a small part of it and Williams & Connolly is a boutique litigation firm, perhaps the most successful in the country.

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Arlington, Va.: Have any big law firm mergers fallen apart later, after the fact?

Steven Pearlstein: I'm not aware of any, although there are examples of mergers with small firms that haven't worked well and driven the partners to leave, taking other lawyers and customers with them.

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Washington, D.C.: Steve, I have a hard problem believing that lawyers don't know anything about economics. If there weren't economic benefits to getting bigger, these legal mergers wouldn't keep happening. Clearly, there are benefits that make mega firms a profitable move.

Steven Pearlstein: There are a lot of smart people in alot of industries who get caught up in herd behavior, following conventional wisdom that you have to get big to survive. And, as in advertising, it turns out that isn't really the case. Time and AOL is another example of chasing after synergy and cross-marketing opportunities that weren't big enough to offset the downsides of merger. So I'm not razzing lawyers uniquely here. It may also be, by the way, that mergers increase the profit per partner but don't really help clients or the legal system or the other employees. In that case, partners would be very rational in pursuing mergers but they might not be in the general public interest.

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Washington, DC: Your challenges to the usual rationales for mergers are substantive and persuasive.

Two questions, though, or, really, two points for your further comment:

As a PR firm that has represented both the largest law firms and a healthy sample of midsize ones, we've learned that the marketing advantages of law firm size and platform are simply overwhelming. This pertains to corporate buyers for whom size constitutes a safety sell -- and for lateral partners in search of "platform." One important measure of a merger's success is the new business it gets from new partners attracted to the behemoth. Firms have all sorts of horror stories about lost opportunities because bigger firms attracted the new partner with a $10 million book of business.

Second, are you aware of studies that show profits per partner immediately increasing after mergers? I don't have one handy, but would be glad to send you such a study.

Larry Smith

Levick Strategic Communications

Steven Pearlstein: Both good points. A friend called this morning to say that marketing expenses are growing and do represent an opportunity for scale economies. I have no reason to doubt that. And it may be that partners looking to make a lateral move or corporate general counsels looking for "safe" choices will tend to go with larger firms. But as I said earlier, you have to try to separate the reality from perceptions here -- perceptions can be self-fulfilling, but in competitive markets reality generally wins out before too long. I guess what I mean to say is that there is no reason to believe that 500 person corporate firm with a great reputation and deep bench in four or five specialty areas is not necessarily going to lose out in the future and better hup to in getting themselves to 3,000 lawyers in 60 cities.

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Washington, DC: Are trans-Atlantic law firm mergers falling out of favor? I recall Fried Frank's recent attempt to merge with a UK firm failed, for instance. Are the cultures simply too difficult to merge?

Steven Pearlstein: I'm told one big issue is compensation systems, where the American firms are more "eat what you kill" and British firms more lock-step, get paid for your rank and tenure. In general, I think you can say there are cultural issues and distance issues that involve risk and diseconomies, so when you think about a merger, there has to be real, take-to-the-bank synergies in which 2 plus 2 really does equal 5. And you have to be skeptical about these synergy claims and really scrub them.

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Washington, D.C.: Do you get the sense that there is an effort among merging law firms to create a new, combined culture, or do they continue to operate as separate units, concentrating on past specialties?

Steven Pearlstein: They all say they will integrate and create a combined culture, but the reality of the law business is that it is and will always be a collection of fiefdoms run by practice heads. And you can have warring fiefdoms even within an existing firm, to say nothing of warring fiefdoms after a merger. Obviously, to get the advantages of scale and synergy and cross-marketing, however, you have to achieve a pretty high level of operational and cultural integration.

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Bethesda, Md.: Is this good or bad for lawyers that are just starting their careers? And how does it affect salaries?

Steven Pearlstein: I'd say the merger process accelerates the trend toward superstar salaries, in which the gap between the pay of the superstars and everyone else is widening. It's happening anyway but mergers probably add to it by weakening further the ties between partners and a firm. There's more movement, more free-agency, etc. So this is good for the superstars and bad for everyone else.

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Bethesda, Md.: What are the great minds in law school academia saying about the merger trend?

Steven Pearlstein: Can't say that I know, although I talked to a number of them yesterday, including David Wilkins at Harvard, who helped me refine some of my skepticism.

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Washington, D.C.: Good afternoon. Here's my question.....Do these consolidations mean that more lawyers will need to specialize?

Steven Pearlstein: It certainly seems to point in that direction, although I'll leave you with an intriguing idea. One thing big law firms offer is surge capacity, the ability to handle a big litigation or big deal or big even when it comes along. And in other industries, one way companies more efficiently develop surge capacity is to cross-train some employees so they can move from one big project to another without having to have large numbers of people in each function hanging around just in case the big projects come along. So that may argue for a firm structure that both emphasizes specialization AND creates a new pool of people whose specialty is that they don't have one but are quick studies and are flexible and know something in a number of areas.

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Washington, D.C.: The Labor Department has projected that the demand for lawyers will continue to grow, specifically in the areas of patent law and litigation. Are there other areas that you think will grow/decline?

Steven Pearlstein: I don't know and I wouldn't rely on the Labor Department projections in making any big decisions.

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Washington, DC: Over the 20 years that we have been conducting market research for the legal industry, including our most recent survey this year, we have found that a very important predictor of a firm's success is the degree to which EVERYONE at a firm shares a common vision, culture and strategic intent. This internal consistency is essential if a firm is to put forth a coherent and compelling message to its market(s).

Merged firms often struggle to unite the joining factions around common values and goals. As recent as last month, a lawyer mentioned a we/they schism remaining from a merger in the 80s!;

How will Wilmer Culter Pickering Hale & Dorr accomplish the crucial feat of becoming one entity in spirit?

Steven Pearlstein: That's a good point and I don't have the slightest idea how Wilmer Cutler and Hale & Dorr will measure up on that point. I do know they've been careful about going about this and spent a lot of time with each other before deciding to do this. I also know they are very smart people and are very successful, which increases the odds of success. I also know there are not a few big egos involved at these firms, and lots of pride in the two original firms. Those factors decrease the odds of success.

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DC: As a consultant/cheerleader I don't think merger is for everyone. A merger can be one way to help a firm achieve their strategy but isn't a strategy by itself. Your thoughts?

Steven Pearlstein: I think it is fair to say the consultancies, for obvious self-interested reasons, tilt toward mergers or acquiring parts of other practices. Just the same as investment bankers rarely find a merger they don't think is a good idea. Its hard wired.

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New York, NY: How do you think clients view these mega-firms? Is it an added benefit or a complication?

Steven Pearlstein: General counsels come in all varieties, but I would suspect the best and most sophisticated aren't very impressed with mega-size, except in the rare instance where a problem requires it. I'd rather be a big deal customer at a half a dozen really top notch national firms, each with different specialties, than enjoy the "convenience" of dealing almost exclusively with a 3,000 lawyer mega firm.

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Washington, DC: Is there any end in sight for merger mania among law firms, or will the consolidation continue?

Steven Pearlstein: The skepticism of the business columnist notwithstanding, it is continuing and accelerating.

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Washington, D.C.: Mr. Pearlstein, What kind of pressure do you think this will put on D.C. firms of Wilmer-like prestige and size, such as Covington and Steptoe?

Steven Pearlstein: You can bet it will force them to into higher gear in considering and looking for merger partners.

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Boston, MA: In my experience, lawyers still have a "my client" not an "our client" mentality. Regardless of how good a merger looks on paper, won't this philosophy hinder the prospects of cross-selling and expanding relationships with clients?

Steven Pearlstein: I don't think it so much discourages partners from going along with mergers before they are made as making it difficult for mergers to realize their synergy and cross-selling potential after they are made.

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Washington, DC: What are your feelings toward the alleged "merger of equals" I doubt it since the firm name will be Wilmer, Cutler, Pickering, Hale and Doer. As most lawyers know it is only first (and possibly) the second get any mention in the legal realm. In the end I have a feeling this firm will become more Wilmer than Hale. In a year or two we will see an exodus of partners from Hale's offices (similar to Clifford Chance merger with Ropes and Gray).

Steven Pearlstein: That is obviously a possibility, based on past experience. But in this case I really do think each firm really does need the other's specialties and 2 plus 2 really can equal five. There may be some defections in practice areas where both have strong egos as practice heads. But the IP factor is really key here and it gives Hale/Dorr the leverage to make sure they are treated as an equal.Also, you may be looking at this through a Washington prism.

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Alexandria, Va.: Are partnership model businesses like PR, Law and Accounting generally note good on the "mega" scale? I was struck by your column's description of managing hundreds or thousands of "prima donna" partners...

Steven Pearlstein: You raise a good question and I think the answer is no.

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DC: I have heard from many practitioners that large clients prefer to have firms with offices spread over the globe, even to the extent of saying that such expansion is necessary to survival. Merger is one way to achieve that quickly. Also, perception is very important, especially when courting large clients. Aren't these "non-economic" aspects just as important?

Steven Pearlstein: Yes, the non-economic, perceptual, "irrational" factors do play a role, no doubt about it. And I agree the global issues have to be dealt with, although I suspect alliances will wind up being a good option in many cases (see accounting, by the way, on that).

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Washington, DC: Do you think the current legal market, which is relatively unconsolidated compared to other industries, is "efficient" from an economic perspective? With all the competition why doesn't it have more impact on price.

Steven Pearlstein: Well, now there's a good question. If this were a more price sensitive market, and there were more economies of scale, then it would drive law to the kind of consolidation that other industries are now experiencing. But in the corporate legal sector, while price is becoming more of an issue on routine type work, on the big, bet the firm cases it is not. And, as I said, the efficiencies and advantages of scale aren't that overwhelming right now, although I agree they are getting bigger (tech, marketing, recruiting, accounting).

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Washington, DC: As a PR professional for the law firms, I feel confident predicting that there will always be a place for the mid-size firm. The demise of the mid-size firm has been lamented for over 20 years and yet they are still thriving. The truth is that high quality, high value, professional services will always "sell", despite the size or organizational makeup of the service provider, and those firms that can continue to deliver and demonstrate value will not go away.

-- Betsy Jaffe, Jaffe Associates

Steven Pearlstein: Thanks.

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Arlington, Va.: One of the most perverse aspects of law firms is that they are usually managed by people who have been trained to be good lawyers, not good managers. Do you see any trend toward more professional business-management skills within firms? I seem to recall that some firms have experimented with hiring a "CFO," for instance.

Steven Pearlstein: Yes, there will be more professional management, but in the end the owners (partners) will make the big decisions.

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VA: I doubt Covington & Burling will ever merge. They did with a small NY firm.

Steven Pearlstein: They may grow by luring away practice groups if their culture is not amenable to merger.

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Princeton, NJ: Any sense of what the corporate client view on mergers and how they impact the law firm service levels? Do general counsel perceive that there is added value in working with a large firm because of the added attention paid to client care issues? Or are mega-firm viewed as being 'jack of all trades, master of none' (with sub-par service to boot)?

Steven Pearlstein: I suspect they see it as it is, as a two edged sword.

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Washington, DC: Your article in today's paper ends with the statement, "Success in the law will still be about having the best people doing the best work." My reaction: Yes and no. Yes, good legal work is always the foundation. But, as our recent study, Why Firms Fail? Why Firms Succeed?, shows, simply believing that "if you do good work, more work will follow" is not enough.

There are plenty of firms out there doing good work and vying hard for your clients' business. Indeed, corporations today have dozens of law firms on retainer. Firms need to understand their strategic focus, and communicate that focus to lawyers, staff and clients. Business development today is about much more than doing good work; it's about breaking through the clutter and getting that message across to your target audience. What do you think?

-Rachael Loper

Marketing Director

Greenfield/Belser Ltd.

Results of our groundbreaking new study, Why Firms Fail?

Why Firms Succeed??, are unveiled in the April issue of

American Lawyer. To learn more, visit

www.greenfieldbelser.com

Steven Pearlstein: I think it is not surprising that marketing directors and consultants would come to this conclusion.

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D.C.: What do you think the Wilmer/Hale merger means for those who are slotted to become new associates in the fall?

Steven Pearlstein: Means you'll have a wider range of choices now and in the future about what offices you might want to work in, and what specialties you might want to pursue. But I'd say you were in a good position either way. As I said, these are two VERY classy firms.

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Steven Pearlstein: That's it for today, folks. Thanks for joining in. See you next week.

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