Law People : Law Practice Management, Organizational and Personal Dynamics; Talent Management : Ronda Muir of Law People Management, Inc.

The reports are in for 2011 on mergers and acquisitions in the law firm biz-- the pace is picking up-- and the prospects for 2012 look to be the same.  

US Mergers

Hildebrandt reports that 45 mergers that involved U.S. firms were completed last year, a 67% increase over 2010, with the Midwest being a locus of activity,  With 11 U.S. mergers already announced by the first week of 2012, almost double the number (6) announced at the same time a year ago, "merger activity appears to be heading back towards pre-recessionary levels which typically saw 55+ mergers per year... [W]e predict this trend will continue in 2012." Hildebrandt notes that by their tally mergers outside the U.S. jumped to 54 in 2011 compared to 44 and 48 in 2010 and 2009, respectively.

Altman Weil counts 60 law firm mergers and acquisitions announced in the United States in 2011, up 54% from 2010 and at the highest level since 2008, according to Altman Weil MergerLine, while the number of cross-border mergers involving US firms declined in 2011 after increases in 2009 and 2010.  “We think the trend toward larger deals will continue and the pace of mergers could accelerate in 2012.” 

The largest merger in 2011 between two U.S.-based firms was the combination of Kilpatrick Stockton and Townsend Townsend and Crew to create Kilpatrick Townsend & Stockton, followed by the acquisition by Edwards Angell Palmer & Dodge, a 500-lawyer Boston-based firm, of Wildman, Harrold, Allen & Dixon, a 160-lawyer Chicago firm, creating Edwards Wildman Palmer effective October 1. 

Faegre & Benson, headquartered in Minneapolis, merged with Indianapolis-based Baker & Daniels to form nearly-800-lawyer Faegre Baker Daniels on January 1.  Bryan Cave, a 900-lawyer firm based in St. Louis, acquired 59-lawyer Denver-based Holme Roberts & Owen as of January 1.  Ice Miller in Indianapolis also combined with Schottenstein Zox & Dunn in Columbus, Ohio effective January 1. Bingham McHale, an Indianapolis-based law firm, merged with Louisville-based Greenebaum Doll & McDonald to form 250-lawyer Bingham Greenebaum Doll effective January 2. 

So the industry must be starting to take off again, right? 

What is not always apparent from the data is why those mergers are taking place. In some cases,  the acquisitions are of law firms that were in deep trouble. For example,  Bryan Cave acquired Holme Roberts & Owen after it suffered a string of partner defections and staff layoffs, while Arnold & Porter merged with San Francisco’s Howard Rice after Howard Rice had lost nearly half its lawyers over the preceding decade. The negotiation of the Edwards Wildman Palmer merger has been scrutinized recently for having been tainted by the personal agenda of a managing partner, since replaced, rather than having been executed with the best interest of the firm in mind.

So when the predictions are for more mergers in 2012, one has to wonder if that is an indication of further distress as much as growth in the industry. Dissolutions of law firms took place throughout 2011, starting with Howrey LLP and continuing with smaller and midsize firms throughout the year. Clearly a lot of firms are having a tough time adjusting to the new marketplace, with some firms not even making it to the acquisition stage.

Asia Arising

Perhaps the greatest event in the law firm merger market recently is one that has largely gone unheralded-- the announcement of the merger of China’s King & Wood and Australia’s Mallesons to be effective March 1. Becoming the largest law firm based in the Asia-Pacific region, with more than 1,800 lawyers, King & Wood Mallesons will be a combination of one of China's largest law firms with one of Australia’s biggest, most innovative firms. But that is not where the Chinese are stopping. The two largest law firms in China, Dacheng and Yingke, are opening offices in London and a small Chinese firm, Broad & Bright,  is in merger discussions with Clifford Chance. Has the rest of the international legal world taken note of this wave of Chinese competition starting to lap at its shores in this year of the Dragon, the most auspicious of all of the Chinese years to start a business or execute a strategy?

Where does all that leave us?  As Patrick Lamb of the Valorem Law Group reminds clients: "The turmoil in law firms created by merger talk, rumors of merger talks, rumors of departures, rumors of de-equitization or personnel reductions DOES affect the work on your matters.  Don’t be naive enough to think your work is immune!"

Where we are is in a quickly expanding legal services universe that no longer revolves around the pyramid that you grew up with.  It is a universe that requires innovative, forward-thinking strategies to first identify your market, build an effective delivery system to keep and expand your client list and finally adapt your practice to the ever-changing future.

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An extraordinary and convincing vision of a revolution in big law's future was presented by Mark Chandler, SVP and General Counsel of Cisco, in a speech in January at Northwestern School of Law's 34th Annual Securities Regulation Institute.  I would like to join other legal commentators in paraphrasing Chandler's comments and commending him on his far-sightedness.

Driven as are other GCs to realize productivity improvements in his department, Chandler is committed to reducing Cisco's legal expenses as Cisco gets bigger.  Chandler points out that information, a law firm's stock in trade, will only get easier, and therefore cheaper, to access over time.  Already standardized on-line legal data is available, with residential leases and individual tax returns now largely done by software.

But even Cisco's first tier corporate legal work is being drilled down to a cost-effective, accessible product.  Contracts are drafted, executed and archived by employees using on-line software. Cisco pays a fixed fee for patent prosecution and intends to pay at least 5% less each year, requiring its firms to find ways to lower costs.  It also pays a fixed fee for the review of license offers, which Baker & Botts has been able to make profitable by developing a more efficient systematic approach.   In the corporate secretarial area, Cisco has replaced a group of outside firms with a one-firm solution that aims for a 20% reduction in legal expenses in part by using standardized forms and open interfaces. 

In litigation, Cisco has a fixed fee arrangement with Morgan Lewis to manage all of its US commercial litigation, which has made litigation avoidance the firm's key goal, aligning perfectly with Cisco's interest.

Counseling will be the next frontier, Chandler believes, as online tools like tax counseling via www.taxalmanac spread to other legal areas, such as export regulations, human resources and employment and eventually securities law compliance.  Cisco is already working with eight other Fortune 500 companies and a number of law firms on a site called Legal On Ramp to allow direct access to search law firms' knowledge management systems.  See www.legalonramp.com.

And in each instance, what was novel in Cisco's legal management strategies five years ago has become more commonplace among its peers today and may well eventually become available for purchase as packaged software.

The current law firm business model, according to Chandler, reflects a fundamental misalignment of interest between clients who are driven to manage expenses and law firms compensated by the hour.  Clients are not in the market of buying time, he points out, but value.  The current system not only mis-serves clients, but also the lawyers themselves, particularly associates, who Chandler says are beating down his doors because they don't want to work for law firms any more--enslaved by a billable hour-based compensation system that is inefficient in producing a valuable product and that offers them little chance of making partner.

Chandler recognizes that law firms are currently profitable as structured.  Clay Christensen of Harvard Business School calls large American law firms "the most profitable businesses in the world.  Speedier information-gathering capabilities allow large law firms to increase utilization of less experienced lawyers without passing cost savings on to their customers."  But Chandler is convinced that the very source of success for firms today--the ability to control client access to expertise, requiring 1:1 delivery--will be the source of their failure in the future.  It is top quality boutiques that Chandler is betting will change and survive, and it is in Cisco's interest to help make them profitable while doing so.  Chandler views slower-moving, cost-heavy large centralized firms to be at risk. 

"If the economic system of law firms is frustrating to associates and even some partners, I can tell you that from the standpoint of a metric driven general counsel, it is more than incomprehensible.  It looks like the last vestige of the medieval guild system to survive into the 21st century."

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