It's Hard to Accept Intelligence That Breaks Your Heart

It must be very difficult to accept intelligence that foretells your demise or says your dearest strategies and models have failed. That’s the situation in which the major investment banks found themselves in the last few weeks and where many commercial banks also find themselves. It’s also the situation some US-based law firms are in now.

As most readers from law firms know, two Bay Area-based firms, Heller and Thelen, are visibly struggling with “you’re probably not going to make it” warnings, as they seek to find merger partners.

Eleven months ago I prepared a report for a client that was considering expanding in the Bay Area, which included this statement:

At least half a dozen large Bay Area law firms are showing signs of stress. If one or more of these firms were acquired or dissolved, the health of the remaining major firms practicing in the Bay Area—in San Francisco and the Valley and even beyond—would improve. Such change(s) would make a dramatically positive difference for a few firms.

Heller and Thelen were among the six stressed firms I reviewed, although they were in trouble for different reasons.

Over the years, Heller did many things right and built an admirable brand with a strong culture. Following the tech bubble, the firm was quick to jump on the life sciences bandwagon in 2002-2003. But in 2004 and 2005 the firm’s revenue and profit trends faded. The firm responded with partner de-equitizations, staff cuts, and other cuts and lowered expectations. If the firm made any strategic changes, those weren’t visible from the outside, although considerable business development flogging was evident. Still, “work harder, build revenue, cut costs, and de-equitize partners” is not a strategy.

Nearly three years later, after seeking and not finding a merger partner, Heller is considering dissolution, among other options. Their candor on this point is refreshing and, although deeply depressing to loyal Hellerites, will probably ensure that Heller’s best remaining legal DNA mates with the best possible other legal DNA at other firms.

Thelen, another Bay Area firm whose brand is less burnished than Heller, is regularly losing partners and groups while they seek a merger partner—their third. The firm has already squandered opportunities to grow and diversify through mergers it initiated with two New York-based firms, Reid & Priest and Brown & Raysman, but both mergers resulted in little permanent gain. Thelen’s growth strategy, to expand beyond its old-economy practices like construction law into financial, IP, and other practices, was upended by internal West Coast vs. East Coast rivalries. The West Coast winners were merciless, and the East Coast losers fled, as did some West Coast partners who found more peaceful places to practice law.
Memo to file: Collaborate, don’t compete, to achieve post-merger assimilation.

The Bay Area is not the only US geographic market that would be healthier with fewer corporate law firms; Atlanta, Boston, and Philadelphia have long been too crowded. And now it seems New York will experience law firm mergers and failures too. Obvious NYC candidates for hastened demise are firms that have lost big clients and will see double-digit percentage losses in firm-wide revenue and that have a very high transactional to litigation capability ratio.

Bruce MacEwen, the estimable law firm economist who blogs at www.adamsmithesq.com, reminded readers on Sunday that the most basic strategy key intelligence topics now apply: What are your firm’s strengths, and how much does the marketplace need what you have to offer?

Fortunes, careers, and reputations are made in exciting times like these. And hearts are broken, too.