Thursday, April 16, 2009

Law Firm Economic Cycles -- Part III

This is my third post in a four-part series that offers findings from analyses I performed last fall as my law firm clients were considering how best to respond to the economic downturn. Seven months later, some of my findings from last fall look like a big duh, although others still offer useful insights. (For more details and caveats about this series, read the past two days’ posts.)

5. In this recession, many law firms will be dissolved or acquired by stronger firms.

I maintain a list of “weakest link” law firms—those that are nearing or have passed a tipping point in terms of falling lawyer headcount and net operating income (these two metrics seem to be as good or better indicators of potential law firm dissolution or fire-sale acquisition compared to more arcane metrics). Right now, my weakest links list contains the names of nearly a dozen US law firms among the Am Law 200, the dissolution or acquisition of which would improve the health of competing firms, in some cases dramatically.

As with earlier recessions, this one will drive some law firms to failure and weaken other firms that will fail after the recession ends. US regional markets that are particularly stressed include Atlanta, Boston, Ohio, and the San Francisco Bay Area. During and following this recession, we can also expect to see failures or acquisitions of three or four New York Am Law 100 and 200 firms.

Firms that grew rapidly in recent years, spending or borrowing heavily to fund their growth, will suffer extra pressures during this recession. Those pressures will be hardest to withstand at firms where large blocs of partners have been together only a short while.

These forecasts should not shock anyone. Of the Am Law 100 firms listed in reports describing 1989’s financial performances, twenty no longer exist. Eight were acquired, and twelve have dissolved (see Table 2 below).

Twenty 1989 Am Law 100 Firms That No Longer Exist

A. Eight Firms Were Acquired
1. Brown & Wood
2. Hale and Dorr
3. Hopkins & Sutter
4. McCutchen, Doyle, Brown & Enersen
5. Rogers & Wells
6. Rosenman & Colin
7. Shaw Pittman
8. Winthrop, Stimson, Putnam & Roberts

B. Twelve Firms Have Dissolved
9. Arter & Hadden
10. Brobeck, Phleger & Harrison
11. Coudert Brothers
12. Gaston & Snow
13. Graham & James
14. Heller Ehrman White & McAuliffe
15. Johnson & Swanson
16. Keck, Mahin & Cate
17. Mudge Rose Guthrie Alexander & Ferdon
18. Pettit & Martin
19. Shea & Gould
20. Thelen, Marrin, Johnson & Bridges

6. Stronger firms absorb failing firms’ best assets, producing even stronger firms.

As in the past, many lawyers in firms that will fail or falter in the next few years will remain in private practice. An acquired firm’s strongest assets (lawyers) with the best strategic fit will be retained and assimilated, or they will find even stronger new homes.

Newly acquired and unhappy groups and practices at unsteady firms will be fair game for poaching firms with the resources to invest in new talent.

Odds are also strong that a Magic Circle firm and a top-tier New York City firm will soon find more reasons to merge than to stay single. If I had more courage, I would name here those two firms I fantasize will tie the knot.

Coming soon:

Tomorrow’s post concludes this series and addresses coming changes in:

7. Law firm partnership tiers

8. Marketing and business development functions

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