EDITOR September 2003 James Wilber Principal Report to Volume 30, Number 12 Altman Weil

CONTRIBUTING EDITORS

Ward Bower Principal Legal Management OUR 29TH YEAR Altman Weil

William F. Brennan Consultant Are Large Law Altman Weil

David G. Briscoe Firm Mergers Senior Consultant Altman Weil Successful? Thomas S. Clay Principal By Ward Bower Altman Weil assisted by Debra L. Rhodunda Ward Bower

James D. Cotterman t a recent meeting of the executive Þrm data here to protect the conÞdentiality Principal Altman Weil committee of an AmLaw 100 Þrm of those Þgures provided to us by our law A discussing merger as a strategy, Þrm clients. Daniel J. DiLucchio, Jr. one member challenged me to Òname one We selected 17 law Þrm mergers involving Principal Altman Weil successful merger of large law firms,Ó 300 or more lawyers over the last ten years. and then went on to say, ÒI am not aware of The 17 selected mergers involved 33 Þrms Virginia Grant Consultant a single success.Ó Taken aback, I cautiously (one firm was involved in two of the Altman Weil responded that it was my impression that mergers). The average size of the ÒleadÓ

Marci M. Krufka most major law firm mergers would Þrm (larger of the two) was 441 lawyers at Consultant be considered successful, at least in the time of merger. The average ÒacquireeÓ Altman Weil financial terms. was 169 lawyers, for an average total

Charles A. Maddock That question resonated with me over merged Þrm size of 610. The largest merger, Principal subsequent weeks and inspired me to team measured by total numbers of lawyers Altman Weil with Altman Weil consultant Debbie involved, was Clifford Chance/Rogers and

Alan R. Olson Rhodunda to analyze recent large law Þrm Wells. The smallest was Blackwell Principal mergers in terms of the primary objective Sanders/Peper Martin (Kansas City and St. Altman Weil measure of success, that of proÞtability Louis) in 1998. Table 1 on page 12 lists the Richard C. Reed as measured by proÞts per partner. Most Þrms involved in the mergers studied. Senior Advisor mergers contemplate increasing proÞts per Altman Weil partner, at least over the long term. Few Short Term Success Debra L. Rhodunda Þrms would enter a merger that promised to As a baseline, we used the proÞts per Consultant decrease partner incomes. partner of the larger or Òlead ÞrmÓ in the Altman Weil Our analysis of changes in proÞts per year pre-merger. We compared that number Larry R. Richard partner is based mostly on AmLaw 100/200 to the proÞts per partner of the merged Þrm Principal Þgures published by American Lawyer in each of the Þrst two years, post-merger Altman Weil Media, partly on Þgures from Legal Business (for one recent merger, only the Þrst post- and The Lawyer in London, and partly on our merger year Þgure was available). We did MANAGING EDITOR direct knowledge of some of the ÞrmsÕ continued on page 7

Susan D. Sjostrom performances as a result of our work with Inside This Issue them as clients. In the few instances of Successfully Dealing with the HR discrepancy between published Þgures and Department In Setting Lawyer Compensation ...... 2 those provided to us by the Þrms via Online Continuing Education: Anytime, Anywhere Learning ...... 4 their Þnancial statements in the course of Fundamentals of Practice Group Marketing Plans ...... 8 consulting engagements, we opted to use the News from Altman Weil ...... 11 latter. We have not presented any individual Mergers … continued from cover Second year proÞts per partner existing or new location with signiÞ- this short term analysis because compared to starting or ÒleadÓ Þrm cant strengthening of one ore more conventional wisdom suggests that proÞts per partner: existing practice areas. We have not transaction and integration costs identiÞed which mergers fall into ¥ was the same in two Þrms; and would be expected to reduce PPP in these categories, as some are so small the Þrst year or two, whereas longer ¥ increased in 14 Þrms. that it could compromise conÞdential term PPP would be expected to grow. Altman Weil client information. The results were revealing. We Figure 3 The following chart indicates year found that in the Þrst post-merger Pre-Merger “Lead” Firm to Year 2 one, year two and cumulative year: Decreased PPP Same PPP growth in proÞts per partner orga- 0% 12% nized by type of merger. ¥ Three Þrms experienced reduced Primary Year Year Two Year proÞts per partner. Strategy One Two Cumulative Scale -2% +10% +8% ¥ Three ÞrmsÕ proÞts per partner Increased PPP 88% were the same as pre-merger. Scope +9% +11% +22% Scope/Scale +13% +7% +21% ¥ Eleven Þrms experienced increased The results seem to disprove the All Firms +9% +8% +18% proÞts per partner. conventional wisdom that PPP Figure 4 should not be expected to increase in Short Term (Two Year) PPP Figure 1 early post-merger years. by Type of Merger Short Term PPP, Post Merger — Year 1 Increased PPP Decreased PPP Scope or Scale Ñ Does it Matter? Scale 64% 18% Merger is a strategy, not in itself a Scope goal. It is a means to achieve any number of strategic goals, including Scope/Scale diversiÞcation, geographic growth, All Firms Same PPP increasing market share, building 18% 0% 5% 10% 15% 20% 25% depth or critical mass, among other % Two Year Increase, PPP possible objectives. Generally, mergers In the second post-merger year: intended to build depth are termed Thus it appears that scope or mergers of scale, while those intended combined scope and scale mergers ¥ Zero Þrms reported a reduction to expand product lines or services or generally produced greater short-term from Þrst year proÞts per partner. to access new geographic markets are economic improvement in proÞtability referred to as mergers of scope. than pure scale mergers. In a sense, ¥ Two Þrms reported the same prof- We further examined the 17 that is understandable, as scale its per partner as in the Þrst year, major law Þrm mergers and con- mergers require greater integration and cluded that although most could be of cultures earlier, and thereby could considered as some combination of be expected to be more disruptive. ¥ Fourteen Þrms reported an scale and scope, the primary objective Scope merger successes were increase in proÞts per partner of three of the mergers was scale, as comparable whether the objective was from the Þrst year. they were basically expanding in either geographic or practice area existing geographic markets in expansion, but less so where the objec- Figure 2 existing practice areas or specialties. tive appeared to be both geographic Year 1 to Year 2 Nine of the mergers appeared to be and practice area expansion. Strategic Decreased PPP Same PPP primarily mergers of scope to pur- focus thus appears to add value. 0% 12% sue geographical expansion (Þve), Scope Merger Year Year Two Year practice area expansion (two) or a Purpose One Two Cumulative combination of geographic and Geographic +10% +13% +26% practice area growth (two). The Practice Area +14% +11% +24% Increased PPP remaining Þve mergers appear to be 88% Both Geographic 0% +8% +9% equally both of scale and scope, and Practice Area involving substantial growth in an continued on page 12

Report to Legal Management September 2003 7 Mergers … continued from page 7 Figure 5 Figure 6 Long-Term Experience Short Term Scope Merger PPP, Long Term PPP Growth Finally we looked at those seven by Purpose Since 1999 mergers that occurred over four years ago (1999 or before). Since 1999, PPP Geographic Pre-1999 has increased 21% in those Þrms, on Mergers average. The AmLaw 100 PPP Þgures Practice Area since 1999 have increased 13%. (See AmLaw 100 Figure 6) By this standard, large law Both Average Þrm mergers seem to have achieved 0% 10% 20% 30% 0% 5% 10% 15% 20% 25% their Þnancial objective over the % Two Year Increase, PPP % Increase, PPP Since 1999 longer term, as well. Table 1: The Mergers Studied Conclusion Baker Botts/Brumbaugh, Graves, Donohue & Raymond 1997 Who says large law Þrm mergers Bingham Dana/McCutcheon, Doyle, Brown & Enersen 2002 donÕt work? From a proÞt perspective, Blackwell Sanders Matheny Weary & Lombardi/Peper, it appears they generally do, both in Martin, Jensen, Maichel and Hetlage 1998 the short and longer term. It also Blank Rome Comisky & McCauley /Tenzer Greenblatt 2000 appears that scope mergers pay off Clifford Chance/Rogers Wells 2000 better and sooner than scale mergers Dibb Lupton Broomhead/Alsop Wilkinson (UK) 1996 and furthermore that either geo- Foley & Lardner/Hopkins & Sutter 2001 graphic or practice area scope mergers Holland & Knight/Dunnells & Duvall 1994 are initially more successful than Holland & Knight/Haight, Gardner, Poor & Havens 1997 those intended to achieve both. ◆ Howrey & Simon/Arnold White & Durkee 2000 Nixon, Hargrave, Devans & Doyle/Peabody & Brown 1999 Ward Bower is a principal and Debra Paul, Hastings, Janofsky & Walker /Battle Fowler 2000 Rhodunda is a consultant with Altman Pillsbury, Madison & Sutro/ Winthrop, Stimson, Putnam & Roberts 2001 Weil, Inc. Both work out of the ÞrmÕs ofÞces in Newtown Square, Pennsylvania Piper & Marbury/Rudnick & Wolfe 1999 (610/886-2000). WardÕs email address is Sidley & Austin/Brown & Wood 2001 [email protected] and DebraÕs Swidler & Berlin/Shereff, Friedman, Hoffman & Goodman 1998 is [email protected]. Thelen, Marrin, Johnson & Bridges/Reid & Priest 1998

12 September 2003 Report to Legal Management