Baker Donelson merges with a Houston firm. Two Lafayette area firms join forces. And Jones Walker expands for the fourth time in four years, with its eye on one or two more through 2013.
The urge to merge is growing strong in the legal profession, particularly in south Louisiana.
During the first three quarters of this year, mergers and acquisitions nationwide rose 79% compared to the same nine-month period last year, according to a study by Altman Weil, which provides management consulting services to legal organizations and tracks all U.S. law firm combinations.
The South leads the nation with 10 mergers, and south Louisiana is a big part of the surge.
“Mergers and acquisitions among law firms have become more prevalent on a local or regional basis,” says Skip Philips, managing partner of Taylor Porter. “I’ve also seen more of an expansion of existing firms into different geographic markets, and sometimes that has been by merger. Just 15 years ago, that was very rare in the Baton Rouge or the Louisiana legal market.”
In recent weeks, Baker Donelson merged with Houston-based Spain Chambers, making its entry into the Texas market.
Though the firm is headquartered in Memphis, Tenn., it has offices in Baton Rouge, Mandeville and New Orleans. And Roy C. Cheatwood, managing shareholder of Baker Donelson’s Louisiana offices, says this particular move into Texas is key to the firm’s strategic focus in Louisiana.
Spain Chambers represents businesses throughout Texas, including Fortune 500 clients as well as entrepreneurs, privately held companies and multinational corporations in energy and oil field services, manufacturing, engineering, real estate, construction, health care and information.
The merger brings the firm’s total number of attorneys and advisers to nearly 620 across 17 offices in six states and Washington, D.C.
In April, Lafayette-area law firms Bernard & Angelle and Boyer, Hebert & Abels joined forces, with offices now in Lafayette, Breaux Bridge and Denham Springs. The merger will “increase the depth of the legal services we currently provide to our clients,” partner Randy P. Angelle says.
And in early November, Jones Walker finalized its merger with Watkins Ludlam Winter & Stennis of Jackson, Miss., expanding its Gulf Coast presence. The firm has almost doubled in size since Hurricane Katrina, with now close to 400 lawyers in 14 offices in Alabama, Arizona, Florida, Louisiana, Mississippi, Texas and Washington, D.C. The firm is edging ever closer to being among the top 100 largest firms in the country.
Altman Weil Principal Ward Bower suspects “pent-up demand” following one of the worst economic downturns in history might be part of the reason for the sudden uptick in mergers and acquisitions. Firms have been more aggressive in 2011 because the economy has shown signs of improvement.
“During the recession and in the immediate aftermath of the recession, firms were in what I’m going to call a ‘survival mode,’ not a strategy mode,” he says. “Now that the economy has grown, they’re dusting off their strategies.”
But the trend could also be about survival itself. The latest Hildebrandt Institute’s Peer Monitor Index, which measures law firm profitability, indicates law firms are struggling overall to attract business while their expenses have risen at the highest rate in two years.
“Practicing law is a profession, but operating a law firm is a business,” says Rudy Aguilar, managing partner of McGlinchey Stafford law firm, which has opened two offices in Florida in the past two years and now has 10 offices in six states. “The economic considerations that affect businesses affect law firms as businesses.”
Jack Weiss, chancellor of LSU’s Paul M. Hebert Law Center, says law firm mergers have been steady during the past decade. Some firms merge to expand their services, trying to become more of a full-service firm or meet the specialty needs of a particular client. Others want to extend their geographical reach: again, sometimes to better serve clients with business interests in those regions. For still others, it’s a matter of economics.
“I suppose that law firm mergers are in a sense motivated by the same kinds of considerations that motivate other mergers,” says Weiss, who practiced in New Orleans for 23 years before moving to New York in 1998 to become a partner of Gibson, Dunn and Crutcher. “In some instances, you have complimentary kinds of strengths: You might have one firm that’s strong in litigation merging with a firm that’s strong in transactional work, and in a sense the combination of the two provides something of a hedge against downturns in one or the other. There are many different motivations.”
Jones Walker Managing Partner William Hines thinks many mergers are driven by the economy—not because it’s a “good” or “bad” economy, but because the world economy in general is changing.
“It’s going to be much more global, and a lot of people really haven’t focused on how dramatic the impact of this change in technology is,” he says. “It’s having a huge impact on how a law firm delivers its services. And frankly, if you don’t have the capital and the IT staff to keep up with that and add to it, then I don’t know how you’re going to do it.
“If you’re a small firm, it’s probably somewhat easy because it’s a few people, and if you’re a big firm, we’ve got the balance sheet to do it. If you’re a mid-sized firm, it’s hard to keep up. Our clients expect us to keep up.”
Hines says expanding regional firms in the South are finding that with technology, they can compete with some of the larger national firms because they have the expertise—and lower billing rates.
“Now I can compete using the web, providing legal services in multiple state jurisdictions and foreign countries,” he says. “Now there are firms in New Orleans and Lafayette and Baton Rouge and Birmingham and Jackson that, if they’ve got the skill set, they can use their billing rates to take work away from some of these national and multinational law firms. They’re not able to get the huge billing rates that they used to because we’re undercutting them. Technology and the regionalization of firms are changing the nature of the legal economy.”
Regional expansion can also bring economic stability to a firm. Before it began its Gulf Coast merger and acquisition strategy, 70% of Jones Walker lawyers worked in the New Orleans office. Now, they constitute just 40%, making the firm less reliant on a single area’s economy.
Mergers and acquisitions have their drawbacks. For one thing, the longer the list of clients, the longer the list of potential conflicts.
Firms generally vet and contend with such issues before going through with an acquisition or merger. But even after joining forces, firms have also gotten sophisticated at avoiding such conflicts, Weiss says, through so-called Chinese walls and other measures.
Large firms with multiple offices in different regions—say, in Baton Rouge and Phoenix—can also find it challenging to assimilate and integrate their culture into the acquired firms, as well as maintain their identity as a single firm rather than a confederation of offices in different cities.
“Each law firm has its own culture, and you want to join the lawyers who kind of think like you do and practice law the way you do, and think about the law profession and business the way you do as best you can,” Aguilar says. “If you’re too diametrically opposed, it could lead to internal unhappiness, and unhappy people are generally not productive and not serving their clients well.”
There’s also the challenge of managing personnel over a broad geographical area, and coming to an agreement about what the role of employees from the newly acquired firm might be.
“My sense is that some of them have worked splendidly and others perhaps not so well,” Weiss says. “But I think a well-thought-out merger of two firms with compatible cultures can often be very successful.”
The vast majority of acquired firms are small- to medium-size firms, leading some to believe their days may be numbered. During the past five years, roughly 90% of the acquired firms are those with 100 lawyers or fewer, according to Altman Weil.
Hines says global, national and regional trends point to two successful models in the legal economy of the near future: small, highly specialized boutique or family firms of 10 lawyers or less, and large regional full-service firms.
“The firms that I think are going to have a harder time are the firms that are between 30 lawyers and 150 lawyers,” Hines says. “It’s going to be hard for that firm that’s trying to be sort of full-service, but not small enough with low overhead and specialties. I just think they’re going to get squeezed out.
“It’s going to be very hard for those firms to compete and be profitable and provide the services that their client base is going to expect. I think it’s that middle firm that’s trying to be what the bigger firms are but doesn’t have the horsepower in expertise, geography and technology that’s going to have a hard time keeping up.”
Not everyone agrees with that assessment.
“Lots of people have said that for a long time,” Aguilar says. “I do think the larger firms and the regional firms can give clients a broader breadth of services. It’s hard in a smaller firm to have the tax lawyer, the patent lawyer, the corporate lawyer, the litigator, the regulatory lawyer. … Usually it takes a bigger firm because you have to have enough business to keep them all busy, and that takes a lot of clients. To have a lot of clients, you usually have to have a bigger footprint. But there are very good firms that are only in Baton Rouge, or only in New Orleans. I don’t predict their demise at all.”
Weiss believes the smaller firm will continue to be a major player in the legal economy in Louisiana. The flexibility and more intimate collegiality found at such firms, he says, will always be attractive to lawyers.
“Certainly here in Louisiana they seem to be still able to compete,” Weiss says. “That’s the predominant mode of organization to practice law here, and it’s actually been a very positive thing for the state’s legal economy that we have so many lawyers organized in lower-cost, smaller entities that are not as directly affected by the ups and downs of the national economy as they may be in major markets, where as Wall Street goes, so goes a lot of law firms.”