Small Firm Struggles Make for Midsize Firm Growth

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1 TOP HEADER &pt=Mid-Market%20Report CONTENT Small Firm Struggles Make for Midsize Firm Growth By Lizzy McLellan **Editor s note: This is the first part in a two-part series about consolidation in the legal industry, and how it affects midsize firms.** Midsize firms are hungry for niche services and geographic expansion, and as small firms struggle to meet client needs, the time is ripe to feed that appetite. According to ALM reports and Altman Weil MergerLine, which tracks law firm mergers, 70 law firm combinations have taken place so far in Of those, 30 involved a midsize firm acquiring a smaller shop. Legal recruiter Frank D Amore said that kind of activity makes other law firms more open to the idea of merging. They keep reading about this frenetic M&A pace and it s almost like it legitimizes in their mind, he said. Small firms, particularly those with head counts in the single digits or teens, have faced dilemmas with the increase in real estate and technology costs. Or, as they become more successful and need additional resources to meet client demand, they may find that staying small isn t sustainable. There are different breakpoints for firms with respect to the investment they have to make from an operations standpoint and putting their own money into the firm, D Amore said. The partners at those firms, that s their money they re putting into that. Shedding Small Firm Pressures

2 Chad Williams, co-managing partner of Denver firm Davis Graham & Stubbs, said he and co-managing partner Kristen Lentz constantly have their ear to the ground on potential small combinations of 10 or fewer lawyers, though they are selective about executing on them. If you are a five- or 10-lawyer firm and you want to service Fortune 500 companies, that is going to be very difficult, Williams said. Those firms present really good opportunities for an upstream merger for a firm like ours. Technology is a major factor in that dynamic, as large corporate clients demand top-of-the-line cybersecurity and privacy measures. A firm of 20 lawyers or less may not be able to invest in that technology. That s a fundamental shift in the landscape that s happened over the last five years and is going to continue to happen, said James Goodnow, managing partner of midsize firm Fennemore Craig. In terms of small law, boutique firms, I do think they re put under extraordinary pressure if they want a shot at servicing the larger clients. Pennsylvania midsize firm Cipriani & Werner has capitalized on that trend, acquiring small practices within its geographic footprint, the firm's Harrisburgbased managing partner, Dennis Cullen, said. Particularly in banking, he said, small firms have been unable to keep up with the costs of complying with client cybersecurity and technology demands. Cullen recalled one former small firm partner who found himself incapable of answering a client's technology questionnaire his security measures at the small firm would lose him the client, but his firm could not afford the required technology. Most recently, Cipriani & Werner added seven lawyers and a new office in Lancaster, Pennsylvania, by acquiring employment firm Devine Law Offices. Both firms had bumped up against limitations to their practices, Jim Devine, founder of the acquired firm, said. And Devine Law had also experienced financial pressures that made a merger attractive. "Every year, we had a good year at Devine Law. The difference between a good year and a great year for a small law firm is one thing going the wrong way," Devine said. "We were in business for 18 years and we managed it well,

3 but it was a struggle every year." For six-lawyer Chicago firm Bronson & Kahn, which merged earlier this summer with midsize firm Much Shelist, their size was limiting the work they could do for clients. Once the two firms announced their merger, clients said they would be turning to the combined firm for the services Bronson & Kahn had been unable to offer, co-founder Dan Bronson said. As we ve grown and as our clients have grown their needs have grown, Bronson said in May. It just made sense to move everything over to a firm that could better serve our clients. As for mid-market clients, as opposed to the Fortune 500, they are often seeking a full-service platform from their outside counsel, said Michael Mercurio, a M&A partner at Offit Kurman. His firm, too, has grown throughout the Mid-Atlantic by absorbing smaller practices. In the insurance industry, for example, clients are looking to work with smaller panels of law firms, Cullen, of Cipriani & Werner, said. There s also the universal, but complex matter of planning for the future. My presumption with law firms is that smaller law firms, ones that don t have succession plans, or don t have a next generation of leaders, are looking to reduce their risk by not signing new leases, not having to take out another line of credit, Mercurio said. Avoiding Stagnation Meanwhile, midsize firms are doing what they can to gain market share, both by practice area and geography. Once clients see and understand that the law firm is either treading water or stagnating, it s really hard to retain clients, but also retain lawyers, said Barry Genkin of Blank Rome, an M&A lawyer who has worked on several law firm combinations. Mergers signal to clients, lawyers and potential lateral hires that a firm is thinking about the future, and looking to improve its services, he said. For Offit Kurman, a recent combination by affiliation in New York was key to

4 retaining and expanding the firm s business there. The smaller firm, Menaker & Herrmann, not only doubled the head count of Offit Kurman s New York office, but gave the firm a physical foothold in the city, after the real estate portion of another New York affiliation did not come through. If not, I don t know what we would have done, chairman Ted Offit said at the time. Similarly, Philadelphia-based Dilworth Paxson was seeking a physical presence along the corridor between Philadelphia and New York when it acquired 10-lawyer firm Smith, Stratton, Wise, Heher & Brennan, which had offices in Princeton, New Jersey, and New York. Paul Hughes, managing partner of Connecticut-based Wiggin and Dana, said his firm looks at potential mini-mergers periodically. The firm would like to grow its Washington, D.C., presence in particular, he said, and a combination might be the right way to do that. But that doesn t mean picking up just any small firm in the area. The idea of merging in bodies for the sake of bodies does not thrill me. If one plus one equals two, one is fine, Hughes said. Because of course, not every deal is what it seems. Midsize firms run the risk of doing too many combinations and outgrowing certain lawyers, D Amore said. And firms eager to grow sometimes lose their discipline under the pressure to compete, Genkin said. The pitfall is losing your identity, he said. A lot of people at small law firms are there because they wanted to be at a small law firm. Goodnow, of Fennemore Craig, called the current merger mania an identity crisis. While some appreciate the autonomy of the midsize firm environment, others are watching the industry stratify and worrying about falling into a widening gap between Big Law and niche boutiques. So they push toward growth at all costs. Midsize law firm consultant Jeff Coburn has said midsize firms should also be wary of combining with a small firm that lacks a cohesive practice. "Some of these small firms literally are not firms. They re individuals strung together by telephone wire, he said. Hughes, of Wiggin and Dana, and M&A lawyer, noted that the greatest

5 potential pitfall in any type of business acquisition is a lack of due diligence. Without it, he said, you don t know what you re buying. There s always the concern that you re not getting what you thought you would get. There are different breakpoints for firms with respect to the investment they have to make from an operations standpoint and putting their own money into the firm. The partners at those firms, that s their money they re putting into that." - Frank D'Amore, legal recruiter