Chicago's influx of national firms puts the wind up locals

Another week, another shake-up of the legal market in Chicago. In the past six weeks, two national firms have moved in to the Windy City, while local players have felt the squeeze.

First came Reed Smith's announcement that it would launch in Chicago by coupling with local firm Sachnoff & Weaver. Then, on 27 November, West Coast firm Paul Hastings Janofsky & Walker opened its doors on North Wacker Drive by taking two local partners from Jones Day.

So why is Chicago so attractive to US national firms? And why now?"It's a thriving legal market," says Duane Quaini, outgoing chairman of Sonnenschein Nath & Rosenthal. "Many large corporations are headquartered here, more than in any other place in America, other than New York."

Kraft, McDonald's, and United Airlines all have bases in the Chicago area, and Boeing moved its headquarters there from Seattle in 2001.

Contrary to many foreign firms' opinions, there is more to America than the East and West Coast. Sidley Austin's chairman Tom Cole points out: "Chicago is the capital of the Midwest." He explains that in addition to local corporates, local firms can serve clients in places such as Detroit - home to America's 'big three' car manufacturers, among others - that would rather come to Chicago than New York.

Also adding to Chicago's buzz is the news that the Chicago Mercantile Exchange (CME) is acquiring its rival the Chicago Board of Trade (CBOT) for £4.3bn. McDermott Will & Emery's Chicago head George Heisler says: "CBOT will be a leader in derivatives, and that's a growing and profitable area for firms."

And yet Chicago is yet to hit the radar of UK firms. Lovells is the only British firm with an office in the city. DLA Piper is there, but by virtue of its American arm. Lovells' US managing partner Joe McCullough says: "Chicago has been overlooked for many years. London powerhouse firms should look beyond New York."

Then again, there are only eight top-20 UK firms in New York. Those that have expanded beyond the Hudson - namely Clifford Chance - are tipped by Chicago's heavyweights as the hot favourites to make a move into Illinois.

But following the firm's withdrawal from the West Coast Clifford Chance's New York managing partner Craig Medwick says there are no plans to move to Chicago. "For the combination of the clients we want and the work we want to do for them, we find we can serve them perfectly well out of New York. Of course, we compete with firms such as Kirkland & Ellis, but they're trying to build up their presence in New York."

Firms that are eyeing up Chicago would do well to follow Reed Smith's example and find a local mid-size firm to partner if they want instant bulk and access to local clients.

Or, says Cole, out-of-town firms will have to lure one of Chicago's marquee practitioners if they are to compete with local firms.

So far, the Chicago stalwarts have the upper hand there: Ty Fahner chairs Mayer Brown Rowe & Maw (MBRM), litigation star Dan Webb is Winston & Strawn's new chairman, and corporate legend Jack Levin is one of Kirkland's top partners.

National firms that moved into Chicago more than 10 years ago, specifically Latham & Watkins and Skadden Arps Slate Meagher & Flom, have made some headway. M&A star Chip Mulaney left MBRM for Skadden 20 years ago, while Latham made headlines recently by hiring the former chief prosecutor of Enron, Sean Berkowitz, in October.

With national players flooding the market, midmarket firms are feeling pressured. Profitable ones are picked off by the national firms, as was the case with Sachnoff. Smaller firms are also partnering up, such as Chicago firm Gardner Carton & Douglas, which paired with Philadelphia-headquartered Drinker Biddle & Reath in November.

McDermott's Heisler says: "Firms that were competitive at 200 lawyers some years ago are now finding it difficult to compete. There's growing competition from Chicago firms, growing competition from out-of-towners and growing demands from clients."

That may be true of most US markets, but with Chicago's current popularity, the city's midmarket firms are particularly pressured to eat or be eaten.