26 June 2006
Just five years ago, in 2001, Pittsburgh firm Reed Smith had 594 lawyers, who brought in $193m (£104.89m), with an average profit per equity partner (PEP) of $335,000 (£182,000).
By January 2007, when the firm's merger with Richards Butler is completed, assuming there is not too much trimming, the combined law firm Reed Smith Richards Butler will have more than 1,300 lawyers with revenues in excess of $750m (£407.62m). Average PEP for Reed Smith last financial year was $800,000 (£435,000).
But there's a piece of the jigsaw missing - Hong Kong. Richards Butler Hong Kong would add another £30m to the top line and, with its level of profitability, would also add a healthy chunk to the bottom line. But the likelihood is that Hong Kong will maintain a separate partnership.
Reed Smith chairman Greg Jordan grudgingly admits: "We would be delighted to continue the current relationship with Richards Butler Hong Kong as part of the combined firm. We need to make sure we have an arrangement where the clients get a seamless service. In the current arrangement they feel that the clients have gotten that service."
But before trying to bolt on Hong Kong, Reed Smith will have a big enough job integrating Richards Butler. The jury is still out on all the major transatlantic mergers. Jones Day's 2003 merger with Gouldens resulted in the
axe falling on a tenth of its fee-earners within three months of the deal being signed. Three years later, a vast number of the original Gouldens partners have left. The merger between Mayer Brown & Platt and Rowe & Maw in 2002 to form Mayer Brown Rowe & Maw (MBR&M) has also resulted in a number of departures from the UK firm.
Jones Day has grown 64.6 per cent in the past five years from 1,298 lawyers to 2,136. The firm has also boosted its revenues by 90 per cent from $675m (£366.87m) to $1,285m (£698.39m) but average PEP during that period has slumped 7.1 per cent from $775,000 (£421,000) to just $720,000 (£391,000).
During the same period, MBR&M has grown its lawyer numbers by 53.2 per cent from 853 to 1,307. Revenue has grown 83 per cent from $533.5m (£289.96m) to $980m (£532.63m). It has boosted average PEP 35.2 per cent from $725,000 (£394,000) to $955,000 (£519,000). Reed Smith Richard Butler's equivalent figures are 119 per cent growth in lawyers, 289 per cent growth in revenue and 139 per cent increase in PEP. That's a solid performance by any standard.
Of course, five years ago Reed Smith was a much smaller firm than either MBR&M or Jones Day. Its PEP has only just overtaken Jones Day and lags behind MBR&M. But Reed Smith is closing the gap - and it has momentum.
Look at Jordan's CV: during the past five years, Reed Smith has managed to integrate California's Crosby Heafey Roach & May in 2003 and UK firm Warner Cranston in 2001. Warner Cranston added 55 lawyers and two UK offices, while Crosby added five offices and more than 100 lawyers in both northern and southern California. Reed Smith has also absorbed 25-lawyer New York firm Parker Duryee into its Manhattan office and has added a number of sizeable teams in France, Germany and elsewhere around the US. All this has come without any negative impact on the bottom line - quite the contrary in fact.
Jordan inevitably says he expects a similar upturn in the merged UK operation. He says: "You can't underestimate this. The enthusiasm and excitement of this change does cause people to be fully re-energised and we expect to see that in both firms.
"Secondly, there is already, even before the vote, an influx of new business. The new business that the combined firm attracts as a result of the combination tends to be at a higher value level."
One of the things that Reed Smith has going for it is Jordan himself. If you ask senior Richards Butler partners why they think the combination is a good one, it always comes back to Jordan.
Jordan grew up in the small town of Wheeling, West Virginia, as did Orrick Herrington & Sutcliffe's charismatic chairman Ralph Baxter, and both share that evangelical zeal for their firms that has been essential as they globalise. Indeed, Jordan acknowledges: "Ralph is a great leader and role model for me."
Both inspire the same sort of loyalty and respect - almost awe - as DLA Piper Rudnick Gray Cary's managing partner Nigel Knowles. Leadership is a vital ingredient of a smooth merger, and the personality and enthusiasm that leaders such as Knowles, Baxter and Jordan share goes a long way towards keeping the troops happy when a firm is going through a vast amount of what can be unsettling change.
If one is to contrast these figures with the leaders of Jones Day or MBR&M the differences are clear. While both have strong leaders in the UK in the shape of Russell Carmedy and Paul Maher respectively, their US management teams are more anonymous. And both Carmedy and Maher are as likely to inspire through fear as through fondness.
If Jordan is the charismatic cheerleader, then director of strategic planning Michael Pollack is the details man. "I'm pretty involved with the day-to-day nuts and bolts of things," says Pollack.
As reported by The Lawyer last week, he is moving to London, with his family, to oversee the integration of Richards Butler and has a lot of experience of integrating law firms, but this will be his biggest project yet.
"The most important thing is we go in with the attitude that neither firm is necessarily better than the other. Sometimes we use the Reed Smith way of doing things and sometimes we use the other firm's way of doing things. We never come at it with a dogmatic approach. We've learnt a lot from our merger partners," says Pollack.
Richards Butler chairman Paul Johnston says: "We've taken comfort from the things that Reed Smith has done, or rather the things that it hasn't done, such as in London, when it took on the team from Warner Cranston, which pretty much remains intact. The second thing was the deal with Crosby Heafey in California. They are very, very positive about what has happened to their business since the merger."
Jordan says: "Our expectation is that the profitability trendline will continue without any serious re-engineering of the equity ranks at either firm or the combined firm."
All of Richards Butler's equity partners will become equity partners at Reed Smith and all the non-equity partners will join as fixed-share partners.
Richards Butler managing partner Roger Parker, who will become Reed Smith Richards Butler European managing partner, says: "This is a genuine merger. We're merging profit pools. There have been a number of deals between US and UK firms that have not managed to do that."
One problem that Pollack has not had significant issues with so far is finding a single home for two firms which already have significant real estate commitments in the same city. Reed Smith has 30,000sq ft in Minerva House, by Borough Market (and an office in Coventry), while Richards Butler occupies 82,000sq ft in Beaufort House in Whitechapel.
The plan is to move both in under the same roof, but neither site has the space to house both firms. In the meantime, the firms will move people around to get practice groups acquainted.
"Property has the potential to be the biggest issue," says Pollack. But, he adds: "The first thing we have to do is work out who fits into which practice group and who the leaders of the groups will be."
That leadership team has raised the eyebrows of a few sources with close links to the firm. It has an unwieldy look, with Reed Smith UK managing partner Tim Foster reporting to Parker, who joins the senior management team, and Johnston joining Reed Smith's UK senior partner Ian Fagelson on the executive committee.
Johnston counters this scepticism. "The executive is on the back seat. It's a check and a balance to the management team, which makes the decisions. It just ratifies those decisions," he says.
The power is concentrated in the management team, which comprises Jordan, Parker and Pollack, together with business and regulatory department head David Dennino, litigation head Tom McGough and director of legal personnel Eugene Tillman.
"Greg is clearly the cheerleader, but one of the great things about our management team is that ideas are flying around among us all the time," says Pollack.
Jordan adds: "Reed Smith doesn't really run like the military. It's a team thing."
When you are stuck in a room with the lot of them, it certainly seems like it could be unwieldy, but there is no doubting who the boss is. Jordan may not be an axeman, but he is the one with all the power.