The deal was promoted as a merger of equals, whatever the reality. “Orrick [Herrington & Sutcliffe] is an imperial organisation. People on the Dewey Ballantine side understood that [Dewey chairman] Mort Pierce wasn’t going to end up running the firm. [Orrick chairman] Ralph Baxter was.” This view comes courtesy of a current Orrick partner, who preferred to remain anonymous.
Fears of post-merger inequality in terms of governance are thought to have been the major factor in the failure of the talks, although for its part an Orrick spokesman claims Baxter’s only interest in securing the deal was in creating “a world-class” law firm. “Ralph Baxter’s sole ambition was to create an institutional, economic and strategic framework that would have served the interests of the combined firm,” says the spokesman.
Oh well, at least Dewey can take satisfaction from the fact that, when the talks collapsed, both firms combined equally for the PR. In a joint statement dated 4 January, the firms said they had “jointly decided” to scrap talks on what would have been one of the largest law firm mergers in the world. “No one issue led us to this point,” it added.
Far from being a merger of equals, rarely has the legal market thrown up a deal that was so obviously a mismatch. On paper the firms seemed a good fit. Orrick was supposed to be buying Dewey’s M&A strength and scale in New York, while Dewey would be getting its hands on Orrick’s finance (in particular securitisation) practice and heavyweight litigation capability.
In practice, though, the diametrically opposed cultures of the New York and West Coast-headquartered firms meant this was one deal that was never going to happen.
Now, with the echoes of the failed talks still reverberating around the offices in New York and San Francisco, where the talks were held, and the private mud-slinging getting into top gear, the inequality between the two firms is likely to become only more apparent. The immediate future may be uncertain, but the consensus is that it will be Orrick that emerges the stronger.
“I don’t think it’s done Orrick any harm,” confirms a merger expert. “Maybe one or two firms will be a bit more nervous about talking with Ralph Baxter in the future, but Orrick will continue to grow. I’d be much more concerned if I were Mort Pierce.”
The warning signs about the viability of the Dewey-Orrick deal came early. As summer 2006 ended, news leaked out that the firms had entered merger talks, but in a statement (as reported on www.thelawyer.com, 12 September 2006), Pierce admitted: “There’s much that needs to be discussed, so it’s still premature to speculate on a potential outcome at this time.”
A month later, and with the news now out, both firms agreed to take the controversial step of making an announcement about the merger. The firms’ management recommended the merger to their respective partnerships, as reported on www.thelawyer.com (25 October 2006). But neither side ever got to vote on the deal.
According to the management of both firms, they had resolved most of the major issues in early autumn. “At that time we were optimistic that we were going to get a deal,” says Dewey executive committee member Jeffrey Kessler.
Indeed, Dewey London managing partner Fred Gander told The Lawyer: “We’ve cleared the major issues such as firm name and senior management and now we’re getting down to the nitty-gritty.”
Over the course of the autumn the two teams began to work up specific documentation. “That led to certain issues,” says Kessler. “The concept we thought we’d signed up to was a merger of equals. The new firm would have embodied the best of both. But Orrick’s management had a different view of that.”
The dispute centred on post-merger governance and the structure of the board. Sources close to the talks say that “all along” it had been presented to Dewey that the representation on the board would be equal, with five places each. “Then Orrick wanted to add [European managing partner] David Syed, so we added [London head] Fred Gander,” said the source. The issue was never resolved.
The talks, by now stalling, continued well past the Thanksgiving holiday and into Christmas. They extended through the holiday period, at which point the looming 1 January vote on the deal was put back. By 4 January the deal was off.
“Ultimately,” says Kessler, “we didn’t feel we could continue.”
For its part, Orrick will only officially claim that “the decision [to end the talks] was mutual”.
Since the collapse of the talks, Orrick has maintained what it would like to be thought of as a dignified silence (Baxter refused to speak to The Lawyer for this article). Its official line is that it has “taken the high road” and decided not to comment on the reasons for the talks ending.
Unofficially, on Orrick insider maintains the truth is that there was no one reason. “There were maybe 10 or 12 [reasons],” he adds. “And if we gave specifics or examples they’d be picked up and have importance attached to them, which wouldn’t be right.”
Privately, sources close to the firm are willing to be a little more expansive. There is no doubt that the departure of such a large number of partners from Dewey in such a short space of time, in particular two of the three M&A protégés handpicked by Pierce, Jack Bodner and Michael Aiello, was a major factor.
“What was worse was that Pierce was surprised by it,” says a source close to the talks. “He was completely blindsided. That doesn’t inspire confidence that the large-billing, 3,300-hours-a-year managing partner has maintained the connection with his lieutenants. Where’s the collegiality of the partners?”
Losing more than partners
It is a reasonable question. Dewey’s management would appear to have underestimated the level of resistance from the wider partnership on an issue that was never put to a vote, but which was presented, at least publicly, as a done deal. Which raises an even more pertinent question, and one that until now has not been answered: what prompted such a large exodus of Dewey partners? Clearly partners had concerns about the look and feel of the firm’s management post-merger, but what else?As the merger deadline approached, a slew of Dewey partners – 11 in three weeks – deserted their firm rather than stick around to face an uncertain future at the combined, $1bn (£506m)-plus Dewey Orrick.
Of the 11, most either failed to return calls or were not prepared to go on the record, with the exception of New York restructuring head Alan Gover, who joined White & Case. Gover, for his part, claims his reasons for leaving had “nothing” to do with the merger.
So what caused them all to jump ship? In most mergers the thorniest issue is often labelled ‘cultural differences’. And for culture, read money. At the end of the 2005 financial year, Dewey had a total of 135 partners, of which just 25 were non-equity (18.5 per cent). Orrick, in comparison, had 279 partners in total, with 130 being non-equity (almost 50 per cent).
It is understood that it was Orrick’s use of fixed-capital partners that was a key stumbling block to securing the deal. Dewey sources claim that, from the start of the talks, the firm had made it clear that it was not willing to convert a significant number of its equity partners into fixed-share, allegedly a requirement of Orrick’s.
“It was an unacceptable proposal to us,” says the source. “I think we were fully capable of merging the compensation systems based on the financials, it was just their philosophy that we couldn’t sign up to.”
One New York-based recruitment consultant says: “Dewey Ballantine had agreed to de-equitise a number of partners, but Orrick wanted more.”
Another factor was the disparity between the two firms’ remuneration systems. Dewey’s system for equity partners is a modified lockstep with a significant bonus element. Orrick’s, in contrast, is entirely merit-based with no lockstep element, in which the remueration is set by a committee chaired by Baxter.
There are 12 tiers in Orrick’s compensation system, ranging from primarily fixed-income partners to those with a much greater share in the annual profit of the firm. Although, as one Orrick partner claims, “everyone gets a vote, everyone is equity”, there are significant gradations. A number of lockstep-based Dewey partners may have felt that, under the aggressively managed Orrick system, their remuneration would suffer.
Dewey’s pension problems also point to the cultural differences between the two firms. As reported by The Lawyer (22 January), Dewey’s unfunded pension obligations, based on an historically generous partner scheme, is currently $89m (£45.04m). Orrick has no comparable partner pension scheme and consequently equivalent pensions deficit. The issue was to have been addressed partly with the assistance of Orrick had the deal gone through, with the firm contributing at least $25m (£12.65m). However, the exit of so many Dewey partners meant the legacy partners were facing increased pension obligations. In early Janurary, renegotiations stalled. As an Orrick source close to the deal puts it: “The economics of the deal changed and that was probably the primary event behind the talks ending.”
This comment refers not only to the increased pension obligations, which were not a deal breaker, but also to the fact that Dewey’s New York M&A capability had been reduced significantly by the departure of so many partners. “Orrick was supposed to be buying M&A strength and scale in New York in this deal,” says the source. “Suddenly the deal’s economics have changed and you’re looking at less value for your money.”
In other words, there had been an erosion of the three prongs that are critical in any merger deal – strategic, economic and cultural. This impacted negatively on the strategic analysis.
The partner exits had an impact on future issues at the combined firm. “We were losing younger partners,” says the Orrick partner. “Where was the successor to Mort in M&A?”
In fact, the touchstone differentiator between Dewey and Orrick boils down to two people: Pierce and Baxter. Stylistically, the two could not be further apart.
Pierce is a self-confessed workaholic – a low-key, pensive, old-style Wall Street working lawyer who routinely bills in excess of 3,000 hours a year. “No one has a bad word to say about Mort, but you’d be hard-pushed to describe him as a people person,” says one colleague.
The closest The Lawyer could get to criticism of Pierce came courtesy of a current Orrick partner, who says he works “a grotesque” number of hours. “It’s the New York mentality,” adds the partner. “There’s no respect for management. Here we have a huge respect for managerial skills.”
And few would deny that those skills are personified in Baxter. He is the pioneer of the law firm leader as full-time manager, a cheerleader for McKinsey-influenced managerial techniques, intimately familiar with his business’s operations, numbers and marketing strategies.
“He’s a law firm visionary leader,” says one management consultant. “And to be fair, he’s delivered.”
Pierce and Baxter are, if you like, substance and style. Had the deal gone through, the combined Dewey Orrick might just have got itself the perfect combination of what it takes to run a global law firm. The combination of the introvert and the extrovert might have worked. But in the end it came down to control and the inability to cede it. It was inevitable that Orrick, the larger firm, would seek more representation on the combined firm’s board. But this was a sticking point Pierce and his team were unable to sell to their partners.
The irony is that the Dewey-Orrick deal would have not only cemented one of the world’s largest law firms, but a six-year courtship by Baxter of Pierce. According to numerous sources, Baxter has been trying to hire Pierce for years.
Post-merger the disparity between the two firms would likely have been thrown into sharp relief. Orrick’s year-end figures showed a revenue increase of 19 per cent to more than $660m (£335m) and a 15 per cent rise in profit per partner, up from $1.24m (£630,000) to $1.43m (£725,000).
Dewey’s figures, to its September 2006 year-end, were also positive -indeed, its best year ever. Average profit was up by 14 per cent, from $1.23m (£81,000) to $1.4m (£920,000), while firmwide revenue topped $400m (£261.96m) for the first time at $408.2m (£267.33m) versus $392.5m (£257.05m) for 2005.
But it is Dewey that will have been most weakened by the seven-month upheaval of merger talks. The ending of the talks has failed to put a lid on the departures. On 17 January The Lawyer broke the news that Dewey was losing one of its key London capital markets rainmakers, Camile Abousleiman, to Leboeuf Lamb Greene & MacRae, along with fellow partner Louise Roman Bernstein.
“For a partner, once the process of leaving begins and the momentum gets going, it’s hard to stop,” says a New York headhunter.
Dewey’s Kessler says his firm’s objective to be “a world-class competitor in corporate, litigation and tax, with an appropriate global footprint” remains. With the talks over it will aim to achieve that via lateral group or offices hires, but not with a major merger.
“Nobody here wants to think about a merger now in relation to our strategy going forward,” confirms Kessler. “It was never an objective of Dewey Ballantine, we were just presented with an opportunity that we considered.”
Dewey still has a name that resonates on Wall Street, and perhaps its management has had a few useful pointers. According to one insider, Pierce was overheard saying recently: “I’ve learnt a few things after this. Perhaps I should focus on my administrative responsibilities instead of billables.”
But that may be too little, too late for Dewey. As one consultant puts it: “Four to five years ago, if you’d said that Dewey was going to merge with Orrick you’d have been accused of smoking dope. It shows how far Orrick has come and how little Dewey has progressed.”