Welcome back to the Big Law Business column. I’m Roy Strom, and today we look at what’s causing a period of severe instability among major law firms. Sign up to receive this column in your Inbox on Thursday mornings.
Big Law is wrenching its way through a period of disruption.
Distressed law firms are in merger talks. Firms that out-performed others during the pandemic boom are laying off lawyers and delaying start times for new associates. A handful of aggressive firms are making splash hires from rivals, rocking competitors.
The tricky part is finding what ties it all together.
Here’s an attempt: After years of out-performance, a handful of large, diversified firms are far better equipped than smaller rivals to withstand a market lull.
Years of compound growth doesn’t just make the good times roll—it turns the lean times into an opportunity to strike. Some firms are doing just that.
For others perceived as distressed, the tough times are a nerve-wracking period of potential destabilization.
“It’s the era of the storm,” said Jim Jones, senior fellow at the Center for the Study of the Legal Profession at the Georgetown University Law Center.
Law firms are always vulnerable to departures, but the risk grows when firms fail for years to pile up returns for partners.
Shearman & Sterling and Stroock & Stroock & Lavan lost important partners to stronger competitors, and those moves destabilized both firms.
Stroock saw more than 40 restructuring lawyers decamp for Paul Hastings a year ago.
Shearman’s story isn’t as straightforward, but the firm has seen partners depart to firms including King & Spalding, Gibson Dunn & Crutcher, Paul Hastings, and more.
The two firms also didn’t keep up with industry growth.
Stroock revenue had largely stalled, with fiscal 2021 results essentially the same as 2016. The firm’s average compensation for all partners (a metric that strips away potential “equity” partner gimmickry), had grown about 21% from 2016 to 2021, AmLaw data show.
Paul Hastings—which hired those 40 Stroock lawyers—was headed in the opposite direction. Revenue surged 46% from 2016 to 2021 and average partner compensation jumped 74%, according to American Lawyer data.
Such growth adds up to real money, making the hires easier for Paul Hastings to digest. The firm was paying its average partner about 2.5 times as much as Stroock did by 2021. That’s up from about 1.7 times in 2016.
At Shearman, revenue was largely flat from 2016 to 2022. Its average partner compensation dipped by about 7% in that period, AmLaw data show.
Now Shearman and Stroock are tied to possible mergers. Shearman is nearing a vote on a merger with Allen & Overy, while Stroock has been in discussions with multiple firms.
With all this upheaval, the sense from managing partners I’ve spoken with is that something has changed in the market. More firms are willing to throw money around to aggressively poach partners. And no firm feels particularly safe.
“The market is out of control, and it feels like all firms, no matter how strong or profitable, are at risk of other elite firms willing to offer lavish, extravagant, irrational amounts of money to lift partners in strategic practice groups,” one managing partner at a Top 25 law firm told me this week. “No one is immune. The world has just become this lateral playpen.”
Paul Hastings made another big move this week: Hiring three up-and-coming partners from Cahill Gordon & Reindel, historically one of the most profitable firms in the country.
Cahill has a niche practice that, as I’ve written before, dominates in ways law firms rarely achieve in any market. But the business is struggling in today’s financial markets. High-yield debt issues, where Cahill has represented more managers than any firm for at least a decade, fell off a cliff last year and are still languishing.
Cahill’s market share has barely slipped, but the market isn’t providing the work it once did. The firm’s revenue fell by nearly 20% last year while profits per equity partner plunged 27% to about $4 million, AmLaw reported.
At least eight partners have left Cahill this year, joining White & Case, Latham & Watkins and Paul Hastings.
Cahill’s situation highlights the difficulty firms have relying on a small set of practices.
That dynamic has also led to struggles in tech-focused Silicon Valley firms like Gunderson Dettmer, Goodwin Procter and Cooley. Two years ago, those firms were riding high off the boom in startups and venture capital funding. Now they’ve joined their client base in laying off employees.
All of this holds a message of caution for law firm leaders pursuing ambitious growth: Today’s growth guarantees little about what comes next. And partners may wind up valuing consistency more than an all-out growth strategy.
“It’s all up for grabs,” another managing partner at a major firm told me last week. “Nobody wants their career careening from guardrail to guardrail. They don’t want huge peaks and valleys. They want stability.”
Instead, the Big Law market is experiencing turbulence. Buckle up.
Worth Your Time
On Law Firm Growth: Jeff Ranen has big-time growth in mind after leaving Lewis Brisbois with about 140 lawyers, Justin Wise and Tatyana Monnay report. Barber Ranen expectes to grow to as many as 300 lawyers in the next three years and expand beyond labor and employment law.
On Lawyers in India: Law firms are exploring opening up offices in India after the country relaxed rules about foreign lawyers operating in the nation, Menaka Doshi reports. But much uncertainty remains, including from ongoing protests by Indian lawyers.
On Litigation Finance: Louisiana is advancing legislation to require disclosure of litigation finance agreements, making it the latest in a string of states to clamp down on the lawsuit funding tool, Emily Siegel reports.
That’s it for this week! Thanks for reading and please send me your thoughts, critiques, and tips.
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