In the News Legal Week Global

Outgrowing The Windy City

With corporate HQs leaving the city, it is no surprise that Chicago's top tier firms are looking beyond their hometown. They know where they want to be; it is how they get there that they disagree on, says Felicity Clarke.

Transatlantic expansion is all the rage in the Windy city. Most of Chicago's legal heavyweights have already made the leap across the pond and, for the few that remain, time is of the essence. 

"Time is starting to run out for US law firms," says Winston & Strawn chairman James Thompson. "We have decided that we need to be in London. Our clients are telling us that we need to be in London. So London is on the front burner."
As home to four of the world's six biggest law firms (measured by revenue), London has been the obvious starting point for Chicago's top tier. Their ways and means of getting there have differed but the game plan has been the same - make a base in London and use it as a springboard into Europe. Markets may be down at the moment, but with a forecast for the Continent to be a fertile ground for M&A activity and public financing, all eyes are on Germany and France. Asia comes next in the plan - Hong Kong, Tokyo and Singapore in particular - but the first priority is Europe, and for Europe you need London.
"London is the building block, the heart and soul of international expansion," says Kirkland & Ellis partner Kevin Evanich.
Coming in at the later stages of the expansion game, Winston & Strawn has the advantage of being able to scrutinise its rivals' strategies; a near form of hindsight.
"Mayer Brown & Platt's merger with Rowe & Maw has been instructive," says Thompson. "We are stepping up the pace for opening in London and considering both options of merging and establishing a green field office. Whichever approach seems most reasonable by the end of the year, we will do."
So what has changed in the US' second-largest legal market to make the top tier venture abroad? Can the Midwestern heartland no longer sustain the margins sought in the higher echelons of its legal market?
Chicago has come a long way since its steel, freight and meat packing days. Founded as a trade and transport centre, the city developed from picking up resources coming in from the west and taking them east. It went on to transform itself into the financial services powerhouse of the Midwest, but with all the consolidation now going on in corporate America, this latter guise is on the wane.
Other than the high profile relocation of Boeing's world headquarters to Chicago last year, many corporate head offices have been vacating the city. Recent losses include Amoco following its merger with BP, Bcom3, the parent of leading Chicago advertising firm Leo Burnett, which was sold to France's Publics, and now with Andersen - one of Chicago's biggest employers - struggling for survival, it could be the next to follow suit.
Tenants have been vacating the banking sector too. "Chicago as a capital markets community has been reduced in scale as a result of foreign acquisition of many of the banks here," says Latham & Watkins corporate partner Mark Gerstein.
"Bank One headquarters are still here, but a number of the smaller banks have been acquired over the years."
The US downturn and 11 September have also left Chicago hurting, but corporate ill health is not the only factor behind transatlantic expansion. It is part of the journey down the road to globalisation on which Chicago law firms have embarked in pursuit of their clients.
"We do not build offices on spec and the hope that if we are there, clients will come," Evanich says. "We wait for our clients to tell us where we ought to be and what the configuration of our services ought to be from that location."
Transatlantic expansion is an integral link in the legal food chain. Without it, a law firm finds it more difficult to attract the high profile clients, who bring in the cutting edge work, which pays the top billing rates, which sustains the margins, which enable the firm to recruit the top class lawyers.
"We do not want to grow for growth's sake," says Evanich.  "We want to grow in practice areas and jurisdictions where we can capture work that is both challenging and lucrative. We see our international expansion strategy as part of the calling card to remain in the game."
Mayer Brown & Platt's transatlantic strategy has dominated recent legal headlines on both sides of the Atlantic. As Chicago's largest law firm, its February merger with London-based Rowe & Maw produced Mayer Brown Rowe & Maw, the 10th largest law firm in the world with 1,300 lawyers and 13 offices. Mayer Brown & Platt had been in London since 1974, but its inability to achieve the critical mass it desired led to a three-year search for a merger partner.
"We were not deep enough in the London market," says chairman Ty Fahner. "So we talked and did a short dance with other London-based law firms, but when we met Rowe & Maw it was easy to put together because the chemistry was there."
Common clients were also there. "Each of us received external validation of the other from clients we had in common," says managing partner Deborah de Hoyos.
"I think it says a lot when clients choose the same law firm and already there is an enormous acceptance by them to look at the capabilities of the newly-merged firm."
A few blocks up town in the Sears Tower resides Latham & Watkins. Although a West Coast firm by origin, Lathams has been on the Chicago scene long enough, and has a regional client base extensive enough, to no longer be considered an interloper. In 2000, Lathams was engaged in its own merger talks, with London-based Ashurst Morris Crisp. Confidence was high and a mid-year merger was anticipated, but by the spring all merger talks had been called off.
"Although there were differences in culture between the two firms, I do not think they were insurmountable," says managing partner Stephen Bowen. "We were two large firms with great practices and with rich histories and traditions. At the end of the day, it didn't happen."
Mergers are undoubtedly difficult things to pull off and there is no clear reason why Mayer Brown Rowe & Maw reached sign off but Lathams did not. Size must play a part - 274-lawyer Rowe & Maw, although big enough, is more manageable than Ashursts was two years ago with 500-odd lawyers. Chemistry is also important. "It sounds corny and simplistic but it's true, the chemistry has got to be there," says Fahner.
And desperation must count for something - while Mayer Brown & Platt spent years striving to boost its London presence, Lathams' organic growth has seen it expand from a small project finance group when it opened in 1990 to 67 lawyers in 2002.
"When the Ashursts merger fell through, we chose to grow internally and through selective lateral hiring," says litigation partner Kevin Russell. "For the moment, there is not another merger partner on the horizon for us in London."
Kirkland & Ellis, Chicago's second-largest law firm, has followed an expansion strategy of the organic variety. When it opened in London in 1994, it was in the same way as in Los Angeles in 1989 and New York in 1990, with a core group of Kirklanders and opportunistic lateral hiring on the side. With 29 lawyers now in the London office, Kirkland & Ellis says it has reached critical mass.
"The London office is self-sustaining and profitable and does quality work for quality clients," Evanich says. "Certainly this office must and will continue to grow. Currently we represent US clients with their cross-border services, but in the long term we want to evolve to be a serious provider of local services."
Kirkland's strategy may be sufficient for its current needs, but whether it will enable the firm to reach a position where it can successfully compete in the local market - achieving, in effect, what Mayer Brown & Platt could not - remains to be seen.
McDermott Will & Emery is confident it can. In London since 1998, it has promised to build a 250-lawyer, full service office by 2004. Its strategy is distinguished by the fact that the office was founded on English partners and an aggressive recruitment drive has been underway ever since targeting local talent.
"We have chosen to expand by laterals rather than by merger, and by not sending US partners to run or populate the London office, because our experience is that, for us, this is the best strategy," says Chicago partner Larry Gerber.
"We would rather have all of the problems associated with growing by individual laterals than all of the problems associated with growing by merger."
Sidley Austin Brown & Wood's strategy has none of the aggression of McDermotts' and, for the moment, Chicago's third-largest firm is quite content with its 60-strong London office.
"We began our transatlantic expansion eight years ago with a significant expansion of our London office and we are proud of the success we have had there," says Chicago partner Thomas Albrecht. "We are considering additional offices in Europe, but we will be quite deliberate and cautious when exploring our options."
Sidleys' caution is understandable given the events of the past year. In April, it merged with New York's Brown & Wood to create one of the largest US law firms with 1,325 lawyers. And then there was 11 September, when Sidley's offices in the World Trade Centre were destroyed and one employee was killed. With the impact of Enron's bankruptcy on multi-disciplinary partnerships in the European legal marketplace still to be revealed, Sidleys is not making any hasty moves.
"Such an environment suggests a cautious approach," Albrecht says.
Of all the Chicago big cheeses, Jenner & Block is the one that truly stands apart. Its national network includes offices in Dallas, Lake Forest, Illinois and Washington DC, but when it comes to anything beyond US borders, the firm has little interest. Like its Chicago rivals, Jenner & Block's clients come first, but these clients, it seems, are not fazed by the firm's transatlantic strategy, or lack thereof.
"I do not buy into the urge to merge," says chairman Jerold Solovy.
"Clients will hire us regardless of our global reach and it does not break my heart to hire another law firm when I need international expertise. Sometimes the best service to the client is to use someone else."
Solovy is fervent about a lawyer's role in the community and critical of his rivals' profit-driven expansion strategies. "The legal profession is here to serve, not to make as much money as possible," he says. "We are supposed to be lawyers, not money-making machines."
Some may think this is a bit rich coming from the chairman of a firm that saw partnership profits rise to $489,000 last year, up from $410,000 in 2000. But then they should also consider the fact that Jenner & Block devoted 5.5% of its billable hours to community legal service last year, ranking it fifth out of 250 law firms in the National Law Journal's pro bono achievers.
For Winston & Strawn, then, venturing across the Atlantic is hardly a leap into the great unknown. With each of its rivals maintaining that its strategy is a success in its own right, if there is to be a moral to this story, it is that there is more than one way of going about transatlantic expansion.
Reprinted with permission from Legal Week Global, April, 2002.