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An Open Window

Across the US, the last decade of the 20th century saw the biggest shake-up of the practice of corporate law in a generation. On Wall Street, the likes of Cravath Swaine & Moore and Wachtell Lipton Rosen & Katz were pushing profitability through the roof, fuelled by the activity of the strongest financial markets in a decade. In California, `start-up' law firms such as Venture Law Group and Gunderson Dettmer Stough Villeneuve Franklin & Hachigian spent the latter part of the decade dismantling the law firm model, and rebuilding it in the image of the new economy. And throughout the decade, a new breed of global law firm - epitomised by the likes of Shearman & Sterling, Skadden Arps Slate Meagher & Flom, and Latham & Watkins - was emerging to join the UK's `magic circle' in a new top tier of international firms.
In Chicago, the effects of the mid-1990s boom years were rather less palpable. The city's economy had always been steadier than those on the coasts, and the extreme heights of profitability and experimental approach to practice management in evidence there were barely seen in the Midwest. "If you look at the fluctuations of the Chicago economy, you will see that the highs are not as high and the lows are not as low as you will see on the coasts," confirms Charles Mulaney, a corporate partner at Skadden Arps' Chicago office.
The local economy is built on both manufacturing - especially steelworking - and services. The city's neighbouring conurbation includes such key manufacturing and services centres as Indianapolis, Milwaukee and St Louis. "If you drew a compass line around Chicago, you would draw in a huge percentage of the entire manufacturing activity of the US," says Al Olson, managing partner of McDermott Will & Emery's Chicago office. "Look at the variety of businesses within and surrounding Chicago. You will see it is virtually recession-proof."
In the boom years, the market may have offered few of the thrills of the East and West Coasts, but, as the economy turns down, Chicago's law firms find themselves in an enviable position.
"Chicago firms were helped by the fact that we were more diversified than a lot of the New York firms," says Winston & Strawn chairman James Thompson. "While capital markets and M&A work was important to us, we were not reliant on it in the same way that the Wall Street firms were. We never relied on technology, which is why we have avoided the problems of many of the West Coast firms. The Midwest economy is diverse, and right now that is a strength."
Indeed, the current dip in business confidence presents an unprecedented window of opportunity for Chicago's major law firms, buoyed up by the wave of litigation that accompanies turbulent economic times, to establish themselves in the key markets of the US and further afield. While in the short term the economy has proved one of the most resistant to the downturn, Chicago's biggest firms have long recognised that the longer-term opportunities for financial development in Chicago are limited. Throughout the 1990s, a significant proportion of the Midwest's major corporates, including Amoco, AmeriTech and Quaker Oats, have merged or been taken over by out-of-town parents, and their power-bases shifted elsewhere.
The loss of these decision-makers has proved a powerful push factor for firms looking to increase their economic strength. "One of the reasons we and other firms in the Midwest have had to expand is because, in the past few years, a number of Fortune 500 companies have moved their headquarters elsewhere," confirms Mayer Brown Rowe & Maw chairman Ty Fahner. "Although the work here remains solid, and has proved quite resilient through a difficult economic time, the fact is that there is a great need for firms that are purely or substantially Chicago-based to move elsewhere."
Accordingly, the past few years have seen an unprecedented period of expansion for Chicago-based firms. Winston & Strawn, Piper Rudnick, Sonnenschein Nath & Rosenthal and McDermott Will & Emery have all pulled off mergers in the past 12 months, and most other large firms in the city have made significant hires outside their home jurisdiction. These come hot on the heels of two of the most significant link-ups of the past decade - Sidley & Austin joining New York's Brown & Wood, and Mayer Brown & Platt merging with London's Rowe & Maw.
Jenner & Block, one of the more conservative firms in Chicago, has spent the past year building a significant corporate practice, through the acquisition of former Kirkland & Ellis partners Robert Osborne and Elmer Johnson. "Litigation has always been a very strong part of Jenner & Block. We needed to recognise that we were putting all our eggs in the litigation basket, or to broaden out," says chairman Jerold Solovy. "There was a consensus among the partners that they wanted to be part of a well-rounded firm. We decided to take the latter approach, and we did so aggressively."
The firm is now considering its next geographical move. "The natural places to look are New York, London and Los Angeles," says Solovy. "Those centres have a great magnetic pull, primarily because of their financial communities, and London is also a great stepping stone into Europe."
Identifying expansion as a goal is one thing: attracting the necessary recruits to achieve it is much harder. While the breadth of Chicago firms' practice bases has made them impressively consistent, they are often perceived to lack a clear identity when entering highly specialised new markets - with the exception of Kirkland & Ellis, whose specialisation in private equity is recognised nationwide. In terms of profitability too, even the leading Chicago firms generally lag well behind their rivals on the coast. Of the top 30 most profitable firms in the US in 2001, only two, Kirkland & Ellis and McDermott Will & Emery, were based in Chicago.
However, at a time when both the East and West Coast economies are languishing in the doldrums, Chicago-based firms looking into new markets have found their buoyant profitability and diversified revenue streams attractive attributes for recruits disillusioned by rocky conditions in their own firms. "When you have firms such as Brobeck [Phleger & Harrison] out there who are just cratering, it puts a lot of good lawyers into the market," says Debora de Hoyos, managing partner of Mayer Brown Rowe & Maw.
In the years since the bursting of the dotcom bubble, California has been one of the most popular targets for Illinois law firms looking for a more benign climate. McDermott Will & Emery chose 2003 to open its first office in San Diego, with the takeover of three-partner IP and biotechnology boutique Campbell & Flores. Two months previously, Kirkland & Ellis launched its first practice in northern California, with a view to capitalising on the emerging leverage buy-out market.
Kevin Evanich, a corporate partner with the firm, says the timing of the move was crucial. "After the crash of 2000, California will eventually come back up," he says. "In the meantime we can build up a talented pool of lawyers who will be serving clients at the top of the market in a few years' time. This is precisely the point in time when very talented lawyers are maybe less busy than they would like to be, and may be freer to make a move than they otherwise would be."
Washington too has proved an attractive market for expansionist Chicago firms, drawn by the capital's opportunities for public law, regulatory, and Supreme Court work. Piper Rudnick pulled off a merger with leading public law boutique Verner Liipfert - previously reported to have been in talks with McDermott Will & Emery - in October last year.
Sonnenscheins also built on public law with the hire of a three-partner regulatory team from Arent Fox Kintner Plotkin & Kahn. "We already had a presence in Washington, but we were not doing the public affairs work our clients needed," says the firm's co-managing partner Jeff Fort. "We have a strong healthcare group that we were looking to build on, and we knew that we would need a much stronger profile in Washington if we wanted to attract the right people."
Sonnenscheins' other, more ambitious, expansion came in New York, with its merger with TMT and entertainment specialist RubinBaum, a move that gave the firm an additional 60 lawyers in the city. The New York market is widely recognised as one of the most vital for US firms to crack. "If you want to compete at the top of the profession you have to be in New York in a big way," Evanich says.
Unsurprisingly, Chuck Douglas, co-chair of newly-merged Sidley Austin Brown & Wood, agrees. "A more significant New York presence was vital to our strategy," he says. "We had successfully built a very good office, but to really have the significant presence and depth of ability we wanted required a lot more than we could get simply from organic growth." The merger gave Sidleys an additional 80 lawyers in New York, and boosted the firm's combined turnover to $715m.
Mayer Brown upped the ante for European expansion last year with its merger with the UK's Rowe & Maw, a deal which gave the Chicago firm a significant foothold in the London market. London is, unsurprisingly, the obvious overseas location of choice for almost every firm that has not already cracked the market. Sonnenscheins - which closed its London operations in 1999 after five years - is widely known to be looking to make a comeback. Winston & Strawn, currently in preliminary talks with five potential merger partners in the UK capital, is looking to have its first London office up and running by the end of the year.
There are even signs that the expansionist fever of the bigger firms is now filtering down to the middle tier. Insurance litigation boutique Clausen Miller opened its first London office in July 2002 after picking up a team of partners from its former alliance partner Hextalls. "The firm had done some work for companies overseas and wanted to expand on that," says Clausen Miller partner Dominick Savaiano. "When those partners decided to leave Hextalls, we saw that this could be an opportunity for us to establish a different relationship [in the London market]."
The `flight to stability' is acknowledged as a significant factor in the ability of Chicago firms to recruit in markets they had struggled to penetrate in better times. "In troubled times there is something in human nature that wants to be close to something that is stable, that has been there a long time," says Olson.
With more and more lawyers on the market in London, New York and northern California looking for just that stability, the Chicago firms have been handed a golden opportunity to catch up with the national and global expansion of their East and West Coast rivals. In this city at least, more than a few fingers must be crossed that the downturn does not turn upwards at too great a pace.
This article is reprinted with permission from Legal Week Global. © April 2003.