Talk of firms merging could be a sign of the times

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The Minnesota legal community last week learned that two of Minneapolis’ largest firms are considering consolidating — an increasingly common phenomenon, both locally and nationally.

Leonard Street and Deinard, Minnesota’s third largest law firm with about 155 attorneys, has been discussing a merger with Fredrikson & Byron, the state’s fifth largest law firm with about 145 lawyers. A merger of the two firms would give the 300-lawyer Twin Cities office of Dorsey & Whitney some serious competition. (Dorsey & Whitney has 600 attorneys in its offices nationwide.)

Both Leonard Street and Deinard and Fredrikson & Byron have business-oriented practices whose legal services include banking, employment, corporate and tax law.

According to Lowell Noteboom, president at Leonard Street and Deinard, the two firms have been conversing intermittently about a possible merger for the past two or three months.

Warren Mack, chairman of Fredrikson & Byron, said that his firm has also considered mergers with firms in other regions but believes that an in-market merger would have the “potential for the greatest impact,” and would better benefit its clients in the Upper Midwest.

Both Noteboom and Mack emphasized that at this stage the talks are “conversational,” “preliminary,” and “exploratory.” There is no deadline set for completing a merger — both firms said they are moving deliberately and cautiously in their discussions.

“It would be a mistake to create expectations that the merger is a done deal,” cautioned Mack.

Attorneys in other local firms did not find news of the proposed marriage surprising.

Steven C. Eggimann, managing partner of Meagher & Geer, P.L.L.P., pointed out that Leonard Street and Deinard has been acquiring law firms over the last decade, and Fredrikson & Byron, itself the product of a merger many years ago, has considered mergers with a number of other candidates, including the now-defunct firm of Doherty Rumble & Butler.

“[A merger between Leonard Street and Deinard and Fredrikson & Byron] would be consistent with the trend toward consolidation in the legal community,” observed Eggimann.

In-market merger

Executives from Leonard Street and Deinard and Fredrikson & Byron said that joining forces could bring the potential for competitive advantage both regionally and nationally.

Mack predicts “dramatic changes” in the way law firms deliver services in the next 10 years, and observed that mergers provide inherent advantages in terms of resources, breadth, and depth of practice. An in-market merger, like the one proposed between the two Twin Cities firms, would likely have a greater impact in the Upper Midwest than would a merger between firms from geographically diverse areas, added Mack.

“You ought to explore all the strategies when you’re at the top of your game, and an in-market merger with another strong firm is one of those strategies,” said Mack. Mack explained that his firm is in a particularly strong position at this time because of its strong international practice group and its developments in the health law arena, including the addition of health law consultants. (Fredrikson & Byron has offices in Minneapolis and London, and affiliate offices in Mexico City and Warsaw.)

Noteboom said that Leonard Street and Deinard is “very committed to a regional focus” and believes the merger would further their goal of building a greater presence in the Upper Midwest.

“Good law firms try to be aware of opportunities in their own communities and in their own region for better ways to serve clients,” said Noteboom, adding that one of the firm’s primary goals is serving the needs of the region rapidly growing businesses. (Leonard Street currently has offices in Minneapolis, St. Paul and Mankato.)

According to Noteboom, a merger would allow the firms to provide a greater breadth of practices and greater depth in particular practices.

“Size offers the ability to have a complete range of the specialties that clients need and to have more depth in those areas of specialty,” he explained.

Continuing trend

The proposed merger is indicative of a continuing trend among law firms across the country. Law firms have tended either to focus on a specialized boutique practice or grow to offer a broader range of services.

During the mid-’80s through the mid-’90s, a trend developed in which large firms would swallow up boutique practices. But as the new millennium is ushered in, it has become far more common for large firms to incorporate practice groups from other large firms — or to simply join two large firms together into one mega-firm.

According to Mergerstate, which tracks major deals nationwide, mergers of law firms are on the rise. Major law firms were involved in 18 mergers in 1999, up from 10 the previous year and five in 1997.

While Minnesota has not been the merger capital, the state has not been wholly left out of this trend. About three years ago, the Popham Haik law firm became a part of the Chicago-based firm of Hinshaw & Culbertson. Last year, 10 attorneys left the Twin Cities firm of Doherty Rumble and Butler PA — at the time the state’s oldest law firm — and joined the firm of Lindquist and Vennum PLLP.

The migration substantially strengthened Lindquist and Vennum’s agribusiness and environmental practices. However, the Doherty firm did not fare as well. Within several months of the departure of the 10 attorneys that joined Lindquist and Vennum, Doherty Rumble & Butler closed its doors at the end of June 1999, laying off 231 employees, including 90 attorneys from its offices in the Twin Cities, Denver, and Washington, D.C. (At the time of the defections to Lindquist and Vennum, the Doherty firm was still suffering the effects caused when another of its top attorneys, Ralph Morris, left to join Dorsey & Whitney in December 1998.)

Interestingly, before the Doherty firm’s 43 partners decided to close the law firm, Doherty Rumble and Butler had been exploring a merger with other firms, including not only Fredrikson & Byron, but also Oppenheimer Wolff & Donnelly. (According to firm officials, no merger took place because there was not a good fit with the law firms interested in such an alliance.)

Critical mass

Daryle L. Uphoff, managing partner at Lindquist & Vennum, said that he has observed increased consolidation in the legal marketplace in the past several years, though usually the firms involved are not based in the same city.

“The ‘bigs’ seem to be getting bigger,” observed Uphoff, adding that mergers can give firms a strategic advantage by opening up geographic markets and allowing firms to gain or strengthen practice areas.

In order to offer a broad range of general corporate and commercial services, law firms need to develop a number of specialties, including ERISA, securities, intellectual property, and employment, observed Uphoff. In order to be successful in the broad range of specialties that corporate clients demand, law firms need to have a “critical mass” and the ability to cross-market, he said. While that “critical mass” may have been 25 to 50 attorneys 20 years ago, today’s “critical mass” is closer to 100 attorneys, and could be between 150 and 200 attorn
eys in a few years, continued Uphoff.

Eggimann predicts a move toward globalization for the nation’s largest firms, regionalization and nationalization for mid-size firms, and mergers between smaller firms in order to compete in the market and provide clients with the services they demand. At the same time, solo practitioners and very small firms will survive because they typically draw from a much different client base and specialize in different types of services, added Eggimann.

While the effects of some of the biggest recent law firm mergers have not been felt in Minnesota, Uphoff guesses that newly merged firms may be taking some business from other firms because access to clients is doubled and the ability to cross-sell is heightened. But in-city mergers could be a different story entirely, he continued.

Eggimann observed that “it seems logical that a merger would require other firms to seriously consider acquisitions and mergers of their own.” Clients are either asking for or accepting larger law firms that are able to provide a broader range of legal services, he continued. Even though the trend toward merged law firms appears to be client driven, “law firms would not be [merging] if it were not financially beneficial to them,” Eggimann added.