NEW YORK (Reuters) - In 2011, Boston-based law firm Bingham McCutchen was hailed in a Harvard Law School case study as a model of how lawyers can get rich by merging with other firms.
Led by Chairman Jay Zimmerman, the 123-year-old firm had emerged from roots in the local maritime industry to acquire at least 10 other firms in little more than a decade. It opened offices around the world, launched a splashy ad campaign and represented clients in sectors ranging from Wall Street litigation to telecommunications regulation.
What seemed to work so well then isn’t working anymore, and the merger frenzy that generated its success may become the agent of its undoing. Bingham is in talks to combine with Morgan, Lewis & Bockius of Philadelphia in a deal that could be approved as soon as this month, and Bingham could file for bankruptcy if the deal doesn’t go through, management has told people at the firm.
In a firm meeting last week, Bingham managing partner Steven Browne told partners that the firm was exploring other options besides bankruptcy in the event the Morgan Lewis deal collapses, such as merging with a larger law firm or seeking commitments from partners to stay intact as one firm and forge onward.
“For a law firm to grow successfully and healthily, it needs to not only acquire the talent, but it needs to integrate it, respect it, nurture it, and bring it into its culture in a smart way,” said Marshall Grossman, who left Bingham in January for a rival firm, Orrick Herrington & Sutcliffe. “It’s in the execution where Bingham failed.” Bingham acquired Grossman’s firm, Los Angeles-based Alschuler Grossman, in 2007.
Poor execution has abounded since Harvard wrote its panegyric, according to interviews with 15 lawyers who have worked for the firm. Key to Bingham’s problems was an inability to integrate hundreds of lawyers from many firms into one culture and business, the lawyers said.
Bingham is comprised of a wide range of practices, from high-end to mid-market, and lawyers haven’t seen eye to eye about which groups should be treated favorably during a tough financial year, these people said.
Bingham also made liberal use of guaranteeing millions of dollars in annual compensation to some newly acquired lawyers, the people said. The payouts can hurt a firm’s balance sheet and cause resentment among lower-paid lawyers.
Zimmerman, 60, declined in an interview to comment on the Morgan Lewis deal.
“You need to be bigger” to compete with firms such as Latham & Watkins, Gibson Dunn & Crutcher and Kirkland & Ellis, Zimmerman said on Wednesday. He said the firm could survive without a deal and be “very lucrative” with 600 to 700 lawyers.
He said Bingham didn’t use pay guarantees more liberally than competitors, and that rivals who were poaching Bingham lawyers were giving out even higher guarantees. He said he didn’t believe that growing through mergers had made the firm less secure.
Bingham also didn’t require its partners to contribute cash upon joining the firm. At many U.S. law firms, capital contributions help glue partners together. Like many other firms,, Bingham borrowed money from banks. Its lenders include Citigroup and Bank of America.
Another firm that grew massive through a merger, Dewey & LeBoeuf, a 1,300-lawyer firm based in New York, went through the largest law firm collapse in history when it filed for bankruptcy in 2012. Dewey had a $100 million line of credit when it sought protection from its creditors.
Bingham’s woes have accelerated this year. At least 24 lawyers had left by the middle of February, including Kenneth Lore, co-chairman of the real estate group and Scott Bluni, co-chair of the intellectual property group. That followed the defection in April 2013 of 11 lawyers from the firm’s securities enforcement team, led by influential partner Neal Sullivan in Washington, who joined Sidley Austin. Sullivan had concerns about the financial management of the firm and felt Zimmerman didn’t have a clear strategy to take Bingham forward, people close to the firm said.
Zimmerman told Reuters in February that some of the departing lawyers might have been misled by head-hunters, while other departures were the result of “actively managing our business.” That same month, Bingham said its revenue fell to $762 million in calendar 2013, down 12 percent from the year earlier.
In March, Zimmerman said he was ceding day-to-day management of the firm to Browne as of June 1, in accordance with a succession plan the firm said it had begun more than three years earlier. Browne declined to comment.
In September, 28 partners including top rainmaker James Roome, many of them from the London, Frankfurt and Hong Kong offices, said they were leaving. Roome, a restructuring expert, is heading for Texas-founded Akin Gump Strauss Hauer & Feld.
That leaves the firm with about 750 lawyers, down more than 200 lawyers from its peak. Revenue in 2013 was about $110 million below its peak in 2010, according to American Lawyer magazine.
Bingham’s merger spree came in part as a response to market forces. When Bingham’s partners elected Zimmerman as their leader in 1994, many thought the firm was too reliant on one client, Bank of Boston, which accounted for a third of the firm’s work and was on its way to being absorbed into larger banks, according to the Harvard case study. Senior partners retired, cash was short and some inside the firm opposed expanding outside Boston.
Consultants were warning leaders of mid-sized firms that their partnerships would have to merge or die, and Zimmerman proved to be a pioneer of the strategy.
“A lot of firms have decided that being bigger is the only criterion that matters. The merger becomes a way of perhaps avoiding, for some time, tougher issues that you might not want to confront,” said Steven Harper, author of “The Lawyer Bubble: A Profession in Crisis.”
Zimmerman, to an extent unusual even in a consolidating industry, took that to heart. During a 12-year stretch beginning in 1997, Bingham acquired another firm every 14 months on average.
By the time it was done, it had swallowed 10 law firms in whole or in part in Japan, Connecticut, New York, California and Washington, D.C.
The mergers came to a halt in 2009, after Bingham absorbed the tax-focused firm McKee Nelson. Zimmerman came to believe that “the firm had finally reached critical mass and finding a good merger partner was simply more difficult,” the Harvard Law case study concluded.
After Bingham acquired McKee Nelson, some lawyers were paid between $4 million and $5 million a year, sources said. That was at the very top of Bingham’s compensation system.
If a lawyer wanted to see the compensation of a colleague who came on board from McKee Nelson, he or she had to make a special request of management, a former Bingham partner said. Other lawyers’ pay was viewable on an internal firm web page, and the difference in transparency bothered some partners.
Also in 2012, the firm was hit with the winding down of several major cases, as well as a slowdown in its securities litigation and restructuring practices. Settlements were reached in cases, which had once generated tens of millions in fees, against Bingham’s clients Anadarko Petroleum Corp and Mitsui MOEX over the 2010 BP Deepwater Horizon oil spill. Bingham’s work concluded defending Olympus Co. in a $1.7 billion accounting fraud investigation, as did a lucrative copyright infringement battle on behalf of Oracle Inc against SAP AG.
The firm’s management discussed cuts in pay and some bonuses were delayed by months, sources said.
Bingham reached out to at least four firms this year to explore a combination, finally reaching a tentative agreement with Morgan Lewis. The Bingham partnership is expected to vote on the deal this month.
“They were in the driver seat, and now they’re the one in the passenger seat,” said Michael Allen, the head of legal recruiting agency Lateral Link. “The industry lesson is: Don’t over-commit. They bit off more than they could chew.”
(story corrects 17th paragraph to show Akin Gump was founded in Texas)
Reporting by Casey Sullivan , David Ingram and Nick Brown. Editing by Alexia Garamfalvi, Amy Stevens and John Pickering