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A Tale of Two Law Firms
Comments () | Published December 8, 2011

In November, Howrey’s top partners hunkered down for three days of meetings at Virginia’s Lansdowne Resort. It was clear that the partners were fracturing into different camps. On the second day, conversations got heated. The group spent the morning listening to Boland, who was head of the committee in charge of pushing lawyers to collect money from clients. Boland was trying to motivate his colleagues to collect as many outstanding fees as they could. He told them that eking out an extra few million dollars could make a significant difference.

After Boland’s presentation, Ruyak took the stage. He stressed that the firm had significantly cut costs and was much better positioned going into 2011. But some of the lawyers weren’t buying it.

Later in the afternoon, the group took a break and a few senior partners took Boland aside in a conference room. Boland had been in frequent communication with Howrey’s primary lender, Citibank. Fears that the bank would pull its financing of the beleaguered firm had been building.

Howrey was on the verge of breaking a covenant with Citibank. Covenants specify conditions that recipients of loans must comply with. When they aren’t met, the bank is alerted to potential trouble. In this case, says Boland, it looked as though Howrey was going to break an agreement to pay off its credit line with Citibank by the end of the month. Boland says he told the partners that during his conversations with Citi, there was no indication the bank was planning to shut Howrey down. And ultimately, Boland says, Citi waived the covenant. Still, the partners couldn’t be placated. When the meeting reconvened, Ruyak faced tough questioning and acknowledged that Howrey might not be able to pay off the credit line in time.

The seven Young Turks were also on the agenda at Lansdowne. They were more optimistic about Howrey’s prospects than many of the veteran partners. But when they got up to explain their vision, it didn’t go well. Wolf says some senior partners felt excluded.

“When the first comment was one of the senior people saying, ‘I’m pissed off that I wasn’t included in this plan,’ that set the tone of the discussion,” Wolf says. “It was all downhill from there.”

There also was no sense of urgency, says Wolf. He says Ruyak said the firm should institute the changes over the next 12 to 18 months. “We said, ‘No—no, this needs to be done now,’ ” Wolf recalls.

Unlike in 2009, when Howrey’s lawyers were shocked that they came in 30 percent below the expected financial performance, at the end of 2010 many of them hoped the firm would underperform by only that amount.

That was wishful thinking. Howrey came in 45 percent short of expected profit in 2010.

Ruyak says operating costs were reduced by almost $40 million between 2009 and 2010. He and other Howrey lawyers say the positive effects of those reductions would have been realized later in 2011 if partners had been willing to hang on a bit longer. But too many had lost faith in the firm.

Howrey’s demise became a self-fulfilling prophecy as partners fled—taking client matters with them—further weakening the firm.

Howrey needed a life raft in the form of a merger.

Down the block at Hogan & Hartson, the idea of a merger was very much on the table, but under much happier conditions. Discussions with Lovells had proceeded throughout the summer of 2008.

After Gorrell and Sherrington’s initial meeting in July, both men brought more members of their firms’ leadership into the conversation. Later that month, Gorrell and Feagles flew to London to meet with Sherrington and Lovells’ managing partner, David Harris. It was imperative that no one outside the small group of firm leaders find out about the discussions. As an extra precaution, Gorrell signed in under a fake name with the security desk at Lovells’ London headquarters. While visiting the office, Gorrell would go by “Mr. Spencer.”

“The initial focus was purely on the business and the clients,” says Gorrell of the talks. “If it didn’t make sense from the client perspective, even though it might otherwise look good on paper, it wouldn’t make sense to waste any time considering it.”

There were, not surprisingly, a number of client conflicts. For two large firms, each with thousands of clients, that was to be expected. But none of the conflicts was a deal-breaker, and the talks intensified in 2009.

Practice heads from each firm began meeting their counterparts. Management drilled down on how to reconcile differences between the firms’ compensation and governance systems.

In November 2009, the full partnerships at each firm met to discuss details of the merger. In mid-December, they voted on it.

After months of build-up, the moment when Gorrell voted to approve the union—a decision that would define his legacy at the firm—passed without excitement. Alone at his computer in his large corner office overlooking downtown Washington, Gorrell entered his vote electronically. In that instant, he felt a number of things—relief and optimism but also anxiety. People were congratulating him, but he couldn’t help thinking the hard work was still ahead.

Gorrell and Harris, Lovells’ managing partner, became co-CEOs of the combined firm when the merger became official on May 1, 2010.

Next: The next chapter


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Posted at 04:31 PM/ET, 12/08/2011 RSS | Print | Permalink | Comments () | Articles