Is Bingham about to fall victim to its own strategy?
Since 1994, the firm has leapt from a regional firm that worked almost exclusively with the Bank of Boston to one of the fifty largest firms in the world. The impetus behind this expansion was a series of about ten mergers over the course of sixteen years. The firm picked up productive but possibly struggling boutiques and mid-size firms, growing from a 200-attorney firm in 1994 to an 850+ attorney firm in 2009.
How did Bingham reach its current state? Let’s look at the history.
Bingham has expanded through various combinations and acquisitions. In 1995, Bingham head Jay Zimmerman recruited a real estate practice group to join the D.C. office, which had only three attorneys. Zimmerman then recruited former New York managing partner Bob Dombroff to join the team in Hartford. With established offices, the firm turned to growth through combinations.
In 1997, New England banking was drying up and Bingham recognized that it needed to establish a large New York office. That year they combined with Marks & Murase to open a New York office. Looking to further consolidate their East Coast base, they joined with a financial-services firm, Hebb & Gitlin, in 1999, and a mid-size Manhattan firm, Richards & O’Neil, in 2001. These combinations created a strong, full-service New York office with enough diversification to weather cyclical downturns and ride the bull in upswings.
In 2002, Bingham maneuvered again by courting McCutchen, Doyle, Brown & Enersen, one of San Francisco’s top firms at the time. Together they created an 850-lawyer firm with a coast-to-coast platform.
In 2007, the firm opened offices in Hong Kong and leveraged their Tokyo connections through the previously absorbed Marks & Murase to open a Tokyo office. In 2006 they again absorbed a Tokyo restructuring firm and in 2007, New Tokyo International, to build the third-largest office in Tokyo for a U.S.-based firm.
In 2004, Bingham also expanded into Los Angeles by combining with Riordan & McKinzie, a 110-person firm led by former Los Angeles Mayor Richard Riordan. In 2007, they further bolstered their Los Angeles office by acquiring Alschuler Grossman, a Los Angeles litigation boutique.
Finally, in 2009, with the help of my friend and prominent headhunter, Alan Miles, Bingham acquired McKee Nelson, a tax firm that had lost its biggest client, Lehman Brothers. With this final acquisition, Bingham created a firm with top-tier practices in restructuring, complex securities, financial litigation, finance, structured finance, capital markets, tax planning, and tax controversy. Some sources are reporting that part of the reason for these recent (and not so recent) partner defections was over the guaranteed compensation offered to McKee Nelson attorneys, who were guaranteed $59 million in compensation for 2010.
Bingham largely thrived in 2009 because of their wide breadth of practices that could weather countercyclical storms. However, as these practices have slowed down, they have started to deal with the repercussions of merger-and-acquisition-led growth. Growth through combinations as opposed to growth via single or group lateral acquisitions and summer hiring is like operating with a bludgeon instead of a scalpel.
Combinations (i.e., mergers and acquisitions) are nearly impossible to approve without some assurances that a significant majority of partners and associates will be retained given high performance or cut as well given low productivity. However, since firms cannot tie up attorneys with non-competes given the ethical rule of a client’s right to choose, a firm’s income stream could walk out the door at anytime.
In its early days, Bingham did an excellent job at picking its ponies. The firm largely resisted the temptation to bulk up by acquiring firms outside their regional and practice sweet spots. However, the firm has also suffered high rates of attrition over the years from apparently unhappy partners and associates. From 2004 to 2007, nearly half of the attorneys acquired from the merger with Riordan & McKinzie left for other firms. Bingham may say that they cut the fat but kept the muscle here.
Although Bingham is 123 years old, it did not establish itself as a full-service firm until the mid-90’s. Firms like Gibson Dunn and Cravath have decades and decades of stability and prestige that play well for retention, recruiting, and profitability. On the other hand, Bingham’s acquisition-led growth put the firm at the top of the Am Law list only in the past 10 years. Most of the firm’s practices were recently established, making it difficult for some prospective lateral partners to move to Bingham without either spearheading a practice themselves, or fitting into one that has a deeply routed culture and history among the partners. Compounded with hiring fewer summer associates than other peer firms, Bingham had difficulty keeping or growing their number of lawyers without relying on lateral growth, despite having an excellent platform and roster of attorneys.
The question of today: Will Bingham survive without combining with another firm? Possibly, but the firm’s biggest challenge will be with retention and recruiting, given the perception (even if not the reality) of the firm’s current state.
Although Bingham has approached several firms with overtures to merge, I have not confirmed that these firms have expressed any interest. That said, it is my understanding that Bingham has intimated interest in four potential merger candidates: Morgan Lewis, O’Melveny, MoFo, and Winston. Reportedly, O’Melveny and MoFo have rebuffed the overtures.
Looking at the other two firms, I have some preliminary thoughts. Morgan Lewis could logistically be a good fit. They are headquartered in Philadelphia and would coalesce fairly well with Bingham’s existing offices. The office crossovers between the two firms include Beijing, Boston, Frankfurt, Irvine, London, Los Angeles, New York, Palo Alto, San Francisco, Tokyo and Washington, D.C. The overlap of practices in each office is less consistent with the exception of corporate and litigation practices in New York, Boston, Los Angeles, San Francisco and D.C. There are obvious practice synergies from this potential combination.
Recent lateral moves by Bingham attorneys to Morgan Lewis lessen the likelihood of any possible merger. One of the largest beneficiaries of Bingham’s recent lateral losses has been Morgan Lewis. The process of reintegrating or retaining these attorneys in the event of a merger could be difficult.
One potential hurdle with a Bingham-Morgan Lewis merger is each firm’s leverage ratio. Bingham operates with a 4.48 leverage, which is slightly above average for its size. Morgan Lewis boasts a 2.72 leverage, which is about 40% lower than Bingham. If Morgan Lewis were to insist on maintaining their leverage ratio, a significant portion of Bingham associates could be left behind.
Like with any potential merger, we are hearing rumors of a possible combination with Winston. This could face similar obstacles as a merger with Morgan Lewis, but would have a nice upside if done right. Both firms have strong and overlapping corporate and litigation practices in their major offices, but Winston, like Morgan Lewis, is headquartered in Chicago. Winston does not have offices in Tokyo or Frankfurt, and the only international overlaps between the two firms are London, Hong Kong, and Beijing. There could be an attractive way for each firm to expand their platform through complementary practice strengths and regional footholds.
By just looking at the numbers, Winston is a more feasible option than Morgan Lewis. The two firm’s leverages are closer together (4.48 to 3.72), they have a similar equity to non-equity partner ratio, they are more similar in size this year, and they have an almost identical partner compensation average, profitability index, and PPP.
Peter Zeughauser of the Zeughauser Group commented that Bingham’s “naked” capital system could impede a potential merger. I disagree with Zeughauser. A naked capital system just means one less issue on the table to resolve, especially given the common splintering of groups and partners post-combination, which greatly affects post-merger profitability of a firm, and consequently, less certainty of profitability.
What is the future for Bingham — a major combination, further cuts, lateral acquisitions, or simply coming out stronger as a leaner firm? Any comparisons to troubled firms from the past would be hasty. Although Bingham may have to rethink its capital system, its investment in Lexington and its global vision, Steve Browne should be able to lead the firm to a better place.