The housing collapse let Sonnenschein Nath & Rosenthal follow its growth plan by gobbling up more than half the attorneys at a failed rival
While many rivals retreat and retrench, the corporate law firm Sonnenschein Nath & Rosenthal sees the downturn as a chance to gain market share. Its success will turn in large part on Sonnenschein's skill at exploiting the weakness of a fellow firm that entered the recession without a viable strategy.
For many high-end lawyers, as for the companies and banks they represent, these are times to eat or be eaten. In December, Sonnenschein, a well-established second-tier firm based in Chicago, cannibalized Thacher Proffitt & Wood, an old New York partnership. Thacher had grown fat on mortgage-backed securities work but stumbled when the housing market collapsed and no one wanted to buy bonds confected from home loans.
Sonnenschein gobbled up 100 Thacher attorneys, swelling its ranks to 800 lawyers in 15 offices. After providing legal counsel for 160 years, Thacher dissolved, leaving its remaining 70 lawyers to find other homes.
With profits down at most corporate law firms, attorneys are scrambling. "All the strong firms are working hard to pull good people or groups out of firms that are not performing as well," says law firm management consultant Peter Zeughauser. When San Francisco-based Heller Ehrman collapsed last year, former partners fled to such rivals as Washington-based Covington & Burling.
AN UNLIKELY EXPANSION
The consolidation in the law business resembles, on a smaller scale, what's happening in banking. Professional services firms confront both extreme peril—and potential opportunity—as their reeling clients question every bill from high-priced outside advisers. Executive search firms such as Chicago-based Heidrick & Struggles International (HSII) are redefining their mission as companies shed rather than hire top-echelon employees (box).
Sonnenschein's expansion at first glance appears to border on the reckless. The bulk of the lawyers it hoisted from Thacher's sinking ship work in securitization and real estate finance, specialties that are moribund.
But Joseph J. Andrew, a member of Sonnenschein's management committee, says the firm plans to pair Thacher's financial-services lawyers with Sonnenschein's large regulatory and lobbying practices in Washington. Because of the enormous federal bailout of so many banks and Wall Street firms, he says, "there is now a nexus between the capital markets and the U.S. government in a way that there never has been in history before."
Sonnenschein client Sopris Capital Advisors applauds its law firm's maneuvering. Neil Subin, an investment director for the New York-based hedge fund, who invests in distressed businesses, says that the ex-Thacher attorneys could help him find value in beaten down structured-finance assets: "That is a huge opportunity."
Plus, says Sonnenschein's Andrew, "We're not bringing on a capital markets practice at the height. We're bringing them in at the bottom." In other words, former Thacher partners can expect pay cuts. Sonnenschein associates face a salary freeze for 2009, the firm said in an internal memo in December.
Meanwhile, Sonnenschein's growth doesn't appear to have alienated its lucrative lobbying customers. Clients of the firm's Washington office last year included American International Group (AIG), Boeing (BA), and MillerCoors, according to federal records analyzed by the Center for Responsive Politics, a nonprofit research group.
The Chicago-based firm's determination to expand dates back to a plan it instituted in 2006, before the start of the current economywide debacle. The strategy called for opening new offices around the country and taking on additional lawyers in a range of areas.
Determining that breadth and scale are vital to its success, Sonnenschein aimed for revenue of about $900 million within five years, which would place it among the top 25 firms nationwide. The recession might make that goal difficult to achieve. Even with its enlarged ranks, Sonnenschein expects revenue of only $550 million in 2009.
Most of Sonnenschein's growth has come by recruiting "laterals"—lawyers with established practices—rather than by hiring newly minted attorneys. Elliott I. Portnoy, its Washington-based chairman, who came over from another firm in 2002, says that building a cohesive culture is a core consideration.
Still, the bonds are only so tight. Even as it has grown, the firm has periodically let go attorneys and staff from areas in which business declined. Last year, Sonnenschein laid off about 60 attorneys in real estate and other practices hit by the souring economy.