The dot-com meltdown has claimed another victim. After failing to merge with a larger law firm, San Francisco's Brobeck, Phleger & Harrison—which employed 900 lawyers just two years ago—announced yesterday that it is folding.
Brobeck isn't the typical dot-bomb. It's not a poorly capitalized startup in a silly, profitless industry. It is a 77-year-old blue-chip firm whose clients include the highly solvent Cisco Systems.
Americans have learned in the last two years—at a cost of billions of dollars—how the New Economy failed to revolutionize business. The death of Brobeck signifies how it also failed to revolutionize law.
During the '90s, law firms happily rode the technology wave without fundamentally altering their business. As associates defected to dot-coms and venture capital firms, law practices raised salaries and hiked bonuses. But they didn't seek to transform the business of law.
At least not until late in the boom, when previously staid Brobeck began to act like its technology clients. It became a dot-firm. Run by a charismatic leader, the firm spent lavishly on marketing, built a palatial headquarters, sacrificed cash upfront for equity, and focused its resources on the technology sector. Guess how the story ends.
Brobeck charged into the limelight after an attorney named Tower Snow assumed its chairmanship in 1998. The firm boosted first-year salaries to compete with New York powerhouses and added lawyers with abandon. Fed on a steady diet of initial public offerings, VC deals, and mergers and acquisitions, Brobeck grew fat. Revenue jumped from $214 million in 1998 to $314 million in 2000. By the summer of 2000, the firm counted 754 attorneys, up 40 percent from the year before.
Essentially, law firms are high-end employment agencies, in which the partners sell the labor of associates and paralegals at a vast markup. So once you've built that overhead into your billing structure and established a loyal client base, it's hard to go wrong. When work slows down, you simply let people go. Overhead is also easily controlled. Most blue-chips occupy nice but not lavish offices, and marketing is generally discreet—advertisements in the American Lawyer, booths at professional conferences.
Even though Brobeck's profits-per-partner soared to more than $1 million in 2000, Snow wasn't content. He started to view himself not merely as a good lawyer, but also as a good businessman. "He believed that a law firm could be run like a successful company, and, influenced by clients such as Cisco Systems Inc., he emulated the growth, management, marketing and sheer boldness of Silicon Valley's highfliers," Susan Beck wrote last summer in the American Lawyer.
And so Brobeck began to do things that law firms didn't do. It continued to bulk up even after the Nasdaq peaked. In 2001, it became the first corporate law firm in the United States to advertise on national television. The campaign, which ran on CNN—as if viewers of Larry King Live are big consumers of high-end legal services—may have cost $10 million. Snow spoke grandly of taking the firm public.
Brobeck became the anchor tenant in a gleaming new complex in East Palo Alto and expanded its offices in New York and San Diego when prices were peaking.
Brobeck also entered the venture-capital business. Prior to Snow's regnum, individual Brobeck partners could make deals with VC-backed clients and take equity in private companies in exchange for their work—frequently performed at a discount. Snow altered the practice so that the firm—rather than individual partners—received the stock. When their clients failed, the law firm was left holding worthless paper.
To a degree, law is a noncyclical business. When the economy turns bad, general corporate work may decline, but bankruptcy and restructuring work rises. IPOs and equity issues fall off, but debt securitization increases. When securities are out of favor, real estate becomes more active. But Brobeck, in its drive to become a name-brand technology law firm, neglected the unsexy practice areas that could have seen it through hard times.
And so in 2001, when the firm worked on just three IPOs, profits per partner fell 40 percent. The real collapse started in early 2002, as the firm laid off attorneys and canceled the advertising campaign. Tower Snow was forced out in May 2002. Partners began to defect and take practice groups with them. What was left was a rump firm with a dominant presence in evaporating markets, lots of debt, and hundreds of thousands of square feet of hideously expensive office space for which it had no use.
In the end, Brobeck really did turn out to be a different kind of law firm. Just not in the way that Tower Snow hoped.