Meltdown of a Highflier
Shortly after 2 p.m. on Jan. 30, staffers in the New York office of the law firm Brobeck, Phleger & Harrison LLP received an e-mail telling them to "please plan on attending" a firm-wide videoconference in about an hour and a half. Most believed they were being summoned to celebrate a merger with Morgan, Lewis & Bockius LLP--a combination that would have created one of the five largest firms in the U.S. Instead, they were told that talks had broken down and that Brobeck would be folding. Later that day, taps rang out over the office intercom in New York, while lawyers in other outposts sat shell-shocked. "Some people cried, others were pounding the [conference room] table," recalls one Brobeck lawyer.
It was a tragic ending for what had been until quite recently one of the most successful law firms in the country. Founded in 1926, Brobeck had spent decades building a well-balanced practice catering to a diverse group of blue-chip clients, including Wells Fargo Bank (WFC ), Baxter International (BAX ), Owens Corning (OWC ), Gap (GPS ), McKesson (MCK ), and Cisco Systems (CSCO ).
But when the technology boom hit, the San Francisco-based firm chucked the tried-and-true conservatism and made an aggressive bid to become a national powerhouse. Borrowing heavily, partners leased a glitzy Silicon Valley headquarters and opened offices in Washington, Dallas, and Reston, Va. Ignoring industry convention, they launched a $3 million national TV advertising campaign, one of the first ever aired by a blue-chip law firm. New attorneys were brought in by the hundreds, while unsexy nontechnology clients increasingly received the cold shoulder.
For a while, the strategy paid big dividends. Partner profits rose to $1.17 million apiece in 2000--making Brobeck the most profitable firm on the West Coast. But when the tech party suddenly stopped, the firm stayed on its growth course--refusing to lay off attorneys or dump excess real estate. As a result, 1,100 people were put out of work and Brobeck will likely go down in history as the worst legal meltdown since the notorious demise of Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson & Casey in 1988. "They made the classic mistake of assuming [the high-tech bubble] would go on forever," observes Mary Cranston, chair of Pillsbury Winthrop LLP, a San Francisco-based rival.
For many angry Brobeck veterans, the villain of this story is their onetime hero, charismatic securities litigator Tower Snow Jr., who joined the firm in 1995. He came armed with an impressive roster of clients, including Apple Computer (AAPL ), 3Com (COMS ), and Bank of America (BAC ), and a magnetism that charmed Brobeck's troops instantly. Perhaps more important, Snow brought a vision for how to transform Brobeck from a successful regional player into a national brand name: by abandoning the prudence that had long typified the law business and riding the technology wave with the ferocity of an Internet startup. Snow declined to talk to BusinessWeek.
Within three years of his arrival, Snow was elected chairman of Brobeck's seven-person policy committee. In addition to pushing for new offices and the TV advertising campaign, he led an expensive hiring blitz that resulted in Brobeck's legal team more than doubling, from about 450 attorneys in 1998 to more than 900 at its zenith in 2000.
As the technology boom gathered strength, Snow's bet look brilliant. Brobeck raked in millions of dollars in fees working for tech titans such as Intel (INTC ) and Sun Microsystems (SUNW ), as well as relative newcomers like Broadcom Corp. (BRCM ) and E*Trade Group Inc. (ET ) But the expansion had come at a price: Brobeck's array of nontech clients began to feel like unwanted stepchildren. Schuler Homes, for example, a Honolulu-based homebuilder, finally got so fed up that, in late 1999, it took its business to a competitor. "I started to see that we were not getting the attention we had gotten," says Pam Jones, the former chief financial officer of Schuler, which last year sold for $1.2 billion.
Such client defections were easily offset by other work. And Brobeck was still planning for a bright future. The mood inside the firm was so jubilant that in October, 2000, well after NASDAQ had begun its plunge, some 150 partners headed to the Ritz-Carlton Hotel in Cancun to celebrate their entry into the big leagues. "It was party time," recalls one partner.
Shortly after that getaway, Snow circulated among Brobeck's partners a memo asking to increase the firm's credit line with Citigroup (C ). He argued that Brobeck needed the money to hire new lawyers and further expand in high-tech hubs, such as San Diego, Austin, Tex., and Silicon Valley.
The loan would be secured in part by the firm's receivables, meaning that if Brobeck defaulted, the bank could seize the firm's cash, explains Peter M. Gilhuly, a partner at Latham & Watkins LLP who represents Brobeck. In addition, the loan had provisions allowing Citibank to go after individual partners to recover money. Gilhuly says that "numerous law firms have recourse credit agreements." But some lawyers say the terms left Brobeck and its partners vulnerable. Citigroup declined to comment. Brobeck referred all questions to Gilhuly, who declined comment beyond the credit arrangements.
Despite the risks, Brobeck's partners overwhelmingly approved the loan increase and expansion plans. Former partners say Snow had plenty of support for his agenda and, at times, had to restrain other colleagues who argued for an even more aggressive approach.
Snow, like some other partners inside Brobeck, believed the economic downturn was temporary and that Brobeck would cash in when business picked up. In contrast, other tech-heavy law firms were shedding lawyers and real estate. Menlo Park (Calif.)-based Venture Law Group, for example, began cutting lawyers and subleasing its extra space in 2000. Still, Snow vowed that Brobeck would resist layoffs. Instead, he slashed other operating expenses such as overtime and travel, says a former partner on the policy committee. "You wanted to keep your resources available so if there was an upturn, you could do the work," says this ex-partner.
For other partners, though, that cost-cutting effort wasn't enough, and they began to question Brobeck's direction. When a management meeting in Denver was cut short on September 11, 2001, because of the terrorist attacks, a group of partners rented vans and caravanned back to the Bay Area. By the time the partners got home, according to three lawyers, they had decided to remove Snow from his chairmanship.
With the firm's profits rapidly sinking, Snow resigned from the chairmanship in mid-November. He left the firm entirely in May, 2002, joining London-based Clifford Chance LLP, along with 16 other Brobeck partners. Tensions had climbed to such a level between Snow and others at the firm that an angry insider broke a key in Snow's office door, apparently out of spite, since Snow was already barred from entering the San Francisco office.
Those remaining began dealing with Brobeck's mounting troubles, including debt that had climbed to $82 million, according to Gilhuly. At an off-site meeting at a hotel in San Mateo, Calif. in October, partners divvied up three tasks: restructuring the debt, renegotiating leases, and finding a merger partner.
Their efforts seemed to be paying off. Partners spent some $26 million from their own pockets to pay down the debt. Much of the excess real estate was either subleased or a penalty was paid to get out of the obligations. And Morgan Lewis was taking a serious look at Brobeck. In late November, a group of corporate partners, believing they were back on track, headed to the MGM Grand Hotel in Las Vegas. "We were relatively upbeat," says an attendee.
The good mood didn't last long. On the eve of the deal, Steven M. Zager, a Brobeck partner based in Austin who was a rainmaker, bolted for a rival firm. The high-profile loss, among other things, spooked Morgan Lewis, which abruptly called off its plans for a deal. Within hours, Brobeck's leadership met and decided to disband.
The blame game is already well under way, with Snow taking the brunt. But the firm's moves were not his alone. "This was not a matter of Snow leading the cattle to slaughter," says a former partner. "People were not walking the halls blindfolded." To the contrary, they saw the path to the future clearly--and liked the way it looked.
By Linda Himelstein in San Mateo, Calif., with Heather Timmons in New York