The serial disintegration of Dallas-based Jenkens & Gilchrist has created an “acquisition” opportunity for a number of firms. That shouldn’t surprise anyone – the business world is full of examples where distressed situations give rise to tremendous buying opportunities. For example, one of the biggest in my lifetime was the opportunity to acquire assets from the Resolution Trust Corporation after the concurrent failures of the real estate and financial institution (primarily savings and loan) industries in the late 1980s/early 1990s.
Based on published reports, Jenkens now has less than 200 lawyers after having reached 600 lawyers in 2001. In the past several months, Jenkens has begun closing or has closed its Chicago and Los Angeles offices, as well as its Texas offices in Austin, Houston, and San Antonio. It closed its Washington, D.C. and Pasadena, California offices late in 2006. Jenkens’ Dallas office is rumored to be discussing a large-scale move of many of its Dallas lawyers to Hunton & Williams.
While there apparently have been moves by smaller numbers of Jenkens’ lawyers, the larger moves announced recently include 19 lawyers to Baker & Hostetler in Los Angeles, 10 lawyers to Jackson Walker in San Antonio, 15 lawyers to Nixon Peabody in Chicago, and 30 lawyers to Winstead in Austin, Dallas, and San Antonio. Winstead apparently continues to discuss hiring as many as 10 more Jenkens’ lawyers from Dallas and Houston. And, in February a Hunton & Williams partner in Dallas was quoted as saying that firm’s discussions with Jenkens involved the possible move of “more than 12 but less than 100” of Jenkens’ Dallas lawyers to Hunton & Williams’ Dallas office.
I imagine some form of due diligence was done by the “acquiring firms” with respect to each of these moves by Jenkens’ lawyers, as normally would be done with acquisitions in “non-law business” businesses. Probably, there were discussions about gross revenues the acquiring firm expects to generate from the new lawyers, the compensation the acquiring firm expects to pay the new lawyers, and the cultural “fit.” But, I’d bet unlike non-law business acquisitions, no pro-forma financial statements for the acquiring firm as reconstituted with the new lawyers was done by any of the firms, as it likely would fly in the face of a law business equivalent of what I noted in my last posting Warren Buffett calls the “institutional imperative”. That would be a shame because each of these transactions is ripe for a “LawBall”- type analysis. As I noted in “Mergers, Metrics, and Other Musings,” certainly numbers aren’t the entire story to a successful acquisition; but LawBall analysis, as with financial operating performance, can lead one to ask critical questions that facilitate a deeper understanding of the strengths and weakness of both the pre- and the post-acquisition businesses.
A pro-forma financial statement similar to that done in a non-law business acquisition that shows how the reconstituted firm would have looked had the acquisition been in place for the prior operating year would not be difficult to create. Set forth below is a table with a LawBall-type look at each of the 5 firms noted above that either have acquired or are expected to acquire Jenkens’ lawyers, as well as at Jenkens, from The American Lawyer’s 2006 AmLaw 200 survey.
Since the chart likely is difficult to read within the blog, click on it, and a larger version should open in another window. I’ve also attached it as a *.pdf document in the right-hand margin under the category “Posting Attachments” as “Jenkens Moves.”
If one of the firms were acquiring all of Jenkens, one simply would combine the gross revenues, profit, lawyers, and partners (equity partners) shown in the table for the 2 firms to create pro forma numbers for a single firm (the reconstituted acquiring firm). Then one would calculate the “reconstituted” pro forma asset turnover (assets ÷ lawyers), pro forma margin (profit ÷ gross revenues), pro forma leverage (lawyers ÷ partners), and pro forma costs per lawyer ([gross revenues – profit] ÷ lawyers). Finally, one then would calculate the pro forma return on assets (asset turnover x margin) or profit per lawyer and the pro forma return on equity (asset turnover x margin x leverage) or profit per partner. The pro forma then would present a picture of how the 2 firms would have looked as one if the acquisition had been completed at the beginning of the previous year. In the acquisitions at hand, the numbers to be used for Jenkens obviously would have to be modified to reflect the prior year’s performance by the actual lawyers being acquired. And, if the 2006 operating numbers for both firms were available, those would be better to use. A revised forecast for the current year of acquisition also could be created for the reconstituted firm in a similar manner. The differing economic effect to the firms that acquire different parts of Jenkens could be significant. For example, if the IP group joining Nixon Peabody performed better economically than did the Jenkens firm as a whole as reflected in the table and another group of Jenkens lawyers joining another firm performed worse than did the Jenkens firm as a whole, then the acquisition likely would be better for Nixon Peabody than the other firm. As a quick observation, the fact that Jenkens’ return on assets lags behind 3 of the 5 firms should draw scrutiny at least from those 3 firms.
A caveat – if there are known operating changes that will occur with respect to the Jenkens lawyers once they join the acquiring firm, then adjustments should be made to the Jenkens financial operating numbers pre-pro forma consolidation. For example, if the Jenkens lawyers will be vacating their current space and moving into space at the acquiring firm upon which the acquiring firm already is paying rent regardless of whether or not the Jenkens lawyers are there, then the occupancy expense for the Jenkens lawyers at the acquiring firm already is in the profit number at the acquiring firm and Jenkens’ actual occupancy expense at its old space should be removed from Jenkens’ prior year performance numbers for purpose of the reconstituted pro forma (in this case, the Jenkens’ profit to be consolidated with the acquiring firm’s for the pro forma would increase so as to avoid the double occupancy cost hit to the pro forma expenses).
I don’t know about you, but as a member of the acquiring firm I’d want to see this analysis before the transaction occurs so I could ask financial questions and get comfortable with the answers. For any of you at one of the acquiring firms that would like to attempt such an analysis, I’ve included below a blank table for your use. It’s also in the “Jenkens Moves” *.pdf file.
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