Minding the Law's Business: MIDDLE ATLANTIC “TRUMPS” OTHER DIVISIONS

In the immortal words of Russell Casse (Randy Quaid’s character in Independence Day) as he approached the alien space ship, “Hello, boys! I’m back!” And, although much less dramatic and without nearly the fanfare, I’m back also from my Florida trip. Absolutely great margaritas and even better beaches! Now that I am back, LawBall wraps up its journey through Legalritaville with its final stop - the Middle Atlantic division as shown on the U.S. Census Bureau’s Map of the Census Regions and Divisions of the United States.

As one might expect from a division that includes 2 states from the heart of Donald J. Trumpland, size influenced the simple ranking of the firms based on all of the LawBall metric categories, where Philadelphia-based Dechert ranked 1st; while leverage influenced the simple ranking of the firms based on LawBall’s key metric categories, where New York-based Cravath, Swaine & Moore ranked 1st. And, when looking beyond the performance of the individual firms to the aggregate performance of the Middle Atlantic division in comparison to the aggregate performance of the AmLaw 200, the division (if you’ll please pardon the horrible pun – I’m still under the influence of the margaritas) simply “trumped” the other divisions.

According to the Census Bureau map, the Middle Atlantic division includes the states of New Jersey, New York, and Pennsylvania. The division includes 58 firms from the 2007 AmLaw 200 (2006 operating information) – 40 in New York, 15 in Pennsylvania, and 3 in New Jersey. The AmLaw 200 firms in the Middle Atlantic division’s 3 states are:

New Jersey (3): Gibbons; Lowenstein Sandler; McCarter & English.
New York (40): Boies, Schiller & Flexner; Brown Raysman Millstein Felder & Steiner; Cadwalader, Wickersham & Taft; Cahill Gordon & Reindel; Chadbourne & Parke; Cleary Gottlieb Steen & Hamilton; Cravath, Swaine & Moore; Curtis, Mallet-Prevost, Colt & Mosle; Davis Polk & Wardwell; Debevoise & Plimpton; Dewey Ballantine; Epstein Becker & Green; Fitzpatrick, Cella, Harper & Scinto; Fragomen, Del Rey, Bernsen & Loewy; Fried, Frank, Harris, Shriver & Jacobson; Hughes Hubbard & Reed; Jackson Lewis; Kasowitz, Benson, Torres & Friedman; Kaye Scholer; Kelley Drye & Warren; Kenyon & Kenyon; Kramer Levin Naftalis & Frankel; LeBoeuf, Lamb, Greene & MacRae; Nixon Peabody; Milbank, Tweed, Hadley & McCloy; Patterson Belknap Webb & Tyler; Paul, Weiss, Rifkind, Wharton & Garrison; Proskauer Rose; Schulte Roth & Zabel; Shearman & Sterling; Simpson Thacher & Bartlett; Skadden Arps, Slate, Meagher & Flom; Stroock & Stroock Lavan; Sullivan & Cromwell; Thacher Proffitt & Wood; Wachtell, Lipton, Rosen & Katz; Weil, Gotshal & Manges; White & Case; Willkie Farr & Gallagher; and, Wilson Elser Moskowitz Edelman & Dicker.
Pennsylvania (15): Ballard Spahr Andrews & Ingersoll; Blank Rome; Buchanan Ingersoll & Rooney; Cozen O’Connor; Dechert; Drinker Biddle & Reath; Duane Morris; Fox Rothschild; Kirkpatrick & Lockhart Preston Gates Ellis; Morgan, Lewis & Bockius; Pepper Hamilton; Reed Smith; Saul Lewis; Stevens & Lee; and, Wolf, Block, Schorr and Solis-Cohen.

As has become my custom, I’ve placed my observations before the analytic tables and have placed the tables at the end of this posting. The tables include one that contains the 2006 financial operating performance metrics for each of the firms in the Middle Atlantic division and a second that shows the firms’ relative ranking (1 – 58) within each performance metric. By clicking on the tables you can open a larger version. I’ve also attached the tables as a *.pdf document in the right-hand margin under the category “Posting Attachments” as “Legal Industry Middle Atlantic Division Metrics 2006.”

Several observations:

When compared to the aggregate performance of the AmLaw 200, the aggregate relative financial operating performance of the Middle Atlantic division exceeded that of the aggregate AmLaw 200 in every individual key metric category. Also,

Nearly ½ of the division’s firms, 25 (43%), exceeded the aggregate AmLaw 200’s margin of 37.65%.

31 (53%) of the division’s firms exceeded the aggregate AmLaw 200’s asset turnover (revenue per lawyer) of $720,808.

29 (50%) of the division’s firms exceeded the aggregate AmLaw 200’s return on assets (ROA or profit per lawyer) of $271,403.

41 (71%) of the division’s firms exceeded the 3.7302 financial leverage achieved by the aggregate AmLaw 200.

33 (57%) of the division’s firms achieved a return on equity (ROE or profit per partner) that exceeded the aggregate AmLaw 200’s ROE of $1,012,375.

When summing up the Middle Atlantic divisions’ firm rankings in each individual key metric category, the top 5-ranked firms all were New York City-based: Cravath, Swaine & Moore (1st with 39 points); Paul, Weiss, Rifkind, Wharton & Garrison (2nd with 49 points); Sullivan & Cromwell (3rd with 57 points); Simpson Thacher & Bartlett (4th with 58 points); and, Cahill Gordon & Reindel (5th with 59 points). It is interesting to note that Cravath garnered no individual key metric category 1st place rankings, and it’s highest ranking was 3rd place (both in asset turnover and ROE). The highest ranking achieved in any key metric category by Paul, Weiss was 8th (in ROE). Meanwhile, 6th place Wachtell, Lipton, Rosen & Katz (60 points) ranked 1st in 3 categories (asset turnover, ROA, and ROE) and 2nd in margin. (Those totals are not included in the tables for space reasons but are included for all of the firms in the *.pdf attachment).

The juxtaposition of these 3 firms illustrates why ROA is a good measure of the efficiency with which a business allocates its resources and may be a better indicator of a firm’s financial health and performance than ROE, as it eliminates the potentially distorting effects of financial leverage on operating results – and why simple ranking systems epitomize the oft-quoted bromide, “There are 3 types of lies – lies, damn lies, and statistics.” When eliminating the firms’ leverage ranking from the ranking points (Wachtell was 55th, Cravath 22nd, and Paul, Weiss 10th), Wachtell had 5 points (an average key metric category ranking of 1.25 when excluding leverage) and Cravath had 17 points (an average ranking of 4.25). Both firms played really good “offense” and “defense” – as captured by Wachtell’s ROA of $1,585,492 (ranked 1st) and Cravath’s ROA of $646,552 (ranked 4th) (remember: ROA = margin x asset turnover). Paul, Weiss, on the other hand, scored 39 points (a 9.75 average ranking) when excluding leverage and achieved an ROA of $474,695) – a good performance, but not on par with Wachtell and Cravath’s relative performances within the division. Wachtell’s ROA was 2.45 times that of Cravath and 3.34 times that of Paul, Weiss. In fact, Wachtell’s ROA was 1.97 times that of the 2nd ranked ROA firm (Sullivan & Cromwell with an ROA of $804,348).

What was the effect of leverage – “special teams” play? Besides it’s impact on the simple key metric category rankings as noted above, the firms’ relative ROE performances (remember: ROE = ROA x leverage; it’s also margin x asset turnover x leverage) were: Wachtell - $3,974,026 (1st place); Cravath - $3,017,241 (3rd place); and, Paul, Weiss - $2,495,413 (8th place). Both Cravath and Paul, Weiss used leverage to improve their individual ROE ranking from their individual ROA ranking – and the relative ROE disparity between Wachtell and the firms also narrowed as a result of leverage: Wachtell’s ROE was only 1.32 times that of Cravath and 1.59 times that of Paul, Weiss. Another example of the leverage’s effect: Boies, Schiller & Flexner ranked 19th with an ROA of $363,830 (Wachtell’s ROA was 4.36 times greater), but used it’s 1st place ranking in leverage (8.3929) to vault to a 2nd place ranking in ROE with an ROE of $3,053,571 (Wachtell’s ROE was 1.30 times greater). Don’t forget, though, that leverage can be toxic – in good times it can be a rocket fuel boost to ROE, and in bad times it can be a firebomb accelerant as diminishing or slower-growing revenues lead to lesser amounts remaining for distribution as profit to partners.

When summing up the firms’ rankings in all of the metric categories, Dechert ranked 1st (115 points). Paul, Weiss ranked 2nd here, too (117 points). Simpson Thacher and Sullivan & Cromwell exchanged places, with Simpson Thacher ranking 3rd (118 points) and Sullivan & Cromwell 4th (120 points). Cleary Gottlieb Steen & Hamilton ranked 5th (121 points). Firm size likely had a hand in the ranking changes when moving from summing only the key metric categories to summing all of the metric categories. Gross revenue and profit by their nature are pure size metrics – each simply measures the amount – and the larger the amount in each category the lower the relative score. When looking at Dechert and Cleary Gottlieb – 2 firms that were not in the top 5 firms in the key metric category only rankings but moved to 1st and 5th, respectively, in the all metric category rankings – both firms ranked in the top 10 in both gross revenue and profit and replaced 2 firms that were not. In addition, Deckert’s greater number of lawyers than Cravath – a lawyer to lawyer ratio of 2.21 to 1 – when paired with costs that bore a smaller relative differential – Deckert’s cost to Cravath’s cost ratio was 1.37 to 1 - contributed to Deckert’s having a significantly better cost per lawyer ranking (23 to 55) than Cravath. The net ranking points “swing” among those 3 additional categories (39 points for Deckert and 83 for Cravath for a favorable 44 point swing for Deckert) was enough for Deckert to vault from 13th in the key metric only category ranking to 1st in the all metric category ranking and to knock Cravath from 1st in the key metric ranking to 6th in the all metric ranking. With a lawyer to lawyer ratio of 3.45 to 1 and a cost to cost ratio of 4.36 to 1, Cleary Gottlieb did not have a cost per lawyer advantage when compared to Cahill Gordon (38th ranking to 17th), but its significant gross revenue and profit size advantage was enough for the net point swing among those 3 additional categories (50 points for Cleary Gottlieb and 74 for Cahill Gordon for a favorable 24 point swing for Clearly Gottlieb) to move it from 11th in the key metric only category ranking to 5th in the all metric ranking and to move Cahill Gordon from 5th in the key metric ranking to 8th in the all metric ranking.

The *.pdf attachment also has easy to view individual tables that reflect the firms’ individual rankings in margin, asset turnover, ROA, financial leverage, and ROE versus the Middle Atlantic division in the aggregate and the AmLaw 200 in the aggregate.