Costs, clients drive big law firms to merge

by Dan Margolies

Kansas City Business Journal — April 17-23, 1998

Aaron Consulting, Inc. acted as the principal recruiting and management consultant to both law firms in this transaction.

In one of the biggest cross-state law firm mergers to date, Kansas City-based Blackwell, Sanders Matheny, Weary & Lombardi and St. Louis-based Peper Martin Jensen Maichel & Hetlage will merge, creating a 312-lawyer powerhouse with nearly 700 employees.

The combined law firm which will be called Blackwell Sanders Peper Martin, will be the third largest in Missouri, behind Bryan Cave with 550 lawyers worldwide and Shook Hardy & Bacon, with 362 lawyers worldwide. Blackwell Sanders, the second biggest firm in Kansas City, has 232 lawyers; Peper (pronounced "peeper") Martin, the eighth biggest firm in St. Louis, has 82.

"This is a client-driven merger," said John Phillips, a member of Blackwell Sanders executive committee. "We have various clients who said that if we were in St. Louis we would get a lot of their work there."

Driven by the changing economics of the legal marketplace, experts say law-firm mergers are likely to continue. Merging allows big firms to spread out their high fixed-overhead costs while filling gaps in their practice.

Blackwell Sanders and Peper Martin began talking last spring and entered into what they called a strategic alliance in the fall, sharing marketing arrangements and pitching joint counsel proposals to clients. Merger talks, however, continued and partners at the two firms approved the combination earlier this week.

"Large, internationally based companies are looking to consolidate their work with a few firms. We see the trend and we're acting on it," said Ron Schowalter, managing partner of Peper Martin.

Four-year search

Blackwell Sanders began looking to establish a presence in St. Louis four years ago as its regional and national client base expanded. The firm, one of the fastest-growing in the country, has a blue-chip client roster that includes such local companies as Hallmark Cards Inc., J.C. Nichols Co., Utilicorp United Inc., Associated Wholesale Grocers, Commerce Bancshares, Black and Veatch, Saint Luke's Shawnee Mission Health System and Applebee's International Inc.

Peper Martin's client roster includes A.G Edwards & Sons, Inc., Monsanto Co., The Boeing Co., Planet Hollywood International Inc., Hard Rock Café International Inc., and St. Louis University. The firm also represents several local school districts.

The two firms bring complementary strengths to the table. Both have significant corporate, securities, real estate, mergers and acquisitions, tax, education, labor and employment practices. In addition, Peper Martin, unlike Blackwell Sanders, has expertise in intellectual property law, having acquired a boutique firm specializing in that hot-growth area last year. "Frankly, that's one of the things that attracted us," Phillips said.

Blackwell Sanders, on the other hand, fills several voids at Peper Martin, notably in commercial litigation, health care, environmental and international law. "We see Blackwell as bringing depth in those areas to the firm," Schowalter said.

Blackwell Sanders traces it roots to 1916, when it was known as McCune Caldwell & Downing. For many years, its mainstay was insurance defense work, which remains an important part of the firm's business.

Three federal judges have come from Blackwell Sanders' ranks: the late John W. Oliver, the late William R. Collinson and sitting U.S. District JudgeD. Brook Bartlett.

Peper Martin was founded in 1941. The firm has an office in Belleville, Ill. Last year, it jettisoned its three Florida offices in Punta Gorda, Ft. Myers and Naples because they weren't profitable.

Besides Kansas City and St. Louis, the combined firm will have offices in Overland Park; Springfield, Mo., Belleville; Omaha, Neb.; and London.

Blackwell Sanders opened several offices in Omaha and London several years ago largely to service the burgeoning national and international operations of Utilicorp. The company's growing appetite for acquisitions abroad has prompted Blackwell Sanders to consider opening other overseas offices.

Many merger plans stalled

As corporate clients like Utilicorp demand the kinds of efficiencies law-firm combinations can achieve - both in terms of costs and legal expertise - law-firm mergers have become more common in recent years in Kansas City. But mergers involving big law firms tend to be difficult to pull off.

Local firms that have talked merger in recent years but come up short include Shook Hardy and Shugart Thomson & Kilroy; and Stinson Mag & Frizell and the now defunct firm of Watson & Marshall. 

Over the last decade. Blackwell Sanders itself has held merger talks with several firms, including Stinson Mag & Frizell, Smith Gill Fisher & Butts and Lewis Rice & Fingersh. All of them fell through.

Big firm merger proposals fail for several reasons. For one thing, client conflicts frequently arise, especially when the firms are in the same city and clients are more likely to have competing interests. For another, decision-making at law firms, unlike other businesses, involves lots of people. And finally, law-firm mergers are highly disruptive to the firms' lawyers and clients alike.

Despite the hurdles, two big-firm mergers have taken place in Kansas City in the last couple of years: Lathrop & Norquist and Gage & Tucker combined to form Lathrop and Gage; and Bryan Cave absorbed Smith Gill Fisher & Butts.

 Fierce competitor

Blacckwell Sanders, which touts itself to clients as a "law firm that thinks like a business partner," has shown itself to be one of the more aggressive competitors in the Kansas City legal marketplace. The firm has actively pursued experienced practitioners at other firms and built up formidable corporate and international departments in the last decade.

The firm also has competed aggressively on the basis of price. Apart from standard hourly billing rates, Blackwell Sanders has experimented with fixed fees, where it charges a set annual rate for all the annual work it does for a client; flat hourly fees, where it charges a single hourly rate for every lawyer who works on a case; and fee-plus-premium arrangements, where it charges additional fees if a project, say an initial public offering, is successful.

By merging with Peper Martin, Blackwell Sanders joins a handful of Kansas City firms that have set up shop in recent years in St. Louis, including Stinson Mag, Polsinelli White Vardeman & Shalton and Lathrop & Gage. Stinson Mag and Polsinelli White, however, did so by luring key personnel from St. Louis firms. Lathrop did so by merging with the small firm of Schoenbeck Schoenbeck and Associates.

The Blackwell Sanders-Peper Martin marriage is the biggest cross-state combination since Bryan Cave swallowed Smith Gill in mid-1995. At the time Bryan Cave, whose biggest office is in St. Louis, had 38 lawyers in Kansas City and about 450 altogether. Smith Gill had about 70 lawyers, 60 of whom joined Bryan Cave.

"It's very important to both firms that we be a regional player, but while size is important, that wasn't the main factor driving this deal," Schowalter said. "It happened on the basis that this combination will better allow us to service our clients and, as a result, both the clients and lawyers are better off."