The Firms

July 6, 2009 11:01 AM

Bingham McCutchen to Acquire McKee Nelson

Posted by Susan Beck

After enduring a rough few years caused by the collapse of the structured finance market, the elite specialty firm of McKee Nelson has agreed to be acquired by the larger Bingham McCutchen.

Partners at both firms were informed Monday morning of the merger, which is scheduled to take effect August 1. The combined firm will be called Bingham McCutchen, and will include all of McKee Nelson’s lawyers.

The firms' combined revenue will likely top $900 million, based on 2008 figures, and will include more than 1,100 lawyers. Bingham, with more than 1,000 lawyers spread among 12 offices, was one of the few major firms last year to show growth in both revenue (up 3 percent to $767 million) and profits per equity partner (up 6 percent to $1.42 million). McKee Nelson had a tougher year: Revenue fell 16 percent, to $160 million, and profits per equity partner dropped 15 percent to $1 million. In addition, layoffs and departures have whittled the firm down to 120 lawyers.

Still, McKee Nelson, which is known as one of the pre-eminent firms for tax planning and tax litigation, was viewed by Bingham as an attractive addition. "It's really rare to find a firm that is this size that has three market-leading practices," says Bingham chairman Jay Zimmerman, referring to McKee’s expertise in tax, financial institution litigation, and capital markets-structured finance. Structured finance might be moribund now, but Zimmerman sees it as an area worth investing in. "It will be part of our longterm strategy for serving the financial institution industry."

Reed Auerbach, a co-chief executive partner of McKee Nelson, says his firm wasn't under pressure to find a merger partner. "We had already done the hard work to size the [structured finance] practice appropriately," he explains. At its peak in 2006, Auerbach notes, the group had more than 120 lawyers; today that number is about a quarter of that with roughly 30 attorneys. (Twenty-three lawyers were laid off, 30 joined Ashurst in February, 26 departed under a voluntary program, and 9 moved to other practice areas.) McKee is not carrying excessive debt, Auerbach says, noting that it owes less than $10 million to banks.

Auerbach stresses that the firm had long wanted to expand its practice areas, and considered Bingham the best fit. "Most importantly our businesses are complementary," he says, noting that Bingham’s strength lies in restructuring and insolvency, regulatory affairs, insurance company representations, and private equity. William Nelson, a founder of the firm and co-chief executive partner, adds: "Our tax group has been materially constrained by not having a quality transactional execution [group]." Nelson predicts McKee’s tax litigation group will benefit from Bingham’s "full-throated" litigation practice.

McKee’s practice is concentrated in four areas: tax, business litigation, capital market, and structured finance. It also has a strong white collar practice. The firm represents a roster of major financial institutions and companies, including General Electric Capital Corporation,  Deutsche Bank, Morgan Stanley, JPMorgan Chase, and Credit Suisse. The two sides say they have not identified any significant conflicts.

For Bingham, the deal marks its tenth law firm acquisition since Zimmerman became chairman in 1994. The firm, and its growth by-acquisition-strategy, was featured in the February 2005 issue of The American Lawyer. Other recent acquisitions include Washington, D.C.’s Swidler Berlin in 2006, Los Angeles’s Alschuler Grossman in 2007, and two Japanese firms in 2007.

Bingham and McKee Nelson discussed a merger late last year, but no deal emerged. Two lawyers familiar with the smaller firm say McKee Nelson also engaged in serious talks with Baker & McKenzie this year. Auerbach declined to confirm this, and instead says his firm has had "sporadic conversations with various firms."

McKee Nelson was founded in 1999 as the bold experiment of two prominent tax partners who left King & Spalding: William McKee and Nelson. The firm allied itself with Ernst & Young, and was called McKee Nelson Ernst & Young. The groundbreaking interdisciplinary foray didn’t work out, and the two entities separated. The firm expanded into structured finance, becoming one of the leaders of the practice. It also meant the firm would be hit hard by the financial downturn and the bankruptcy of client Lehman Brothers. After seeking voluntary lawyer departures, McKee resorted to layoffs in 2008. Then, in February, 30 lawyers, including 10 partners, joined the London-based firm, Ashurst. By June, the firm was down to 120 lawyers, from the roughly 200 it claimed as of 2006.

McKee Nelson's leaders will hold some positions of power at the combined firm, but Bingham’s management will clearly be in charge. Auerbach will be the only partner from the smaller firm to sit on Bingham’s 12-person management committee. Nelson and McKee will co-head the tax group, Jeffrey Smith will run the financial institutions litigation group, and Auerbach will manage the capital markets group.

Nelson acknowledges feeling some nostalgia with the passing of his firm as an independent entity, but he’s looking forward to the new venture. The recent cutbacks, he says, presented many challenges and were tough on him and the firm. "It was really hard to maintain a collegial, supportive culture when we were downsizing. It was painful and it hurt," he says. "As a founder, you want to make sure your people will be happy and I think [Bingham] is an environment they will recognize. I’m really excited about this for our whole firm."

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So many people on the bottom of the totem are going to get fired because of this deal. It's sad, but i'm sure they'll probably bring a lot of a wrongful termination lawsuit since they're up now.

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