Heller Ehrman's fate was determined in a day, but it wasn't the Sept. 26 dissolution vote. The day that made the difference came two weeks before the partnership was asked to make that call.
On the morning of Friday, Sept. 12, members of management from both Heller and Mayer Brown were preparing for a Monday presentation in Chicago before Mayer Brown's policy and planning committee, a source familiar with the talks said. A merger term sheet had been signed, Heller sources said, and both sides were hopeful that partnership votes would soon be held. The two-firm team had updated projections to reflect the loss of a 14-partner group of Heller's intellectual property litigation partners, a source said.
For Heller Ehrman, the merger represented the calm after a long storm. Amid an ongoing stream of partner defections throughout the year, serious discussions with Winston & Strawn and Baker & McKenzie had been unfruitful. Earlier that week, the 14-partner group of attorneys in San Diego, Washington, D.C., and the San Francisco Bay Area had announced its plans to join Covington & Burling. It was known that the IP group was considering leaving the firm, but the size of the group had been in flux as management pressed individual lawyers to stay, sources said. The loss triggered a contract clause with Heller's banks, Bank of America and Citibank, that allowed them to seize control of Heller's cash when a percentage of the partnership left within a 12-month period. Yet with the Mayer Brown merger seemingly days from completion, there was still hope for Heller.
"We were very close to consummating the transaction, and I personally believed that it was going to happen," said Heller Managing Partner Robert Hubbell, who hadn't been involved in the presentation.
But it was an uncertain time. The economy was in desperate disarray, with Wall Street -- and many of Mayer Brown's finance practice clients -- in full meltdown. As of that Friday, Mayer Brown client Lehman Brothers had seen its value plunge 80 percent in the course of a week. Lehman would in fact file bankruptcy Monday -- the same day Heller was supposed to make its presentation. The Wall Street collapse, the known problems at Heller and the Covington group's move were enough reason to kill a deal and by late Friday afternoon, that's what Mayer did, eliminating Heller's last viable merger partner, and its last hope of survival.
"It became clear to the partners that completing a merger was a matter of survival during the latter phases of the talks with Baker & McKenzie," said a Heller partner who spoke on condition of anonymity. "When that evaporated, it immediately became clear that we had one more shot and that shot was Mayer Brown."
Heller had been in talks with Baker for months, but had kept the door open with Mayer Brown, too, and those talks were moved to the fore when Baker ended its discussion with Heller in late July.
The Heller team preparing the Sept. 15 presentation included Chairman Matthew Larrabee and partners Mark Weeks, Steven Koppel and Larry Keeshan, said a source familiar with the talks. The Mayer Brown group included Chairman James Holzhauer, Vice Chairman Kenneth Geller and Global Vice Chairman Paul Maher.
Mayer Brown, the source said, was interested in the Asia, London, New York and Silicon Valley strengths of Heller's Venture Law Group, of which Weeks, the head of Heller's business department, had been a leader. The firm also wanted to bulk up its West Coast presence, and other key parts of a merger included Heller's New York and international strengths.
Geller would not comment for this story, and the rest of the Mayer Brown and Heller partners involved did not return phone calls or e-mails. A Mayer Brown spokesman said the firm had nothing to add beyond a statement issued at the time, which cited conflicts as the reason for the failed merger. But, it would be rare for conflicts to derail a merger talks as far along as those between Heller and Mayer Brown, consultants said. Typically, "at the point a term sheet had been put together, due diligence would have been done," said Stacy Miller Azcarate, a San Francisco Bay Area recruiter not involved in the talks. "And part of that due diligence would have been conflict checking."
"Conflicts are one of the first things that you talk about," said another consultant speaking on condition of anonymity. And at least some Heller groups that would have been conflicted out of the merger were already exploring their options.
'PROBABLY NOT A GOOD TIME'
There is some disagreement among former Heller partners over what derailed the talks with Mayer Brown. Some place the blame squarely on the Covington group, but one of the key attorneys in that deal said last week that Heller leaders had been well aware of the group's intentions. Robert Haslam said firm management had known since August that he and a significant number of IP lawyers would be leaving, and would not participate in any merger.
"On Sept. 2, I reiterated to firm management that I was leaving the firm," he told The Recorder in an e-mail on Friday, adding that in at least one conversation prior to Sept. 10, he "told firm management that I thought that, no matter what I did, the San Diego and D.C. groups were going to leave."
The group's intentions were clear, said another source familiar with management's communications with the Covington group. Heller partners interviewed for this story don't deny that the loss of 14 partners from one of Heller's core practices had eroded Mayer Brown's confidence in the deal. As the Mayer team continued to work on the final presentation after learning of the group's departure, they may have had misgivings. But Heller sources say it was only one of several factors.
In previous merger talks, sources noted, Heller management tended to be guarded about financial details until well into the process. If Mayer didn't feel it had a complete financial picture until very late in the game, they said, that may have been a reason the talks progressed so far before collapsing.
Whatever gave Mayer cause to reconsider, the firm certainly wasn't in a risk-friendly climate. The financial world had been in blind panic that month and uncertainty was at a high. The government had seized Fannie Mae and Freddie Mac at the start of the week -- a move The New York Times labeled "a seismic event in a year of repeated financial crises" -- and Mayer clients such as Merrill Lynch and Lehman Brothers teetered on the edge of collapse. When Lehman's stock was halved that week, two days before Mayer Brown called the merger off, The Economist reported that "there is genuine fear that a [Lehman] failure would deal markets a terrible blow, hurting everyone." By the end of the week, Lehman was looking for a bailout, and Merrill was only days away from a $50 billion rescue by Bank of America. The Merrill deal and the Lehman bankruptcy came only two days after Mayer Brown pulled the plug on the Heller deal, a Sunday that the Times would call "one of the most dramatic days in Wall Street's history."
Amid this tectonic upheaval in the financial world, management at Mayer Brown -- which according to the firm's Web site serves "more than half of the world's investment banks" -- was preparing to convince the partnership to take on a struggling 600-lawyer firm that was leaking partners. While the firm refuses to comment on economic factors in its decision, no one would call the circumstances encouraging.
"I'm sure that the general downturn wasn't a positive," said Mark Jungers, a consultant with Major, Lindsey & Africa in Chicago. "Mayer Brown is full of very, very smart people, and I think it was only a matter of time before they realized this isn't a good idea: 'We don't really know what we're getting [from Heller], it's probably not a good time to do this.'"
Over the weekend, Heller management told the firm's policy committee that Mayer had backed out. An extended policy committee met on Sunday and the partnership was notified that evening by a voicemail from Chairman Larrabee. Some partners have said they saw the voicemail as simply more bad news, while others say they -- rightly -- took it as the death knell of the firm.
With partners already headed to the exits -- Heller's insurance practice, which would have been conflicted out of a Mayer Brown merger, was practically out the door, sources said -- and no merger lined up, it became clear that the firm could not justify staying in business to its banks. The policy committee eventually made the recommendation to dissolve the firm and opened the vote on Friday, Sept. 26.
NO STONE UNTURNED
While the Mayer Brown talks were the last chance at a merger for Heller Ehrman, the firm had pursued several other possible combinations this year, two of them seriously. The first was with Winston & Strawn, the likelihood of which Larrabee had placed at above 50 percent earlier in the year, one Heller partner said.
Winston, with profits per partner of nearly $300,000 more than Heller last year, wanted the firm to de-equitize much of its partnership -- similar demands were made by Baker and Mayer Brown, a Heller partner said. Heller management was interested in the Winston merger, but it was clear that so many partners would be affected that they and their colleagues would not be persuaded to go along.
Heller moved on to Baker & McKenzie around late April and early May. The two firms hosted a series of meetings in a handful of cities -- one big, early meeting was held at Napa Valley's Meadowood resort and at least one other at the Mandarin Oriental hotel in San Francisco, a location later used in the Mayer Brown talks, sources said. Within weeks, at least 100 Heller partners, according to several partners' estimates, had met with counterparts at Baker in New York, Washington, D.C., Los Angeles, Seattle, Silicon Valley and San Francisco, but the Chicago firm called the merger off by the end of July because of growing concerns over the cost of merging with Heller.
"The price tag of doing the transaction was continually increasing," said a source familiar with the talks.
The discussions with Baker had never been exclusive, so when those talks ended, Heller management had put its energy into the firm's final serious merger prospect: Mayer Brown.