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Legal Beat
Cadwalader's Layoff Strategy

August 6, 2008; Page B5
The Wall Street Journal

Arguably the biggest law-firm news so far this year came down last week when New York-based Cadwalader, Wickersham & Taft LLP laid off 96 attorneys, bringing its total number of lawyer layoffs for the year to 131.

Viewed one way, the news was nothing short of shocking. In six months, a venerable law firm and a pillar of stability -- Cadwalader dates its existence to 1792 -- had cut nearly 20% of its lawyer staff. Investment banks, heavy industry, software makers, they all might slash from payroll during tough times. But in down cycles, the thinking goes, law firms like Cadwalader just ramp up other practices: labor and employment, for example, to address the layoffs, and bankruptcy to handle the Chapter 11 filings. To lay off nearly 100 lawyers at once must herald true disaster. Trade publications called the move "a stunning fall from grace," and the result of a "misguided management strategy that its current administration is trying desperately to clean up."

[Cadwalader's W. Christopher White]
Cadwalader's W. Christopher White

But through another lens, the move looks different. It could be argued that Cadwalader is simply acting more like a clear-eyed business than like a traditional white-shoe law firm, where partners can often twist themselves into knots trying to avoid any appearance of weakness. The strategy certainly has its downsides for the firm, like blows to its reputation and perhaps its short-term ability to recruit top talent. But if the firm stays on its feet, which it likely will, the bloodletting could provide cover for others to make similar difficult but cost-efficient moves.

The 2000s have mostly meant one thing for Cadwalader: big profits for the firm's partners. According to American Lawyer magazine, the firm's 2007 profits-per-partner were about $2.73 million. That figure was down about 6% from the 2006 numbers, but still good enough to place the firm sixth among law firms nationally, ahead of such heavyweights as Latham & Watkins LLP and Skadden, Arps, Slate, Meagher & Flom LLP.

Much of the firm's recent profitability owed directly to the real-estate frenzy. The firm chased commercial mortgaged-back securities work when the practice was hot, adding a fleet of young lawyers to its structured-finance and real-estate practices to meet demand. Now, with that spigot turned off, one could argue that the firm is simply behaving rationally, cutting its unnecessary overhead. "There was a bubble, we rode that bubble, it contracted, and we adjusted," says W. Christopher White, the firm's chairman. "Even knowing what I know now, I wouldn't have changed a thing."

Will it lead to a full-fledged implosion at the firm? It's theoretically possible. In 2000, the law firms Testa, Hurwitz & Thiebault LLP and Brobeck, Phleger & Harrison LLP were raking it in, the envy of the law-firm world. That year, Brobeck even rolled out an ad campaign for television, unheard of for a law firm. By the end of 2005, both firms had gone belly-up, victims largely of placing too many eggs in the dot-com basket.

There exist good reasons to suggest, however, that Cadwalader will avoid Brobeck and Testa's fate. For starters, the firm is well-diversified, with strong practices in litigation, distressed mergers-and-acquisitions and, yes, restructuring (the firm serves as lead debtor counsel to Northwest Airlines Corp.).

Furthermore, while it might take several months to determine the full damage, so far the firm hasn't seen large groups of partners bolt for the door, a phenomenon that can create a mini-panic at a firm and result in the loss of entire practice groups. Of course, the handsome partnership payouts provide good incentive to Cadwalader partners to stay put. And while Cadwalader might never be called a "collegial" place, its partnership is at least cohesive. It consists of a manageable 114 lawyers located predominantly in lower Manhattan. "If the partners are unified, the firm will survive," says Peter Zeughauser, a law-firm consultant.

Cadwalader's largest challenge will likely fall on the law-school recruiting front. With its $160,000 salary for first-years, the firm in the short term will certainly be able to put bodies behind desks. But it could well find it harder to attract top candidates from the elite schools, the law-review, federal-judicial-clerkship types. And over time, that could hurt the bottom line. Keep in mind, in 1991, shortly after the S&L meltdown, Latham & Watkins laid off 43 associates and then struggled to hire enough talented promising lawyers after the market bounced back a few years later. "There's no doubt that this is going to have an impact on our recruiting," says Mr. White. "It's just hard to gauge exactly what it's going to be."

In the mid-1990s, under the firm's managing partner, Robert Link, Cadwalader reinvented itself. Mr. Link cut sleepy practice areas, closed an office in Florida, and took a microscope to the firm's finances. The strategy did wonders to the firm's balance sheet. Yet the firm developed a reputation as a sharp-elbowed, money-hungry place in part as a result of Mr. Link's occasional hard-bitten press comments.

Mr. White takes issue with the characterization, but concedes that Cadwalader's culture underwent an overhaul -- one he now views as a selling point. "We became more open, more transparent," he says. "We became the kind of place that doesn't try to hide its layoffs, doesn't tell associates they're for performance-related reasons when they're not."

Of course, telling 131 lawyers they're being let go for performance reasons probably wasn't an option open to Mr. White. But some, like Mr. Zeughauser, still think Cadwalader has plenty to sell to young lawyers. "It's not going to be for everyone," says Mr. Zeughauser, "but smarter young lawyers who know they want to practice law for a career and make a run for partner should choose a place that's run like a business, not a cooperative. Cadwalader is run like a business."