Earlier today, we requested reader perspectives on the offering memo. Here are some selected responses.
This reader, if asked whether to blame legacy Dewey or legacy LeBoeuf, would probably vote for Dewey:
Take a look at Exhibit 1.9 [on page 14 of the memo]. Dewey Ballantine’s net income went from $134 million in fiscal 2006 to $70 million ONE YEAR LATER. And that was at the tip-top of the M&A boom. That tells you everything you need to know about how Dewey let things get out of control. Their woes have nothing to do with the recession or the merger with LeBoeuf. They mismanaged themselves into oblivion through all the guarantees they handed out, period full stop.
This reader, from the legacy LeBoeuf Lamb side, shared the following observations (including one about billing rates):
1. Check out p. 29, the section “Billing and Collections” and Table 4.3 and the line item for “PLI”, defined above as “Practising Law Institute.” That must be a typo, the line item appears to refer instead to uncollectible accounts receivables but not being an accounting guy I don’t have the correct acronym handy.
2. Page 27 says that “lawyer billing rates average $600 per hour and range from $385 an hour for a junior associate to $1,050 for a senior partner.” I know Biglaw rates are high, but really was $385 the going rate for the most-junior associate? I find that a little hard to believe. I believe my own rate when I was there as a [far more-senior lawyer in the early 2000s] was around $455.
3. The firm purchased its insurance through a captive, for the tax benefits no doubt, courtesy of Bruce Wright also no doubt (his expertise). Had a $2 million retention for professional liability claims.
4. Dewey had negative cash flow the last quarter of 2006, to the tune of $12 million?
Finally, this tipster — a former lawyer, who now works in business — pulled the following out of the document:
1. The 2007 merger cost $5.1 million to complete.
2. Since the merger, the firm opened 4 new offices, in Dubai, Doha, Madrid and Abu Dhabi.
3. Before the merger, Dewey Ballantine experienced a sharp decline in revenues, from $398M in FY 2005-2006 to $341M in FY 2006-2007, a decline of 14%
4. In the first full year after the merger, 2008, D&L had revenues of $955M, which declined 15.2% in the recession year of 2009 to $809M (a big problem when the firm has lots of partner guarantees, many of which were given to legacy partners to keep them at the merged firm). (We know the revenues would decline further in 2011, with about the same number of lawyers.)
5. The firm eliminated 300 attorney and 300 staff positions after the merger and during the 2009 economic downturn.
6. The bond Notes were to be used to refinance existing indebtedness and for general firm purposes.
7. LeBoeuf Lamb did not have a line of credit, while Dewey Ballantine did, but generally paid it down to zero by the end of the calendar year. That would change when the firms merged.
8. The merged firm had the following debts in 2008 and 2009…
Letters of Credit — $12M in 2008; $10M in 2009
Term Loans — $119M in 2008; $106M in 2009
Line of Credit — $45M in 2008; $87M in 2009 — almost a !00% increase in one year, and not paid off at the end of the year.
9. The bond Notes would be used to pay off the $106M in Term Loans and $10M in Letters of Credit — for a total of $116M. That would leave $9M from the $125M offering, which the firm would hold in cash. The Line of Credit would be unaffected. (Why refinance the Term Loans? Could the bond offering be at a lower interest rate, even after fees? And why does a law firm have term loans? When were they taken out?)
10. After the new bond offering, the firm would have $212M of outstanding debt (the debt would stand at $200M by the end of 2011, a year that saw another decrease in revenues, making the debt a higher portion of annual revenues).
11. The firm expected to consolidated its non-bond debt in a $125M Revolving Credit Facility (seems like this didn’t happen, with the firm keeping a $100M line of credit through 2011).
12. Dewey Ballantine used an Oct. to Sept. fiscal year, while LeBoeuf used a calendar year, making direct comparisons difficult, but here’s a close comparison:
In Dewey Ballantine’s last full fiscal year (2006-2007), it had net income of $56M on revenues of $341M, for a margin of 16.4%.
In LeBoeuf’s last year (2006), it had net income of $174M on revenues of $478M, for a margin of 36.4%.
(Now we can see why Dewey sought a merger and LeBoeuf gained little in the combination besides the Dewey name.)
13. In 2006, Dewey Ballantine had debt of $38M, while LeBoeuf Lamb had debt of $13M, for a total of $51M between them. Dewey & LeBoeuf had a total debt in 2007, at the time of the merger, of $140M — up 174%. It grew to $176M at the end of 2008 (up 25.7%), and then to $203M at the end of 2009 (up another 15.3%). (Why did it grow so much??) So over three years debt increased 298%.
14. The number of “partners” in the combined firms was 324 in 2006, 338 in 2007, 340 in 2008, 336 in 2009, and 332 in 2010. So it was basically flat over 4 years. Interestingly, the Private Placement Memo never makes any distinction between equity partners and non-equity partners. It only uses the term “partners,” which leads a reader to believe that 332 partners have equity in the firm, and therefore a stake in its performance. But that’s not true. Only 190 of them were equity partners. That’s misleading.
15. When “Partners” join the firm they make an “initial capital” investment of 36% of the “partner’s target compensation.” I assume that means annual target compensation. But again no mention is made that the many non-equity partners make no such investment. And it’s unclear if any capital investment is required beyond the “initial capital.” Since a new partner — made through the ranks — earned about $300,000+ (according to news reports), then the initial capital investment from them was just over $100,000 (that’s not much), while lateral partners, with higher draws, probably paid much more.
16. Partners received a fixed monthly draw of $25K, with additional compensation in the latter part of the year based on meeting targets (again no mention is made of the guarantees; with the guarantees, many partners got paid regardless of meeting targets). This is on page 43 of the Memorandum.
17. Partner draws — In 2008 Dewey & LeBoeuf had 340 “partners,” without distinguishing equity from non-equity partners. The total partner draw was $243M, for an average draw of $714,000. The 336 “partners” in 2009 divided a total draw of $339M, for an average draw of $1,008,000. (The numbers can be compared to the Am Law 100 numbers for the firm to see the average draw for equity partners only).
18. In 2009, D&L had 3,544 active clients — 1,741 were US clients, and 1,803 were international clients — and total revenues of $808M. The top-10 clients accounted for 18% of the firm’s revenues, the top-20 accounted for 26% of the firm’s revenues. So 0.6% of the clients accounted for 26% of the revenue. The other 3,524 clients accounted for 74% of the firm’s revenues. That means the top-10 accounted for an average of $14.5M each in billings. The top-20 accounted for an average of $10.5M each. The other 3524 active clients accounted for an average of just $169,000 each. The firm had an average billing rate of $600 per hour. So the bottom 3,524 clients (that’s 99.4% of the clients) were billed for only about 281 hours each on average. That shows how a few clients account for so much of the revenue.
19. In 2009, 39% of the D&L lawyers (437 lawyers) were in international offices. Their work accounted for just 26% of the fees ($210M out of a total of $808M). The firm had 1,803 international clients (that’s 51% of the clients). It’s unclear whether the operating costs in the international offices were less than those for the domestic offices. Therefore, it’s not possible to determine whether the margins there are lower than in the U.S.
Interesting stuff. We thank our readers for their many insights.
What do you think about the offering memorandum? If you’d like to view the offering memo for yourself, check it out on the next page, where we’ve embedded it (via DealBook). If you have observations about it, feel free to share them in the comments.