The Foster Group Featured in Law360 on how "Shifting Market Winds Blew Kramer Levin to HSF Deal"

Shifting Market Winds Blew Kramer Levin to HSF Deal

In a 2020 interview with Law360, Kramer Levin co-managing partner Howard Spilko said the firm’s leadership was “very happy” with its current geographical footprint and believed that its small size was the secret to the firm’s success.

When asked what his goal was for the firm over the next five years, Spilko said it was to preserve Kramer Levin’s culture. Fast-forward four years and the 300-or-so lawyer, New York-based law firm announced this week that it is planning to combine with a more-than-2,000-lawyer global giant with both U.K. and Australian roots, Herbert Smith Freehills.

The winds of change have shifted in the legal industry and particularly the New York legal market, according to industry consultants and recruiters. Smaller law firms like Kramer Levin increasingly find keeping up with larger competitors a challenge when it comes to the contests for both clients and talent, they say.

And outsiders, particularly global heavy hitters based outside the U.S. like HSF, are very interested in making moves to enter and grow in the highly profitable New York legal market.

The deal announced this week followed closely on the heels of the highly publicized combination between global giant Allen & Overy, based in the U.K., and New York-based Shearman & Sterling this spring.

In an interview with Law360 Pulse on Wednesday, Kramer Levin co-managing partners Spilko and Paul Schoeman explained their shift in thinking over the last four years. The duo took over from 20-year firm managing partner Paul Pearlman in 2020.

“The market has changed in a very significant way over that period,” Spilko said. “Our peer firms are growing at a pace that is quite remarkable and that seems to be accelerating.”

Spilko pointed to the increasing importance of scale in transactional work and to the desire of clients to hire law firms with international networks of lawyers to handle their legal work. Right now the firm largely has to tap partner law firms when it comes to the international needs of its clients, Spilko said.

“It’s a very desirable position to be in to be able to say to clients that for all of their global needs, we have the resources, or will as a result of the combination, to perform across the globe,” he said.

The pressures that Kramer Levin has faced as a midsize law firm going it alone in the highly competitive New York legal market are not uncommon, according to industry experts.

The firm’s U.S. headcount has remained relatively unchanged over the last five years, rising from 332 to 339 lawyers between the 2020 and 2024 Law360 400 reports, despite adding 24 lawyers through a combination with a Washington, D.C.-based litigation boutique in 2022.

And just last month the firm saw the departure of a heavy hitter in the white collar litigation space, Barry Berke, then chair of its litigation practice, along with four other former federal prosecutors to Gibson Dunn & Crutcher LLP.

“Firms that are undersized relative to competitors sometimes have a challenge when it comes to attracting and retaining talent because they have less flexibility on compensation than very large firms,” said Kent Zimmermann, a management consultant to law firms at Zeughauser Group.

The increased level of competition is being felt even more acutely in the New York market, where the traditional white-show law firms have entered the lateral fray and increased competition in the process, according to Sabina Lippman, a recruiter with Lippman Jungers.

“I think it is much more difficult for midsize firms or firms generally who are not in the top 30 to 40 to compete in New York, given the significantly enhanced level of competition based on the increasing proactivity of Wall Street firms who previously hadn’t been as engaged in the lateral market, and the profitability delta that has opened up between the top firms and the rest,” Lippman said.

Size and global reach are also becoming increasingly important to the multinational corporations that corporate law firms represent, and smaller firms can struggle to get on important client rosters if they don’t have the size and geographic expansiveness needed to represent those clients in matters across the globe, according to Rose Corbett, a managing director at legal recruiting firm Macrae.

“Looking at it from the Kramer Levin perspective and what would have led them to seek a merger partner, I think the most obvious thing is their size and global reach,” Corbett said. “This, in one fell swoop, opens up a wealth of opportunities for them - market presence, cross-selling capabilities, reach - rather than remaining a midsize firm and competing against the big firms that are getting increasingly bigger over time.”

There’s also a motivation for corporate law firms to enter London specifically, where HSF has a massive presence, when it comes to mergers and acquisitions work, according to Michelle Fivel, a legal recruiter at Hatch Henderson Fivel.

“If you do work at the top echelons in the deal space, particularly anything with finance, I think London is becoming an increasingly important piece of the puzzle if clients are anything other than purely domestic clients,” Fivel said. “I think for Kramer Levin, (the combination) just gives them more options for their clients.”

There’s also a benefit to being the primary U.S. presence for a global firm like HSF - as opposed to joining forces with a large U.S. firm - in that it allows for a degree of independence, according to Michelle Foster, managing partner of The Foster Group Legal Search.

HSF has “only one office in the U.S., which allows Kramer Levin to retain a substantial amount of their culture, clients, structures, and likely fewer conflicts for (its) attorneys,” Foster said.

While the pressures on many midsize firms are clear, there’s a question as to why Kramer Levin would show interest specifically in HSF, a law firm with considerably lower partner profits than its own, rather than another firm with similar profitability levels.

One person with knowledge of the talks said Kramer Levin had already approached two New York-based law firms with merger hopes in the 18 months leading up to the HSF deal announcement, but was unable to reach a deal with those firms.

In their call with Law360 Pulse Wednesday, Spilko and Schoeman didn’t deny that contention. Spilko said that “like many firms, we have explored different strategic alternatives to grow.”

Both of the co-managing partners pointed to the cultural values HSF and Kramer Levin share and the ability of the legacy Kramer Levin lawyers to continue operating essentially as they have in previous years because they populate the vast majority of the combined firm’s U.S. offices and make up a majority of its presence there.

“I think the unique configuration of this combination gives us an incredible opportunity to get the benefits of a bigger firm without losing any aspect of the culture that we love,” Schoeman said. “I think that the U.S. firm will continue very much to resemble the Kramer Levin firm that we know and love and will only be made stronger by the addition of the Herbert Smith team in New York.”

https://www.law360.com/articles/2260162/shifting-market-winds-blew-kramer-levin-to-hsf-deal