In Progress - Updated 11/16/14
to include the Vote To Assimilate 75% & "Post-Game" Commentary
Post-Game Analysis
BankruptcyMisconduct admits that we are surprised. While we could claim our prediction that the merger was not likely to close was accurate, the fact remains that 75% of the partners are being assimilated, which is almost an entire merger. In fact, we don't understand why MorganLewis wants to take 75% of the partners, but doesn't want to admit that they are merging Bingham into their fold. We don't want to split hairs, but lets try to figure out what is going on.
From the perspective of Stigma (see below), we don't see any advantage to MorganLewis in portraying the combination as an acquisition instead of a merger.
To state the obvious, 75% is greater than a super-majority. More importantly, the media has been covering the pending merger discussions for the better part of a year, so it's already seared into the minds of persons who track attorney conduct. If MorganLewis really needed to increase its headcount, there are many firms facing the declining prospects of being BigLaw, and one would think that MorganLewis could have chosen a firm without the stigma that includes DateRape, Malpractice, and representing terrorists. Quite ironic is that one of Bingham's failed legacies is the hindsight that they engaged in too many mergers.
What advantage could MorganLewis have by not claiming a "merger". We can speculate that MorganLewis might see value in having some sort of clear divide between Bingham's history, beyond Stigma, and MorganLewis' future. Much was made of the settlement of the malpractice litigation (instigated ironically by MorganLewis) related to the Dodgers, but there may be other lingering unliquidated liabilities for which MorganLewis desired a firewall of sorts. Just speculation of course, but we don't know if liability related to matters decided by extrinsic fraud could be muddying the outlook. BankruptcyMisconduct readers have seen reference to case law which nullifies statutes of limitations when there is fraud upon the court by on officer of the court. Thus, there it appears to be a weak hypothetical reason. Perhaps MorganLewis determined that the 25% of partners were really inferior. We just don't know. We can only guess that the potential negative consequences, to MorganLewis, of abandoning the 25% at the alter whilst absconding with the 75% has been fully anticipated by management. We remain surprised. We don't know why MorganLewis went so far in the merger talks to begin with, why they chose to assimilate 75% of the partners, and why they are seeking to classify it as an acquisition as opposed to a merger. Presumably, Jami Wintz McKeon is not motivated to try to make the merger probability prediction by BankruptcyMisconduct look smart. (That was tongue in cheek) Perhaps time will tell. Perhaps we should not try to read too much into things until the transaction(s) have taken place. We remain curious, indeed.
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Numerical Survival Probability Predictions
Please Note: Our numerical probability predictions for Bingham McCutchen's going concern continued existence should only be read in conjunction with the entire content contained and referenced in this page. Any reader who attempts to interpret these numbers without doing so will only be doing themselves a disservice. To be sure, these numerical results rely heavily on subjective analysis and interpretation of facts and disclosed information, such determinations could be deemed by some persons to be arbitrary. Furthermore, there very likely exists facts and circumstances regarding the parties which have not been publicly disclosed, and thus such information would not have been an input to the determination of these results.
P of survival is defined as going operating concern for at least 3 years, without bankruptcy protection
P(ind) - scenario where Bingham McCutchen (later abbreviated as "Bingham") does
not find a merger partner within 1 year
P(MLmc) - Probability that the MorganLewis Merger Is Completed
P(ACmc) - Probability that a Merger Is Completed with any candidate
P(MLwBM) - probability of survival for the joint post merger entity of
MorganLewis & BinghamMcCutchenAt this point in time, the completion of a merger with a more financial stable partner is fundamental to the survivability of Bingham. Thus we are also including our estimate of the chance that a merger is completed. We will also include our publication date for each estimate for tracking our estimates as time progresses and facts are revealed. - P(ind) = 5% to 10% 11/12/2014
- P(MLmc) = below 33% 11/12/2014
- P(ACmc) = below 40% 11/12/2014
- P(MLwBM) = Pending
I. Factoids & Media Observations
- Bingham to Join With Morgan Lewis Wall Street Journal Nov 16, 2014
Quote: "The combination, more of an acquisition than a merger, would boost Morgan Lewis’s head count to nearly 2,000 lawyers and could vault the firm into the top five U.S. law firms by gross revenue."
- Morgan Lewis takes on 227 Bingham McCutchen partners, sidesteps merger LegalWeek Nov 14, 2014
Approximately 75% of the parterns from Bingham will be absorbed by MorganLewis.
Sources: Morgan Lewis trying to lock in Bingham rainmakers before agreeing to merger Philadelphia Business Journal Nov 12, 2014We find this report fascinating: Adverse Selection forces would normally compel better Bingham talent to leave, particularly if the Bingham tribe was made to take a "hit". Some Bingham talent may be delaying departures to help old friends. We don't understand how such a deal could be enforced, but perhaps the most significant issue is the move may provide plausible deniability - an excuse for Morgan to bail on the merger. We still don't understand why Morgan would want the merger, other than the same type of blind ambition which got Bingham into their post merger-mania predicament.
II. Analysis
Central to our analysis and prognosis, BankruptcyMisconduct believes that the sum total risk to the continued existence of Bingham firm is highly speculative and doubtful.
A) Fundamentals - Bingham Specific B) Fundamentals - Industry Segment C) Internal Risk - Organizational Dynamics vis a vis Asymmetric Compensation & Control StructuresD) Negative Separation Risk - Inflection Point Externalities E) Merger Speculation
F) Fee Pyramid Aberrations - Theoretical Symmetric Fee Pyramid
- Idealized Curve Fee Pyramid
- Fee Pyramid Insights from observing pro sports
- Convexity - Measure of excess curve (lawyer costs) beyond Idealized Curve
A) Fundamentals - Bingham Specific
Considerable information has already been publicly disclosed about Bingham, and it is considerably negative. Unfortunately for the broad range of talent at Bingham, the fundamentals which point towards a negative outlook extend far beyond merely P&L. These issues are the most difficult to face and write about, which is why they haven't appeared until out 11/13/14 update. Include are significant Stigma Issues which to the detriment of any potential merger, are "sticky". Stigma associated with one firm generally transfers to its merger partner in the minds of potential clients, insurers, self-regulatory entities (bar associations), prosecutors, and the public. This is one reason why lawyers and their firms, who have crossed the line usually melt away into obscurity. The Stigma Issues factored significantly into our low probability of continued survival numbers. - "DateRape Roofie" legacy - Arguably this negative factor alone is sufficient to indicate the demise of the firm.
- malpractice legacy - How stupid can you get? Of course, you're going to have an unsatified client now and then, but to proactively sue your client for the so-called threat of a malpractice claim is like Woody Allen holding the gun to his head inside the bank "Stop or I'll shoot". One has to assume that this suit could not have been filed with senior inside approval, thus calling all expertise firm-wide into question. What legitimate businessman, inside counsel, or sentient news reading human would ever hire one of these lawyers going forward?
- talent bleed amidst self-selection bias - BankruptcyMisconduct is still working on our defections chart for Bingham. Suffice it to say that the best and brightest don't wait around to see what's left in the bag.
- financial failure - Bingham is not a firm looking for a strategic combination or any economy of scale. It is financially imperilled, having already warned it's own people of a possible bankruptcy if a merger is not completed.
- merger binge - Not just an issue of poor judgement in hindsight, mergers are correlated with other financial shennanigans. At a minimum, it is an additional due diligence expense for a white night. Worse, it could be an indicator of non competitive talent.
Perhaps the most significant is the poor financial performance, the dubious merger strategy possibly just a ruse to cover up the profitability deficit a la WorldCom. However, the stigma issues. Talent related problems can not be overemphasized, despite the preposterous industry self-declared notion that attorneys bill based upon their “bar age”. (See Asymmetric Compensation below)
Talent Drain - Adverse Selection
As the bad financial news spread within Bingham, the Rainmakers and "Portable Partners" make their own best self-interested determination to leave. This exacerbates the troubles at the firm because simple self interest cause the most valuable to leave, and the unfortunate flip side is that the least valuable stay. Thus whatever negative circumstance had existed, the downfall accelerates. More coming ...
B) Fundamentals - Industry Segment
The practice of law, so-called “BigLaw” in particular, has undergone tremendous changes in the last decade. To quickly summarize, margins are drastically decreasing, demand is decreasing, and competition is growing. The profit pressures on the legal Industry are reflecting those on the rest of the business world, though arguably the affect on the legal profession has been delayed. In short, there is excess capacity in BigLaw, and by definition the marketplace will eliminate the weak. More coming ...
C) Internal Risk - Organizational Dynamics vis a vis Asymmetric Compensation & Control Structures
Bingham fell victim to its own decision to employ a Secret Compensation Scheme, whose deleterious effects where likely exacerbated due to a pre-existing open compensation system. Those subject to the open compensation system were locked into that inferior position. More coming ...
D) Negative Separation Risk - Inflection Point Externalities
BankruptcyMisconduct believes that one of the most significant factors on law firm survival is ignored in nearly all media. We were the only commentators who predicted that internal acrimony at Dewey LeBoeuf would contribute to its demise, and our unique prediction that insider lawyers would rat out their management proved correct. Informing against ones former bosses represents a drastic change, but as we shall explain, it can be alligned with a given individual's personal utility maximization. Less dramatic negative affects on Bingham (or it's combined successor) resulting from the negative separation fallout include client specific competitive pressures, unanticipated stigma, and non-contributory expenses (litigation, settlements, investigations). More coming ...
E) Merger Speculation
Central to the question of the survival of Bingham is if they can get acquired. The term "Merger" strains credulity, as any acquired partners are likely to suffer some sort of hit as compared to a lateral transfer, assuming their track record and skills are sufficient to warrant a lateral transfer. So we feel compelled to ask Why would anyone take on a Bingham "package deal"? The Stigma Issues are a hurdle for which we can't imagine adequate compensation.
Just thinking out loud, but perhaps MorganLewis is more clever than we first assumed. Perhaps the "merger" talks are just providing them entry into the back room, so that the true productivity of each prospective lawyer could be scrutinized and quantified. Perhaps at the end of the day, MorganLewis will merely cherry pick some no-brainers, and the bulk of the fruit will be left to fall off the tree. This is only a guess, we're not sure how MorganLewis avoids the sticky Stigma if a press release goes out, but at the minimum they might greatly reduce their assumption of liabilities. Assuming al arguendo that Bingham files for bankruptcy, we don't see how any estate could successfully prohibit the best talent making a clean break, and acquirers cherry picking without creditor interference. But #WhatDoWeKnow anyway?
F) Fee Pyramid Aberrations
Theoretical Symmetric Fee Pyramid Idealized Curve Fee Pyramid Fee Pyramid Insights from observing pro sports Convexity - Measure of excess curve (lawyer costs) beyond Idealized Curve
More coming ...
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