In this week's Law Firm Disrupted, we'll dive into a law firm CFO's new valuation model for the industry, one that slapped a $23 billion tag on Kirkland & Ellis. I'm Dan Packel, the author of this weekly briefing on the changing legal market, and you can reach me here or sign up to receive this newsletter here.

Looking for Law Firm Unicorns

Hunton Andrews Kurth CFO Madhav Srinivasan's recent exercise in valuing law firms is certainly a conversation starter.

Take the headline finding that Kirkland is worth $23 billion. That's more than the $22.5 billion valuation of payment technology company Stripe, which according to one set of rankings is the fourth largest unicorn in the U.S.

Or that at roughly $10 billion, second-ranked Morgan, Lewis & Bockius and third-ranked Latham & Watkins are both valued below the $15 billion attached to Fortnight developer Epic Games but more highly than digital currency exchange Coinbase's $8 billion.

As someone who relies on the workplace communication platform Slack to deal with my editor and others in the newsroom, I'm personally struck by the fact that Sidley Austin and White & Case are both valued at slightly over $7 billion—just like Slack during its last financing round.

I don't think Srinivasan put nearly two years of work into building his model just to give a handful of firms bragging rights. While non-lawyers are currently barred from owning or investing in U.S. law firms, change looks to be in the air.

Several state bars, most prominently California, are contemplating eliminating the restriction, with the goal of stimulating innovation and ultimately lowering costs to consumers. Litigation funder Burford Capital has floated its own proposed structure for allowing outside investment that would not require regulatory changes.

In this new world, it will be more than just a curiosity that we can put a price tag on a law firm and see where it sits in the marketplace. In the U.K. and Australia, some law firms are already publicly traded. The U.K. firm DWF went public in March; before its IPO, it was valued at 366 million pounds, or over $462 million—the largest offering in five years.

“Law firms are suddenly being treated like normal businesses, valued by Wall Street bankers in the same way they would value Uber, or any other company for that matter,” noted ALM Intelligence analyst Nicholas Bruch.

One more thing I found striking about Srinivasan's report: He shows his work. I'll be curious to see if any others in the industry agree with the merits of the exercise but find fault with his methods.

If any of you think you have a better way of valuing firms, don't hesitate to let me see your results.

In The News

➤➤ Last week I mentioned the financial stratification between the most profitable firms and everyone else in the industry. Now we have data on the Am Law Second Hundred to help us continue fleshing out that divide. My predecessor here Roy Strom observed that these firms grew at a five percent slower clip than the first hundred in 2018. While part of that gulf appears to be fueled by the wild success of firms like Kirkland at the top of the big list, Roy also flagged a comparative inability to curb costs in the Second Hundred.

➤➤ Why are accusations of gender bias against a giant law firm fodder for a newsletter about competitive pressure on the legal industry? Beyond the fact that a putative class action suit is presumably disruptive to morale at Jones Day and my own normative interest in law firms being equitable places for all sorts of people to thrive, if Big Law in general is a lousy place for women to work, that's bad news in a world where firms are competing not just with each other but with outside entities for top talent. That's why I was struck by Reuters' Alison Frankel's observation that lawyers bringing these claims should stand behind their real names, just as is expected in other industries.

➤➤ A small data point against the hypothesis that the Big Four are ruthless indomitable forces destined to swallow the global legal industry in the same way they dominate accounting: The Financial Times reported that Goldman Sachs dropped PwC and selected Mazars to audit its European operations. Blame European rules that mandate switching auditors every 20 years.

➤➤ And how about CKR? Per my colleague Christine Simmons, this firm spread its tentacles from New York to Southern California, Philly, Seattle and Texas and then to Estonia, Switzerland, Turkey and Wyoming. Apparently it's not working out so well.