A merger of Atlanta-based Troutman Sanders and Philadelphia's Pepper Hamilton would create a combined law firm with more than $855 million in revenue, potentially shooting the firm up to the Am Law 50.

The two firms confirmed Wednesday they were in talks, stating they have "entered into discussions about a possible combination. … Our first priority is delivering exceptional legal services to our clients," said the firms' shared statement. They declined to comment further.

The tie-up discussions are far along, sources say, but the firms have not publicly confirmed several details, including when the deal could close and any new name for the combined business. Internet domain name records show TroutmanPepper.com and TroutmanPepperSanders.com have been created in recent months.

The merger, which would create a combined firm with more than 1,000 lawyers, would appear to expand Troutman's practice offerings and give it a strong foothold in the Northeast, while helping out Pepper Hamilton, which has seen falling revenue and head count in the last three years.

"I don't think it's essential for the deal to happen for Troutman, but it would expand their offerings and platform," said Shannan Rahman, an Atlanta managing partner at national legal recruiter The Partners Group. "Pepper is known for their excellent attorneys and they have a great reputation, especially in the Northeast."

Rahman added that the combined firm, potentially in the top half of the Am Law 100, would compete with "another echelon of firms." 

Troutman now ranks at No. 68 in the Am Law 100, with $521.5 million in gross revenue last year and 650 lawyers in 12 U.S. offices. Pepper Hamilton is ranked at No. 105 on the Am Law 200, with reported gross revenue of $334 million last year and about 450 lawyers in 14 offices.

"It's a win-win for both firms," Rahman said. "A lot of national firms are merging with other similarly situated firms to expand their footprint and combine resources. That provides additional stability for firms—more of a safety net as they expand their practice offerings. If there is a downturn [in the economy] and some areas are struggling, there are other areas to buoy them." 

Financial Picture

On paper, some of the firms' financial metrics are similar, while others are further off. Revenue per lawyer at Troutman last year was $809,000, near Pepper Hamilton's $789,000, according to American Lawyer. The firms' profits per equity partner figures last year were further apart, with Troutman at $1.074 million and Pepper Hamilton at $830,000.

"Troutman is probably the better-known firm nationally, and is stronger financially, but the numbers are not so far off that it doesn't make sense," Rahman said. "They should be able to bridge that gap with their rates and profit per partner."

Both firms have offices in New York and Washington, as well as several locations in California: Orange County for both firms, Los Angeles and Silicon Valley for Pepper Hamilton and San Diego and San Francisco for Troutman. 

That said, Troutman's New York and Washington offices, at roughly 100 and 70 lawyers, respectively, are about double the size of Pepper Hamilton's offices in those cities. The deal would significantly expand Troutman's Northeastern footprint though, adding Pennsylvania, Boston and New Jersey. Meanwhile, Pepper Hamilton would gain a larger national footprint and a foothold in the Southeast, particularly Atlanta; Charlotte, North Carolina; and Virginia, where Troutman has several offices.

Kent Zimmermann, a law firm consultant at Zeughauser Group, said the firms seem to have two critical elements for a successful merger: "shared strengths and shared aspirations."

"I think it fits into a larger pattern in the industry, of firms coming to the conclusion that it's hard to be a far stronger version of themselves, hard to really be the firm they want to be, on their own by just trying to grow slowly, brick-by-brick, lateral-by-lateral,"  said Zimmermann, who was not involved in the merger talks between the two firms.

He said the combined firm will have a better profile and brand and will likely be able to raise rates more easily and quickly than the two separate firms would have. In turn, he said, they will be more profitable, and more attractive to potential lateral hires.

From a financial standpoint, Pepper Hamilton saw dramatic declines in its 2016 performance, compared with the year before, and never fully recovered its numbers. 

The firm saw revenue drop 10.6% and profits per equity partner plummet 28.8% from 2015 to 2016—which firm leadership attributed at the time to a temporary drop in demand in the firm's health effects practice, after a record 2015.

That performance was followed by a string of lateral departures at the beginning of 2016. 

Pepper Hamilton's PEP recovered slightly in 2017, increasing by 14.3%, thanks in part to the firm being a bit smaller, with lower head count and gross revenue that year. It shrank again in 2018, but firm leadership characterized that year as a success, saying "we're a little different." 

Different, to be sure. Pepper Hamilton saw profits per equity partner of more than $1 million in 2015, compared with the $830,000 figure reported for 2018.

In 2014, the firm had 508 lawyers, and in 2018, its head count was down to 424.

Asked earlier this year how the firm was "different," Pepper Hamilton managing partner Thomas Cole said in the past, more of the firm's revenue could be traced to a small group of "behemoth" clients. Now, he said, those clients don't turn to the firm for every need, only their most significant ones.

"The industry we serve changed dramatically," chairman Thomas Gallagher added. "We've changed because the industry we serve has changed."

Past Talks

Both Troutman and Pepper Hamilton are entering the talks after having abandoned other discussions in recent years. For instance, the last time Pepper Hamilton was engaged in merger talks that became public, the discussions were with Pittsburgh-born international firm Reed Smith.

"Ever since what happened with Reed Smith a couple years ago, I think we all knew after that that the firm would again look to merge," said one former Pepper Hamilton lawyer, who asked not to be named. But since the Reed Smith talks fell apart, any other merger discussions "have been like state secrets."

Sources said Pepper Hamilton has been working toward a merger for some time, focusing on strengthening its core practices while keeping other practices lean.

Troutman has also been considering mergers with other large U.S. firms. Last year the Atlanta-based firm entertained merger discussions with Dallas-based Winstead, but those talks broke off in July 2018 due to obstacles such as law firm billing rates and the preferred client mix.