Pepper Hamilton, Troutman Sanders, Faegre Baker & Daniels and Drinker Biddle & Reath.

It's not every day that two Am Law 200 law firms headquartered in the same city acknowledge just hours apart that they are in serious merger talks with large firms based elsewhere.

But on Nov. 13, that's what happened in Philadelphia. First, Pepper Hamilton confirmed that it's discussing a tie-up with Atlanta-based Troutman Sanders. And later that evening, Drinker Biddle & Reath confirmed that it's been talking with Minneapolis-based Faegre Baker Daniels about a combination.

Philadelphia-area legal recruiter Frank D'Amore said the fact that two firms of such size and with "such long roots in Philadelphia" are considering combinations with out-of-state firms is "monster news."

"That has to be the most significant day or day-plus in Philadelphia law firm history,"  D'Amore said.

Tom Clay, of law firm consultancy Altman Weil, had a more tempered reaction, noting that both Pepper Hamilton and Drinker Biddle have each been rumored to be seeking a merger for some time. "It's not as if all of a sudden something happened in this market," he said.

However, Clay said, their interest is indicative of a change industrywide.

"Right now there are more discussions between firms that really want to scale up than I've seen ever," Clay said. "The idea of being national or probably even international is where a lot of firms think they need to be."

If the deals both go through, D'Amore said, it's likely there will be some job loss in the Philadelphia area.

And, D'Amore noted, depending on where the combined firms define their respective headquarters, the mergers may decrease the number of Philadelphia-based Am Law 200 firms. (Troutman Sanders is significantly larger than Pepper Hamilton and Faegre is slightly larger than Drinker Biddle, so if size is any indication, that's a possibility.)

Still, he added, where a firm is headquartered has become less and less significant over the years.

Overall, both Philadelphia firms are looking at favorable deals, recruiter Robert Nourian, of Philadelphia-based Coleman Nourian, said, with opportunity to add geographic breadth and practice depth.

"Any firm in that 300-600 lawyer range anywhere in the country, including Philadelphia, is figuring out what to do for the future," Nourian said. Firms like Drinker Biddle and Pepper Hamilton, he said, don't seem to be forced into mergers by dire situations. Instead, they are thinking ahead.

Richard Scheff, a Philadelphia-based partner at Armstrong Teasdale and former chairman of Philadelphia's Montgomery McCracken Walker & Rhoads, said the two deals make sense for firms that are looking to expand their national footprint.

"It seems that Troutman Sanders wants to be stronger in the East, and Faegre wants to be stronger nationwide and in the East," Scheff observed. And he noted that Armstrong Teasdale is looking to do the same. When Scheff joined the St. Louis-born firm, he was tasked with spearheading its growth in Philadelphia and New York.

Michael Heller, CEO of Cozen O'Connor, said in an email that these potential deals reflect well on the local legal market by showing that national firms want to "capitalize on what these firms have built."

"On the one side it is a recognition of the success of Pennsylvania firms," Heller said. "On the other, I would hate to see Philadelphia no longer be the business headquarters for two venerable Philadelphia institutions."

More Firms Willing to Talk

Mergers with Philadelphia firms are not new, of course. The city's firms have been involved in other sizeable combinations in recent years.

Last year, Fox Rothschild did its biggest acquisition, bringing on over 100 lawyers from Southeastern firm Smith Moore Leatherwood. In September 2017, Ballard Spahr and Saul Ewing each announced plans to merge with midsize firms based in the Midwest. Blank Rome added over 100 lawyers from Dickstein Shapiro in 2016, and Morgan, Lewis & Bockius brought on hundreds of professionals in 2014 from Bingham McCutchen.

Industry watchers say more firms are now open to the idea of a merger.

D'Amore said law firms often tell him they used to turn away calls about prospective mergers because they were proud of their history. But now they feel they're in a size range the market no longer favors.

"If you're playing in that territory in the Am Law 100, you can't just stand there. You have to keep going, you have to grow," D'Amore said.

Nourian said law firms looking to grow their head counts into the thousands are finding that smaller acquisitions and lateral hires aren't getting the job done as quickly as the market now demands.

"That's a slow way to grow, and these days with the pace of business and what's going on with clients and the legal community generally, most firms are looking for larger, more transformative transactions," he said.

D'Amore added that for firms that don't want to take on debt to grow, the next option is for partners to give up some of their own money each year to reinvest in the firm. Combining with another healthy firm presents an alternative.

Still, Clay cautioned, mergers are sometimes quite costly, and the related expenses are often underestimated. However, he agreed that the reluctance to take on debt may be playing a role in the activity by large firms of late.

Due in part to lessons learned in the Great Recession, and in part to banks tightening their credit requirements, law firms have been managing themselves conservatively, Clay said. And being in decent financial health means one less barrier to a combination going through.

"The profession is in very good shape," Clay said. "It just is."