As plan to expand falls on hard times, firm is forced to merge. (Up Front).

Kurt Peterson became managing partner of Crosby Heafey Roach & May PC two years ago with plans to expand the 102-year-old firm's scope and reach.

Less than two years later, it's about to disappear.

Instead of overseeing what should have been heady times for 250-attorney Crosby Heafey, Peterson watched profits fall by 15 percent in 2001, the departure of about a dozen partners, and the layoffs of 13 associates.

Stung by the recession, the dot-co meltdown, and the cherry picking of clients by East Coast firms moving West, the firm was forced to late last year to seek a merger partner.

One grueling year later, Peterson, who opened the L.A. office in 1990, completed the year's largest law firm merger late last month when Oakland-based Crosby Heafey combined with Pittsburgh-based Reed Smith LLP.

"This year has been pretty tough," said Peterson, who delegated day-to-day responsibilities to Oakland partner Jack Nelson while focusing on merger discussions. "When I was a practicing lawyer, I billed a lot of hours and tried cases, but it's never been like this past year."

When Peterson joined Crosby in 1978, 60 attorneys worked in one Oakland office, specializing in trial work for the railroads, medical malpractice and product liability. Seeking to grow, Peterson and other partners recognized that certain practices -- such as insurance defense -- did not bill at a high enough rate to attract new partners.

Broader focus

The firm shifted to corporate work, building through the acquisition of a group of corporate partners in San Francisco in 1997, and last year of the 15-person Bay Venture Counsel of Oakland.

Meanwhile, the firm added offices in San Francisco, Oakland and L.A. The expanded practice boosted revenues to $108 million in 2001 from $90 million in 2000, he said.

"They want to be a national player because they can usually get more of the best work and upgrade their client base," said Orange County legal consultant Peter Zeughauser.

But growth came at a cost.

"The partners who were there were plainly making long-term investments in the firm," said Judith Droz Keyes, a former Crosby labor partner who left in August to join Morrison & Foerster LLP's San Francisco office. "That impacted the profitability on a short-term basis and that made it difficult to recruit. What we could afford to pay incoming lawyers was limited."

Despite the expansion, Crosby still had two-thirds of its attorneys in the Bay Area when the dot-coin bubble popped. Profits, which had been holding steadily at about $380,000 per partner, fell by 15 percent in 2001.

Though it was involved in one of the largest product liability cases of 2001, serving as California counsel for Sulzer Orthopedics Inc. in its $1 billion hip implant case, Crosby saw some of its Fortune 500 clients -- Coca-Cola Co. and Daimler/Chrysler -- gobbled up by East Coast firms moving West.

For some at Crosby, Peterson, 49, represented a new style of leadership. He had replaced managing partner Ronald Rosequist, 61, who turned an Oakland litigation shop into a strong California firm by adding offices statewide.

"Ron represented the strong, proud history of the firm," said Droz Keyes. "Kurt was a new generation with a different vision. He was a very strong, solid, impressive face for Crosby not being your grandfather's law firm."

But not every partner agreed with the direction Peterson and other management were taking.

Jim DeRoche, a 12-year Crosby partner who joined Seattle-based Perkins Coie LLP's L.A. office as of counsel in September, said he did not want to be part of a large, national firm.

"I just thought Crosby would be too big," he said. "It loses its espirit de corps. The bigger you are, you become more isolated from partners and the staff."

Merger challenges

In the end, the loss of some major clients and the profit squeeze were factors in the departure of about a dozen partners during the past year and a half. Late last year, Peterson approached the firm's senior partners with the possibility of a merger.

"There can't be anything more different than a law firm merger. Unless you get everyone to go with you, you don't have anything to merge," he said.

Reed Smith, with similar practices, was looking for a California presence. Still, Crosby's profits needed to be tweaked. Reed Smith was a 700-attorney firm with $400,000 in profits per partner in 2001, according to American Lawyer magazine's AM Law 100 list.

To make the deal more palatable to the larger firm, Crosby had to reduce its roughly 80 equity partners to 55, Peterson said. It approached mostly part-time and senior partners to become non-equity partners or change to an of counsel status. Other partners simply left.

The combined firm will have 1,000 lawyers and projected 2003 revenue of $500 million, with profits per partner of about $500,000, Peterson said.

Peterson will be one of three Crosby partners to join Reed Smith's 18-member executive committee. Reed Smith Chairman Gregory Jordan will remain managing partner.

"I'm very excited about practicing law and doing whatever I can for Reed Smith," he said. "But I'm also excited to pass the baton on to Greg Jordan."