Thanks to Apple and its Mac, "You'll see why 1984 won't be like '1984,'" an announcer intoned at the end of the minute-long spot, referring to George Orwell's classic dystopian novel.
That image persists even as the Valley has become not just a bastion of corporate America, but perhaps its capital. At more than $150 billion, Apple's market capitalization is within a few billion dollars of IBM's, and the company markets its iPhone through an exclusive partnership with AT&T Inc. Among the corporate giants based in the Valley are Cisco Systems Inc., Intel Corp., Oracle Corp. and Google Inc., which went public just five years ago and already is worth almost as much as Apple.
The combination of the Valley's entrepreneurial energy and its large companies has attracted a wide array of law firms to the Valley over the past decade. Firms from San Francisco and Los Angeles such as Morrison & Foerster LLP and Latham & Watkins LLP have tried to extend their reach into the Valley by building sizable offices there. Pillars of the New York corporate bar such as Davis Polk & Wardwell LLP and Simpson Thacher & Bartlett LLP started coming in the late 1990s in hopes of capturing high-end corporate work. And firms from around the country continue to open in the Valley; Atlanta-based King & Spalding LLP arrived last year, for example. In a few cases, the outsiders have acquired a Valley or San Francisco law firm; in many others, they've poached lawyers from the local firms.
But the native firms, led by Wilson Sonsini Goodrich & Rosati PC, Apple's longtime outside counsel; Cooley Godward Kronish LLP; and Fenwick & West LLP, continue to dominate the Valley legal market. They have deep relationships with venture capitalists, entrepreneurs and established companies. Wilson's Larry Sonsini and Fenwick's Gordon Davidson have been major figures in the Valley for decades; their counterpart at Cooley, James Gaither, moved to Sutter Hill Ventures in 2000. Younger lawyers at all three firms have maintained the ties those lawyers forged. The three firms still have far more lawyers in the Valley -- "feet on the street," in the local argot -- than any of their competitors (see chart).
Attractive as it is to law firms, the Valley is not without its challenges. Though the companies with headquarters there have continually become larger and more global, they've also diminished in number. According to the San Jose Mercury News, there were 315 public corporations in the area in 1994 and 417 in 2000. But that number has fallen for eight straight years and rested at 261 when the Merc published its most recent annual survey of the tech market in April.
The decline is the product of both consolidation through mergers and acquisitions and a much less robust initial public offering market. According to the Merc, an average of 41 Valley companies went public each year between 1990 and 1998. After the frenzy of 163 IPOs in 1999 and 2000, that number has dipped to 11 annually. Many observers believed Google's 2004 IPO would lead to a flood of imitators; it hasn't.
Wilson, Cooley and Fenwick built their franchises on venture work and the public companies it spawned. What effect will the decline of the IPO market have on them? And more broadly, will the increased size and reach of the Valley's public companies generate enough legal work to offset the contraction in their number?
For a community that proclaims its status as the world's purest meritocracy, Silicon Valley is a remarkably insular place. Wilson and Cooley sit across from each other on Page Mill Road in Palo Alto, Calif., just south of Stanford University, the locus of many of the technological developments that the region's businesses have commercialized. The venture capitalists who have funded those businesses are massed on Sand Hill Road, which runs along the northern edge of the Stanford campus.
The physical proximity fosters close ties among VCs, entrepreneurs and lawyers. "It takes a long time to develop an extensive network," Davidson says. "I know, because we came to the party approximately 15 years later than Wilson Sonsini did. And it probably took 15 years to develop those relationships. Our founders started the firm in 1972, and John Wilson started his firm approximately 15 years earlier."
John Wilson and Peter McCloskey hung out a shingle in Palo Alto in the mid-1950s, when Larry Sonsini was still in high school. McCloskey moved into politics, and the firm dropped his name when he was elected to Congress in 1966, the year Sonsini graduated from Boalt Hall, the law school at the University of California, Berkeley. Wilson Sonsini became the Valley's dominant law firm, but it was small, and until well into the 1980s most San Francisco law firms ignored the market it served, an error they've spent years trying to rectify. Cooley and Brobeck, Phleger & Harrison LLP were exceptions; they saw the Valley's promise early on and reaped the fruits of their perception in the 1990s.
Brobeck collapsed in 2003 after expanding too aggressively during the tech bubble, but Cooley and Wilson remained the largest firms in the Valley after slimming down to about 650 lawyers each from more than 800 in the wake of the tech market crash. Fenwick remains a significant presence in the VC world, as does Gunderson Dettmer Stough Villeneuve Franklin & Hachigian LLP, a 1995 spinoff from Brobeck. All four firms -- Wilson, Cooley, Fenwick and Gunderson -- have expanded much more slowly this decade than they did in the 1990s as the IPO market, and thus the supply of new public companies, has slowed.
With the partial exception of Latham & Watkins LLP, which opened an office in the Valley in 1997, no outside firm has cracked the VC market. Acquisitions haven't worked; San Francisco-based Heller Ehrman White & McAuliffe LLP went belly-up last fall despite (or, some suggest, in part because of) acquiring Venture Law Group, a Wilson spinoff, in 2003. DLA Piper US LLP's 2005 acquisition of Gray Cary Ware & Freidenrich LLP hasn't made the global firm into a Valley player. And for the most part, lateral hires have also proven ineffectual at their new firms.
"A lot of firms had challenges or even failures by trying to come in and compete with the dominant firms in the startup/emerging company/corporate practice," says Courtland Reichman, the managing partner of King & Spalding's offices in Silicon Valley and San Francisco. "It's hard to compete with the dominant firms in those practices without a differentiating strategy."
Many firms haven't even tried to compete for VC work. Weil, Gotshal & Manges LLP, for example, began building a significant intellectual property litigation practice in the early 1990s, a move that's proven prescient as IP and patent disputes have become increasingly prevelant over the last decade. Simpson Thacher has leveraged its private equity expertise to build a 70-lawyer office, and Davis Polk and Skadden, Arps, Slate, Meagher & Flom LLP have built similarly sized Bay Area presences by bringing their strengths in corporate and M&A work to the area.
The long-term cooling of the IPO market has made ceding VC work to local firms easier. The practice has never been all that lucrative; today, Davidson says, the legal fees on a $10 million venture funding might be $30,000, a small fraction of the bill on a large public company merger. Historically, the key to making such assignments profitable has been to make a little money by doing many efficiently and then to retain as clients the companies that go public. The steep decline in IPOs reduces the payoff from the second part of the strategy.
But some lawyers say the decline in the IPO market does not equate to a decline in the funding of emerging companies. "I think in the last five to 10 years, a lot of companies have realized that going public is not a panacea, not the be-all and end-all," says Kevin Dennis, a partner at Goodwin Procter LLP, which opened in the Valley in 2007. "Going public is a mixed blessing, and there are other liquidity events, and maybe doing a significant minority deal is a more appealing liquidity event. I think people have thought a little more creatively, if you will, about how liquidity can be reached."
Alan Mendelson, a Latham partner who moved from Cooley in 2000, agrees. "The number of public companies that I've had as clients has vacillated, and it's certainly somewhat lower than it was several years ago," he says, "but with emerging companies, if you can continue to attract them and get financing, you don't know what it's going to be, but something is going to produce revenue over time."
More fundamentally, there are Valley veterans who don't believe the IPO market will stay slow forever. Davidson hypothesizes that the market waxes and wanes in long cycles. There was a boom of IPOs in 1968, he says, and then the market closed until 1980, when Apple and Genentech Inc. -- another Wilson client, which was sold to Roche Holding Ltd. earlier this year for $50 billion -- went public. There was another lull until Oracle went public in 1987, and another until Netscape Communications Corp.'s 1995 IPO opened the floodgates for the dot-com boom. "I think we are coming up on the end of that eight- to 10-year cycle where we'll see public offerings again," says Davidson.
And the long-term rewards for the firms that are strongest in venture work are considerable. "The venture practice is key to the firm," says Martin Korman, Wilson's head of M&A, who represented longtime client Sun Microsystems Inc. on its $7.4 billion sale to Oracle earlier this year. "We don't know what the next Genentech, Netscape or Google is going to be but we know there's going to be one and if we stay focused on affiliating with the right VCs and entrepreneurs, we will have a good shot at representing one or more of them."
Whatever the future of VC investing, it no longer constrains Silicon Valley. The largest software companies have revenue streams so stable as to be almost annuities, allowing them to assume debt and engage in other transactions such as hostile takeovers and leveraged buyouts once associated with Rust Belt companies.
The bellwether in that regard was Oracle's 2005 takeover of local software rival PeopleSoft Inc. Oracle used Davis Polk for corporate advice and turned to Latham to defend a government lawsuit challenging a potential deal. PeopleSoft first used Gibson, Dunn & Crutcher LLP's Los Angeles office and later turned to Cleary Gottlieb Steen & Hamilton LLP in New York, which doesn't have a U.S. office west of Washington, D.C.
Just a few months after that deal closed, a consortium of seven private equity shops led by Silver Lake Partners agreed to buy SunGard Data Systems Inc. of Wayne, Pa. Ropes & Gray LLP led the buyers' legal team, while Shearman & Sterling LLP advised the target directors. The deal showed tech's maturation and its expansion well beyond the zip codes around Palo Alto.
Just as the elite New York firms won such assignments, national firms with other practice niches moved into the Valley to focus on their specialties. Like Fortune 500 companies in other parts of the country, large Valley corporations use a wide array of firms for various matters.
"Every major transaction Synopsys does has an international footprint," says Brian Cabrera, the general counsel at Synopsys Inc., a $3 billion market cap company based in Mountain View, Calif., that produces software and services used in the design and manufacture of semiconductors.
"My legal team needs to approach the work they do with a much broader global perspective, and they must be armed with deep specialized knowledge. They need to understand that large, multifaceted, public companies like mine have completely different needs than pre-public startups."
Thus firms from around the country find themselves pulled to Silicon Valley. Generations of lawyers once associated King & Spalding with Coca-Cola Co. in the way they thought of Cravath and IBM, but Reichman says 15% to 20% of his firm's revenue and clients come from California. "To serve those clients, we need to be here," he says. "To build a strategy, you need to have a practice group reason for being out here. IP is a major practice for us, and there was a clear need for our IP team to be here. There's an incredible amount of talent available in the Valley." He adds that King & Spalding's strength in life sciences, led by its lawyers specializing in Food and Drug Administration matters, solidified the firm's interest in having a presence in California, where San Diego and the San Francisco Bay Area are major biotech hubs.
More than 75 of the AmLaw 100 are in Silicon Valley, Reichman says, which creates significant competition for clients and legal talent. But, he adds, "the sheer number of top-tier law firms in New York and Washington is based on real, honest-to-God client demand. Silicon Valley is a technology-focused market, but there are a lot of similarities. There is no other U.S. market where client demand is as significant and the talent we see here in the high-tech and life sciences markets."
The new entrants have not escaped the notice of the local legal elite, who began building the practices needed to serve large public company clients years before the New York firms moved into the Valley. Davidson is skeptical of the value of branch offices. Fenwick has 250 of its 265 lawyers in Mountain View, Calif., and San Francisco and has no plans to expand its geographic reach. "Being global is a state of mind as opposed to a state of place," he says, pointing to his firm's longstanding relationships with Cleary Gottlieb and London-based Allen & Overy LLP and citing the expense of opening branch offices.
"We think we can serve clients virtually," he says. "It's a lot less expensive in terms of building infrastructure, and it's a lot easier to manage." Cisco agrees; it used Fenwick for all of its corporate work. Davidson believes law firms with Valley outposts would retain much of their work companies from the area generate even if they left town.
Wilson and Cooley have come to the opposite conclusion. "We started to see the potential of losing business to other firms less as a product of firms coming into Silicon Valley and more because our clients were getting to the point where they believed they needed people in New York and in Washington, D.C.," says Stephen Neal, Cooley's chairman, of the motivation for his firm's expansion into those markets.
"Part of it was an increasing sense from clients that they really liked the idea of having a single firm that they could call that could help them in every major or many of the major markets in America. That was one thing. The second part was a belief that the legal talent that we all need to continue to recruit aggressively wasn't all here in the Valley and they were not all prepared to come to the Valley," he adds, citing antitrust, regulatory and white-collar lawyers as examples. To establish a beachhead in New York, Cooley acquired Kronish Lieb Weiner & Hellman LLP and its 110 lawyers in 2006. The next year, Cooley opened in Boston. And last year, Reston, Va.-based partner Joseph Conroy succeeded Neal as CEO.
The moves didn't appease everyone at Cooley. In July, Richard Climan, the firm's head of M&A, left for Dewey & LeBoeuf LLP and took several other partners with him. Dewey didn't have a pre-eminent M&A practice, but it did offer a national and international presence and regulatory expertise Cooley couldn't match. Three antitrust partners also left Cooley over the summer, two for Jones Day LLP and another for Shearman & Sterling LLP. The departures reflect a belief in the limitations of Cooley's platform despite the firm's expansion efforts.
Wilson also feels pressure to grow. The firm has expanded its practice in areas such as antitrust, increasingly important in a consolidating tech market. And last month, after eight years in New York, Wilson made a major move in the city by hiring Warren de Wied, an investment banker at Merrill Lynch & Co. and before that a co-head of M&A at Fried, Frank, Harris, Shriver & Jacobson LLP, where Korman was an associate before he moved to Wilson in 1993, as were several other Wilson partners.
However much Wilson and Cooley expand, their fortunes will be tied to the Valley's economic dynamism, a quality that stretches at least as far back as the 1930s, when David Hewlett and William Packard and the Varian brothers, Russell and Sigurd, began the research that formed the basis for their respective companies. Once icons as important to the young engineers who came to Stanford as Steve Jobs and Google founders Sergey Brin and Larry Page are now, Hewlett, Packard and the Varians have receded into history, ossified in the names of the companies they founded.
But the commercial success those corporations enjoyed, the innovation they fostered, and the continued emergence of new engineers and entrepreneurs as major figures in American business suggest the Valley will remain vital for decades.
So does Stanford's layout, which like much of the rest of the country, is viewable on Google Maps. Behind a sprawling campus lie acres and acres on which the 124-year-old university could expand even further. The VCs on Sand Hill Road, the lawyers on Page Mill Road, and the scientists who sit between them can only hope that map is an image of their own future.