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M&A Power Wachtell Could be ‘Last True Law Partnership’

Sept. 20, 2018, 4:10 PM

For decades, competitors of M&A law firm Wachtell, Lipton, Rosen & Katz have privately bet against its longevity, saying its business is too closely tied to a single person: Martin Lipton.

The 87-year-old attorney who created the “Poison Pill,” a corporate strategy to protect against hostile takeovers, has not stepped away from his 31st floor office at Wachtell’s headquarters in Manhattan.

He continues to spar with the likes of Carl Icahn, Paul Singer and other billionaires in proxy fights, meets with CEOs at the 21 Club for lunch, and pens memos about corporate law to a who’s who of business executives.

In fact, his schedule is as busy as it was in the 90s, his secretary says.

Lipton’s also advising United Technologies Corporation in its $23 billion acquisition of Rockwell Collins Inc. in what could be the largest aerospace deal in history. And he’s working with longtime client, CBS Corporation, which is confronting the departure of CEO Les Moonves over sexual harassment allegations as the media giant comes under new management.

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Although Lipton has no plans to retire, the question of what will happen to his 260-lawyer firm when he does hang it up has been carefully considered throughout Wachtell’s ranks, according to interviews by Bloomberg Law with more than two dozen of its partners, associates and staff.

As many as 10 key clients continue to rely on Lipton’s judgment. UTC general counsel Charles Gill says he communicates weekly, if not daily, with Lipton, including 3 a.m. emails if things get urgent. And while Larry Tu, chief legal officer of CBS, depicts his relationship with Wachtell as “very deep,” he acknowledges what he calls Lipton’s “unmatched legacy,” saying he’s a lawyer who has “built personal relationships with senior executives in many companies.” Those are “not easy to hand off to someone else,” he says.

One firm staffer goes as far as saying Lipton “is the firm.”

Lipton, however, sees it differently.

“If I wasn’t here tomorrow, the firm wouldn’t be any different,” he says in an interview at his office. “You don’t have a firm unless the generations can pass it on to the next generation.”

The Big Transition

Passing it on is what Lipton has quietly made what is likely his last act at his 53-year-old firm. And it has included more than just passing down legal work, a process that longtime clients such as CBS and UTC can attest to.

Marty Lipton attends the Allen & Company Sun Valley Conference on July 8, 2015 in Sun Valley, Idaho.
(Photo by Scott Olson/Getty Images)

Although he surrounds himself with partners who take on greater responsibility, one key thing he’s done is try to preserve what he and others feel makes the firm special, and also a dying breed in the legal profession. A place that keeps a familial culture, where partners treat each other with respect, and where money, although they make plenty, is not ultimately what binds the place.

“The great thing about the firm is that the culture that the four [founders] started with has been bought into by now three generations of new partners,” says Lipton. “You try to keep a way of living together in practice that works, that hopefully everyone is happy with.”

What partners have bought into is a list of principles Lipton jotted down some three decades ago. Today, they sit in a small room connected to his corner office, where he likes to meet guests. There, a Steuben glass tower is displayed on a shelf and etched with small black letters. Get close and you can read all 35 principles.

They might seem dated to an outsider. One forbids marketing or public relations, saying the firm doesn’t seek clients that way. Another says it doesn’t recruit attorneys from a competitor. A third says the firm has no branch offices. It confines growth of five to 10 lawyers a year, most right out of law school or clerkships.

Perhaps most important is how the firm pays its partners through what’s known as a “lockstep” system. Compensation is tied to firm seniority, rather than hours billed or business brought in.

These principles—and the culture they’ve helped create, where attorneys meet on Tuesdays for lunch to stay close—have been held up by Wachtell partners as “genius,” a playbook worthy of a Harvard Business School case study offering broader lessons for corporate America.

They’ve also helped make Wachtell something of an outlier. It’s the only major law firm where, at least to Lipton’s knowledge, not one partner has joined another law firm for a bigger paycheck.

Lipton, who has made a name for himself protecting boards of directors from unwanted acquirers, has helped create a culture in his own firm that’s shielded it through the chaos of tougher times in the legal industry.

It is an industry where partners, even within the same firm, compete with each other for client business, engage in aggressive marketing campaigns, and seek to capture market share by poaching partners from each other, or executing full-scale mergers with competitors.

Activists and Principles

Lipton’s principles say Wachtell will never merge and emphasize the firm isn’t a business, but an old-fashioned partnership with no written partnership agreement – a handshake between friends.

Partners make decisions by consensus, each with one vote. Its lawyers are involved in the community, and the firm encourages them to teach, lecture, write books and law review articles, and participate in bar associations. There is no single major client, which helps keep its counsel unvarnished. And its lawyers deploy on client matters through organized task forces, across specialties.

Often this means butting heads with billionaire investors as Wachtell defends companies in hostile takeovers and activist shareholder campaigns.

Bill Ackman, chief executive officer of Pershing Square Capital Management LP, speaks during a Bloomberg Television interview in New York, Nov. 1, 2017.
(Christopher Goodney/Bloomberg via Getty Images)

Bill Ackman, for one, has invited Lipton to debate in a public forum about the virtues of activism, an invitation he’s not accepted. In an interview with Bloomberg Law though, Lipton says Ackman’s investment in Valeant, which cost his firm, Pershing Square Capital Management, $4 billion in 2016, was a vivid illustration of the perils of activism.

Two years ago, as its executives faced charges of accounting fraud and price gauging, Valeant stock collapsed, plunging by 90 percent. Since, the firm has brought in new management and its position improved in 2017 and 2018.

Ackman declined to provide any on-the-record statements for this story.

Wachtell has also riled other investors.

One is Carl Icahn, a longtime adversary who has often attacked the firm’s clients with takeover bids. In 2013, Icahn filed an unusual malpractice suit against the firm. He claimed Wachtell didn’t make important fee disclosures to its client, CVR Energy Inc., in a 2012 takeover by Icahn. Wachtell denies any malpractice and the case continues to play out in Manhattan court.

Billionaire activist investor Carl Icahn, center, arrives during the 58th presidential inauguration in Washington, Jan. 20, 2017.
(Andrew Harrer/Bloomberg via Getty Images)

Icahn, through his lawyer, declined comment.

Inside Wachtell, Lipton’s principles embody the anti-activist.

The firm is known for being adverse to change. Lipton and the only other living founding partner, Herb Wachtell, still sit on Wachtell’s four-person executive committee, though Lipton maintains it is an informal governing body that hasn’t met for years.

Now, as Wachtell undergoes yet another generational transition, a key question is how closely future leaders will preserve Lipton’s principles. Whether the firm sticks with Lipton’s ethos or tweaks it is one of the most important decisions confronting the firm’s next generation of leadership.

Over the past 12 years, firm management has been taken over by Dan Neff, 65, who represented Whole Foods in its acquisition by Amazon, and Ed Herlihy, the 71-year-old bank lawyer who Jamie Dimon turned to for JPMorgan’s whirlwind acquisition of Bear Stearns.

Their strategy, rather than seeking to reinvent Wachtell, has been to continue with the status quo in terms of the type of work Wachtell handles and how the firm functions as a law practice.

“If I have one mantra, it would be, ‘Don’t mess up a great thing,’” says Neff.

Herlihy is the same. “We’re not changing,” he says. “We’re building a long term firm that we hope is here for many generations.”

Now, the firm has expanded from the dozen or so partners of Lipton’s day to 80 with different backgrounds and perspectives. Some are mulling who should take over post-Neff and Herlihy, though the conversations have been informal and preliminary.

One partner who declined to be named to preserve relationships, says that several of its characteristics are sometimes discussed. This includes whether to tweak the lockstep pay system to better compensate productive, younger partners, or whether to increase the size of its partnership.

Such changes seem minor in an industry that has seen dramatic re-configuration. Other major firms, such as Boston’s Bingham McCutchen, the lobbying powerhouse Patton Boggs, and Washington’s Dickstein Shapiro, have merged or been acquired.

Some firms have filed for bankruptcy, like Dewey & LeBoeuf, which once staffed as many as 1,300 lawyers around the world, with clients like Dell, eBay, and the Los Angeles Dodgers, or Howrey, which fell the year before. Even extremely profitable, prestigious firms have seen some cracks surface. Just recently, Cravath Swaine & Moore saw two prominent M&A partners exit over the past two years.

“It may be the last true partnership,” says Neff of Wachtell.

If that is true, then how long will it last?

Staff members and lawyers acknowledged their concern that firm culture could change after Lipton retires.

Constance Monte, the firm’s chief financial officer, is one staff member fond of Lipton’s legacy. She says Lipton includes partners in client meetings, shares work, doesn’t take the spotlight, and initiates a phone call if a firm member is in trouble. She hopes his generosity continues to live on in future Wachtell generations.

“I think carrying out those values, the firm will go on,” says Monte.

She isn’t without her reservations though.

“Not every partner may be as committed, but the majority are,” she says. “Things change; nothing can stay the same. I don’t know if everyone is going to stay ... once the founders retire.”

Not Immutable

In terms of any changes going forward, Lipton downplays the importance of his principles in their closest reading, saying they are not immutable in the future. A number have already been challenged.

For instance, since as far back as the 1990s and early 2000s, the firm considered both a London and Silicon Valley office, neither of which worked out. But, he says, he can’t imagine Wachtell would ever change its lockstep pay system, which he considers “the essence” of the firm.

His principles capture the left-leaning ideals that carry over into his politics. He bemoans the election of Donald Trump, saying his public statements have threatened American democracy and his policies haven’t worked. One of Wachtell’s senior lawyers, Eric Roth, calls the firm’s lockstep system “socialism for rich people” because Lipton thinks top performing partners should share their profits throughout the rest of the firm.

Staff members should be valued, too, one of his principles says. And no layoffs should ever be conducted as a cost savings measure.

“I don’t think we’ve ever deviated from treating people well,” says Lipton. “We’ve never fired anybody, other than for cause. We terminated some people for cause, but never to save money.”

Profits Help

Of course, it hasn’t hurt that Wachtell has been so profitable. Though Wachtell partners insist they never disclose their financial figures, the firm is regularly pegged as the most profitable by The American Lawyer. In its most recent issue, it reported Wachtell earned profits per partner of $5.7 million a year. (One partner says that figure falls well below the average).

That’s because the firm advises on the most lucrative legal matters, with the ability to charge premiums on large public company mergers that don’t log hours of attorney time.

Instead, like an investment bank, Wachtell simply charges a single-line invoice that takes into account the size of a deal and the firm’s perception of Wachtell’s value, which a client can either accept or debate. The firm’s deal pipeline, meanwhile, remains active, handling about 75 major transactions a year, according to Lipton’s estimate.

Its headcount remains low. That’s compared to peers that staff at least double or even four or five times as many lawyers, which helps Wachtell generate profits that surpass rivals.

According to The American Lawyer’s most recent financial data, Wachtell’s attorneys generated, on average, $3.1 million in 2017, nearly double the next highest revenue-per-lawyer law firm. Sullivan & Cromwell, with far more associates and partners—812 attorneys, spread across 12 offices in the U.S. and overseas—generated $1.7 million revenue per lawyer.

Without such profitability, would Lipton’s values hold up?

For one thing, Wachtell’s lockstep pay system, which pays partners based on years of service regardless of performance, only works if there is enough money to go around, partners acknowledge.

Top partners only earn about three times as much as the most junior partners, whereas elsewhere in the legal industry, firms go out of their way to compensate star partners generously, sometimes as high as 25 times more than junior counterparts. Those partners’ compensation is tied to performance: how much business the attorney is responsible for, client contacts, and hours billed.

Money Isn’t Everything

What, then, would prevent a young, high-performing Wachtell partner, billing more than 2,500 hours a year, from joining a firm that compensates for that work, rather than stay at a firm where he or she will forever be ranked lower than senior partners who have amassed their wealth through loyalty to the firm?

“Money isn’t the last thing in their lives,” responds Lipton, who believes in the old-school ethos that the law is a profession, not a business, and that money should be viewed as a byproduct of the work, not the chief reason for it.

Besides that, other partners say competitor law firms don’t offer a platform with as uniform quality attorneys throughout the partnership. Though they may receive an immediate pay boost by joining a competitor, it is the mindset that their practice works best with all of Wachtell’s divisions – corporate, tax, benefits, restructuring, and litigation – supporting one another.

Join another firm and risk entering a different environment, where partners operate in their own best interest, compete for clients, and where your individual practice is not as well supported by the rest of the team.

Corporate partner Andy Nussbaum—chair of the board of trustees at Amherst College—says he is sometimes approached by law firms offering him “silly amounts of money.”

He poses the question: how would partners at those firms feel about an outsider coming in and earning so much more immediately? “If I were one of them, why would I want me there? I don’t like the message it sends to the rest of the partners, put aside what it says to the associates.”

So far, there has been enough money to go around and keep Wachtell partners happy. Global deal activity has been off the charts. The first half of 2018 counted $2.1 trillion in global M&A, more than 36 percent higher than last year, with Wachtell capturing more than $210 billion, according to Bloomberg’s M&A data.

It’s not only that no partner has left the firm for a bigger paycheck. Neff, the Wachtell co-chair, maintains he hasn’t even dealt with a partner who has been made an offer and is considering leaving.

“We will practice law and organize ourselves as we have done,” he says. “It has worked. We don’t see a reason to change it.”

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To contact the reporter responsible for this story: Casey Sullivan at sullivan.caseyp@gmail.com

To contact the editor responsible for this story: Tom P. Taylor at ttaylor@bloomberglaw.com

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