Tales of the Takeover Decades from Inside Wachtell

I just finished reading Tombstone:  A Lawyer's Tales from the Takeover Decades (Farrar, Straus & Giroux:  1992) by Lawrence Lederman, former chairman of the corporate practice at Milbank-Tweed (and still a partner there), who started his career as an associate at Cravath in 1967 and joined Wachtell as lawyer #24 six years later, soon to become a partner. 

The book recalls his "present at the creation" moments of being in on, and watching unfold, the astonishing financial-engineering explosion that was the late '70's and early '80's:  Bob Bass, Ivan Boesky, Carl Icahn, KKR, Michael Milken, Boone Pickens, et al.  All the "barbarians" are present and accounted for, but so are the remarkably dedicated, sagacious, and creative lawyers who facilitated the "ordinary" deals, primarily by educating sometimes-naive clients over what the marketplace would inexorably cause to happen once a company was "in play," but who, more importantly, changed the rules in many deals by inventing such devices as the leveraged buyout, the recapitalization, and the poison pill.

Aside from the sheer rollicking pleasure of reading about high jinks by these masters of brinksmanship—and learning just how much of it was truly made up as they went along—Lederman provides a window into two topics near and dear, or so I hope, to the hearts of readers of this blog:  The first is simply a high-level series of examples of how real-world economic calculations are made by some truly gifted strategists; and the second is insight into the high-end practice of law.

An instance of economic calculation concerns "golden parachutes," the late-1970's invention seen largely by the media and the public as exercises in naked greed and self-dealing:  What, one can still hear the critics decrying, could possibly justify throwing millions of dollars at executives who, by hypothesis, will perform no further service?   That analysis falls into the popular fallacy of looking at matters statically rather than dynamically. 

In other words, it assumes the enhanced and accelerated payments to departing executives exist in a vacuum without connection to the surrounding context of the takeover.  As Lederman correctly observes (p. 128), "in fact they facilitated the takeover.  It was the board's way of easing management out."  And, consider the human context as well: 

"For many [in senior management] the jobs had taken years of effort to achieve....  The knowledge acquired by many of these executives was largely limited to the industry in which their company was involved.  There would be few opprtunities for them elsewhere.  A senior manager's job also carried with it a position in the community and often defined social standing.  Much of that would be lost."

Or consider Marty Lipton's shrewd decision to focus Wachtel exclusively on the "defense" side of takeovers (p. 211, emphasis supplied):

"Opposing [Michael] Milken positioned Wachtell Lipton as primarily a defense firm.   The choice was not a necessary one.   Skadden Arps flourished representing both sides.  But limiting representation to target companies was a choice that Goldman Sachs had made years earlier, and it had proved very profitable for them... The early decision of Lipton to say that the firm would not join with Skadden Arps in raids [also] proved very successful.  [...]   When the poison pill defense was developed by Lipton and validated by the courts at the end of 1985, Wachtell Lipton's place as the premier defense firm was assured."

This constitutes one of the boldest, most decisive, and most successful market positionings by a law firm in the late 20th Century.

As the last example of consummate strategic thinking, consider this tactic by one Jack Seabrook, chairman of IU International, a $2.5-billion conglomerate as of 1979.  One of IU's subsidiaries was a 58%-owned Canadian utility, which the Canadian government strongly preferred to see majority-owned by Canadians.  Seabrook had no particular love for the utility business, so watch his thinking (p. 139, emphasis supplied): 

"IU, Jack told us, planned to start an exchange offer in Canda, exchanging the stock of its subsidiary Canadian Utility with IU's Candian shareholders for IU common stock.  The exchange would only be made in Canada.  In the proposed swap of stock, IU's ownership of Canadian Utility would be reduced from 58 to 48 percent.  [...]  For Jack, however, the proposed swap was the official scenario, not the way he would like the matter to come out.
       "What he thought might happen, Jack told us, was that once he announced an exchange offer and indicated that IU was prepared to reduce its ownership below a majority, there might be bids from a number of Canadian companies for IU's whole majority interest in Canadian Utility.  That would give him an opprtunity to negotiate for the sale of control, affording IU a chance to get a large premium price..."

And so, indeed, does it proceed.

Finally, consider his essential distillation of the differences between investment banking and law firms, including his deeply insightful, almost off-handed, observation about an "unintended consequence" of the billable hour (p. 118, emphasis supplied):

"[Investment] banking firms were oriented to doing transactions that brought in fee income and were sensitive to changes in the market.  [...]  Most partners were well off financially and retired in their early fifties.  Important responsibilities were necessarily given to young people, all ready to embrace change.  In the law firms, however, changes in the marketplace had to filter through to the top-tier lawyers, who were tradition-bound, much older than their bankign counterparts, and remote from the market.  Also, lawyers billed on an hourly basis, making one kind of work not much more profitable than another.  As a consequence, law firms rarely developed new specialties.  And lawyers didn't move around from firm to firm as much as business people.  Accordingly, there was limited ability to move or to grow into new areas of the law."

Wachtell, of course, up-ended the billable hour as the default billing methodology, and, with that, proved its ability to "move into new areas of the law" in spades.

Alas, Tombstones is out of print.  I found my copy at Powells, but you might also try Amazon, Alibris, or other book search sites [ISBN# = 0374278458].  You will be deeply rewarded.