BIG LAW enjoys a long life. For an illustration, examine “The Partners: Inside America’s Most Powerful Law Firms”, by James Stewart, published four decades ago. With a few exceptions, the book’s starring firms remain in excellent health. Cravath, Swaine & Moore, Sullivan & Cromwell and Kirkland & Ellis are still some of Wall Street’s busiest limousine-chasers. Less fortunate firms have fizzled out, rather than blown up. One shop, Donovan, Leisure, Newton & Irvine, closed in 1998. Another, Shearman & Sterling, has announced a merger with a British rival.
Mr Stewart’s book gave only a walk-on role to Wachtell, Lipton, Rosen & Katz. The same omission would be unthinkable today. Set up in 1965 by graduates of New York University, Wachtell is America’s pre-eminent boardroom adviser. Bosses tapped the firm to counsel on transactions worth $100bn in the first half of this year, and paid handsomely for the privilege. According to American Lawyer, an industry journal, last year Wachtell’s partners earned $7.3m apiece, bested only slightly by Kirkland & Ellis, a Chicago outfit which fills its boots advising on private-equity deals. Measured by profits per lawyer, Wachtell and its dealmakers, who include fewer junior staff (“associates”) for each of its senior ones (“partners”), look nearly twice as productive as the next best firm.
Supernormal profits are not the only unusual thing about Wachtell. While rivals opened up shop abroad, Wachtell’s flirtation with establishing a London outpost remained just that. The five next most profitable firms have an average of 1,700 lawyers toiling in 16 offices; Wachtell employs fewer than 300 under one roof in Manhattan. There is no formal partnership agreement. Partners are paid in “lockstep” according to seniority rather than their individual contribution. Meritocracy is prized. A Harvard Business School case study recounts the firm’s guiding principles. “The firm is not a business,” reads one.
This structure reflects Wachtell’s speciality: advising American bosses on bet-the-company deals. The firm built its reputation during the 1980s and, since then, Wachtell’s clients have found plenty to worry about. They have often called Martin Lipton, one of Wachtell’s founding partners. Mr Lipton’s most famous paper invention is the shareholder-rights plan, a way of defending against a hostile takeover by threatening to issue lots of new shares. The “poison pill”, as it has come to be known, was such a boardroom hit that by 1986 around a third of Fortune 500 firms had adopted one. When shareholder activists emerged as the new boardroom scourge in the 2000s, bosses found a vocal defender in Mr Lipton. Corporate raiders have largely lost their teeth and activism isn’t the jaunt it was a decade ago, but his influence persists. Mr Lipton also helped pioneer the notion of “stakeholder capitalism”, which relies on statesmen CEOs identifying and attending to interests other than those of shareholders. The idea was adopted by the Business Roundtable, a coven of business leaders, in 2019.
Some see these innovations as shields for imperial bosses rather than brakes on the excesses of financial capitalism. And the impact of the firm’s academic standing on its bottom line is probably less than it used to be. All corporate advisers must worry about whom to advise, weighing the number of potential clients and the depth of their pockets. But in hitching itself so fully to American bosses in their most trying moments, Wachtell chose the right horse. This has proved enormously lucrative. Lawyers usually bill their services by the hour. Wachtell often charges for the value of the engagement, asking its clients to stump up a fee in the event of a successful outcome, a model similar to how investment bankers shake down their clients.
Not everyone is happy. X (the company formerly known as Twitter) sued Wachtell in July. Wachtell acted for Twitter after Elon Musk attempted to back out of his $44bn agreement to take the social-media platform private. Mr Musk caved in last October and Wachtell was paid $90m for its trouble, a fee X now argues was unconscionable. On the conservative assumption that the value of Twitter fell by 17% between April and October, in line with the techie NASDAQ index, Twitter’s shareholders got a fantastic deal by retaining Wachtell: collectively their stock might have been worth around $7bn less had Mr Musk managed to wriggle out of the transaction. In such circumstances, tipping the scales even slightly can be enormously valuable to both king and courtier.
What can other corporate consiglieri learn from this success? Some elements of Wachtell’s operating model work only at small firms offering similarly high-value services. When compensating staff in lockstep, the problem of free-riders becomes unbearable in a larger enterprise. It is not generally wise to turn back the clock and operate firms as unwritten gentlemen’s agreements (Centerview, a boutique investment bank, recently fought in court over profits allegedly owed to one of its former partners).
The real lesson is that focusing relentlessly on your strengths and rejecting growth can pay off. And with fundamental changes to the lives and livelihoods of bankers, lawyers and consultants already on the horizon, there are others, too.
Computer says maybe
Tasks which should have been upended by office software—20-somethings tweaking boiler-plate valuation multiples till the wee hours—ought to become much easier and cheaper with recent advances in computing. Progress may be slow, but bosses should increasingly expect to farm out commoditised tasks. That may mean fewer billable hours courtesy of costly junior staff. Meanwhile, knife-edge calls in testy situations will remain valuable: the realities of language in contracts and egos in the boardroom mean that corporate clashes will never be in short supply. In response, expect surviving firms to adopt the associate-light model employed by Wachtell, replacing their army of minions and boosting their margins in the process. ■
Source: Business - economist.com
