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.