Wachtell Considered Rescinding Offers

Wachtell Lipton Rosen & Katz, the world’s most-profitable law firm, came perilously close to rescinding offers to new lawyers due to economic conditions at the firm.

Of course, that was in 1966. That proximity to the brink led to the decision that built the foundation for the firm’s success.  The story, after the jump.

Things have gone pretty well since then, with the partners seeing profits of just over $4 million last year, which still gave them a $675,000 per head lead over #2, despite being off 18.9% for the year.

Not bad for a firm that was founded on the principle of seeking work that was “interesting rather than lucrative.”

Noted organizational scientist William H. Starbuck wrote about the firm in a scholarly article from 1993 still available at NYU, “Keeping a Butterfly and an Elephant in a House of Cards: The Elements of Exceptional Success.” Sixteen years later, and things haven’t changed much – to the firm’s benefit.

So what happened? Unlike today’s layoffs and deferrals, in the early days, early Wachtell (founded in 1965) was overconcentrated on a single corporate client. In the firm’s second year, “contending groups within this key client asked Wachtell to favor them in ways that made the partners very uncomfortable. The partners resigned the relationship . . . and thus lost two-thirds of their income.” A partner reportedly said that they had to call a prospective employee and say the firm might not be in business the next year.

The partners scrambled to make up the lost work. Ten years later, things had settled down enough that, fearful of being in such a dependent position, they adopted a principle that, intentionally or not, set them on the course for spectacular success: the partners forswore all blanket engagements.

Going forward, they would only take on work for clients on a transaction-by-transaction basis.

That didn’t just keep them from becoming dependent on the whim of a corporation, it had two unbelievably powerful side effects. First, it meant that they would have an easier time clearing conflicts for new clients – unlike general engagements that could cause conflicts in some out of the way practice, it was pretty easy to tell whether there would be a problem. Second, it meant that companies’ general outside counsel could bring Wachtell in as co-counsel without fear of the firm trying to steal the client.

Of course, at the top levels, excellent work is taken for granted, but Wachtell has long had a reputation for being the best of the best. That meant relentless adherence to hiring standards, which was nicely articulated as “each generation should be as good as the founders.” In the early days, Wachtell found those gems in an untapped cache.

[n.b., P means "a partner in Wachtell, including both junior and senior ones; O means "a lawyer from a competing firm who has competed or collaborated with Wachtell;" and C means "a lawyer who has been a client of Wachtell"]

During Wachtell’s early years, its hiring benefited from its founders’ disadvantages: It looked attractive to Jews, and it had an inside track at the New York University (NYU) law school. Although discrimination had been declining since the 1940s, the large American corporations and the banks and law firms that served them had long traditions of anti-Semitism. NYU had a tradition of serving the children of recent immigrants to America; and during the decades when elite law schools were applying quotas to Jewish applicants, NYU’s doors had been open equally to all. During the 1960s and 1970s, NYU’s law school had very high standards and was graduating some excellent lawyers; but because the school was much less well known than the elite ones, its graduates had restricted job opportunities. The founders of Wachtell taught at NYU’s law school and participated in alumni activities, and the deans of NYU’s law school advised outstanding graduates to consider Wachtell. P: ‘For years, two-thirds to three-fourths of the [Wachtell] lawyers were NYU’ graduates. C: ‘They were able to people this firm with some lawyers who might not have been acceptable at other firms - some Jews, some Irish, some Greek, some Italians, Polish - who might have been welcome as associates at other firms but would never have made partner.’

The firm has also had the discipline to stay small, keeping leverage low (in part by turning down cookie-cutter work), which it believes will allows it to survive through downturns.

So how many of today’s firms will have the fortitude, prescience and agility to define principles that actually work, then stick to it?

Related posts:

1. Wachtell Dumped
2. Bad Blood Building Between Wachtell and Paul Weiss
3. M&A Rankings Out – Wachtell #1 (and Not #1)
4. Did Wachtell Really Get UBS a Good Deal?
5. Deal Prof: Wachtell Did Fine