Cravath Changing with the Times?

Cravath’s Scott Barshay (pictured, not the best hedcut the WSJ has done, in our opinion) has been such a fixture on IBM’s M&A deals for so long, that we never really thought about how young he is.

Today, Gina Chon at the WSJ does a deep dive into how it is that Cravath, which has traditionally been viewed as the stodgiest of the stodgy, has become a breeding ground for so many successful, and more importantly, high-profile, young partners.

As the firm approaches its 200th anniversary, the younger generation of partners is getting its share of the limelight, and it’s not ruffling too many feathers, apparently.

That’s all well and good (and we hit on it later), but what’s more interesting is how this signals a fundamental change at Cravath that the WSJ doesn’t mention.

One of the lawyers featured in the WSJ has been seen in these pages before.

Mr. Woolery’s colleague 44-year-old Scott Barshay recently scored one of the largest deals of his career, leading UAL Corp.’s United Airlines’ $3 billion merger with Continental Airlines Inc., announced last month.

Barshay has definitely done bigger deals.  As we wrote when we included him in a list of lawyers who have huge clients:

Scott Barshay of Cravath came to mind.  As of 2005, he had done 25 deals for the technology company – but Sun would have been IBM’s biggest deal, and that was “only” $8 billion, and they didn’t even do the deal. We couldn’t think of anything bigger for IBM than the $5 billion acquisition of Cognos a few years ago.

According to the WSJ, the partners are tolerant of these young whippersnappers because the seniors keep getting richer.  But there’s much more to it than that.

The article explains how the lawyers are getting this work: good ol’ networking and referrals.

Moreover, Cravath attorneys have leveraged their relationships with others in the deal-making world, including bankers, who historically were kept at arm’s length.

When Universal Health Services Inc. decided it wanted to compete with Bain Capital LLC for the acquisition of Psychiatric Solutions Inc., it hired J.P. Morgan Chase & Co., according to UHS CEO Alan Miller. The bank then referred UHS to Mr. Woolery and 33-year-old partner Minh Van Ngo.

See?  Networking does pay off! But you all knew that already, right?

The other change seems smaller but is actually quite significant.

The new approach means taking on the business of hostile transactions, like Inc.’s $5.1 billion bid for Airgas Inc. Cravath had been more reluctant to be involved in hostile bids out of concern of hurting corporate client relationships. In March, Airgas lost a lawsuit to prevent Cravath, which had advised the company mainly on financing issues from 2001 to 2009, from representing Air Products, also a longtime client.

AHA!  Now this is huge.

It may be hard to tell now, but the evolution of large law firms has accelerated and changed enormously in the past 40 years, which is only relatively lately for Cravath, which was founded in 1819.

Back in the 70s and early 80s, LBOs, hostile takeovers, and bankruptcy (and litigation for that matter) were viewed as unseemly.  It was the refusal of traditionally WASP firms like Cravath, Sullivan & Cromwell, and Davis Polk to do those deals that opened the door for the meteoric rise of Wachtell Lipton, Skadden and other predominately Jewish firms.

Don’t believe us?  Ask Joe Flom:

“I got involved [in M&A] because we were in a situation where that was the business that was available,” Flom said in a telephone interview. “We didn’t have a lot to do, and I got involved in it. I liked it and carried it on from there.”

The “situation” was being a Jewish lawyer in New York in the 70s.  And the work was available because Cravath and the others wouldn’t touch it then.

To say Cravath was “reluctant” to avoid hostile work because it might “hurt[] corporate client relationships” is a huge understatement.  Paul Cravath was well known to view hostile M&A, bankruptcy, real estate or anything involving a courtroom as unseemly.  It was beneath his, and his firm’s, dignity to engage in such matters.

It’s not just M&A, either.  Back in December, Cravath did its first debtor-side bankruptcy deal, thanks to the rare lateral hire of Richard Levin from Skadden.  The firm has rarely done any bankruptcy work, even on the creditor side, for that matter.

The fact that these young lawyers are getting publicity from doing work that the firm has traditionally shunned is the connection that we really found fascinating.

What does it say for the Cravath System if the firm is willing to delve into once verboten practice areas?  Will the Cravath System survive, or is this opening the door for unsavory elements that will eventually undermine the firm?

Tagged as: cravath, davis polk, skadden, sullivan & cromwell, wachtell