Skadden, Arps, Slate, Meagher & Flom
Skadden, Arps, Slate, Meagher & Flom
Founded: 1948 as Skadden, Arps & Slate
Sales: $635 million (est.)
SICs: 8111 Legal Services
Skadden, Arps, Slate, Meagher & Flom stands as a monolith in the corporate environment, one of the two largest law firms in the world. The firm built upon its status as the most sought-after mergers-and-acquisitions (M&A) firm in the country to ride the surge of corporate-takeover activity in the 1970s and 80s. As a result of this demand, the firm stood in a position to charge its clients unprecedented fees and grow at an astonishing pace. In the process, Skadden, Arps changed the practice of law into an aggressively competitive business, by handling new kinds of business and increasing the lengths to which its lawyers would go to provide client service. The firm’s grand scale has provoked its fair share of media attention, including numerous features in the national business press and its own biography.
Origin and Founders, 1940s–50s
According to Lincoln Caplan, in Skadden: Power, Money, and the Rise of a Legal Empire, the firm was founded on April Fools’ Day in 1948 as an informal partnership with $12,000 of start-up capital. The firm’s first fee was a modest $532.50. Joe Flom, a graduate of Harvard Law School, joined the firm as an associate in 1948, and eventually influenced the firm’s growth more than any founding partner.
Flom served as the visionary architect of Skadden, Arps’s growth. According to Institutional Investor, “Flom built Skadden, Arps, Slate, Meagher & Flom into one of the largest, most profitable law firms in America, while … redefining the use of the law in M&A…. Rom was the epitome of the market warrior, and he brought the Darwinian ethos of the marketplace into the world of corporate law.” Flom’s early expertise centered around shareholder’s derivative actions. Such actions are devices for the owners of a company to bring suit against its board of directors and management for failing to uphold their duties in running a company. In a typical corporation, the owners/shareholders elect the board of directors, who in turn selects management to run the company. If the board enters into a buyout in a way that does not give maximum value to the shareholders, a derivative action is likely.
The growth of the firm was remarkable: In the mid-1960s, the firm grew to 20 lawyers and had more work than it could handle. According to Caplan, Skadden, Arps started by making $37,660 in revenue and $6,510 in profits its first year; however, “by the late seventies, intense demand allowed Skadden to raise its hourly billing rates to as high a level as any firm’s in New York City.” Those rates allowed Skadden, Arps to bring in $225 million a year in revenue by the end of 1986. A decade later, Skadden, Arps made $210 million profits on $635 revenues, according to recent estimates by Fortune magazine. The firm is not totally peerless in terms of generating revenue; for example, in 1992, Baker & McKenzie surpassed Skadden, Arps in terms of revenue. More than large revenues are required to build a lasting firm. As a reminder that not all megafirms managed to survive intact, Skadden, Arps was hired by bankruptcy creditors of one of its former competitors, Finley Kumble.
The growth in the firm’s revenues is due in part to growth in its physical size and reach. Skadden, Arps has over 3000 employees, including 1000 attorneys, and hires up to 700 new employees every year. In 1976, Skadden, Arps opened a Washington office, and it opened a Chicago office in 1984. Skadden, Arps had 13 offices in 1990, with half of its attorneys in its New York office. Currently, the firm claims nine domestic offices, in New York; Boston; Washington, D.C.; Wilmington, Delaware; Los Angeles; San Francisco; and, Newark, New Jersey. The firm also keeps foreign offices in Beijing, Brussels, Budapest, Frankfurt, Hong Kong, London, Moscow, Paris, Prague, Sydney, Tokyo, and Toronto.
Law Firm Marketing
Notably, the ethical canons and codes of the legal profession, in particular rules restricting solicitation of clients, have limited the ways in which law firms can attract new business. The last half of this century, however, has seen a shift in law firm marketing. Clients have become more sophisticated, and law firms operate more like other businesses, trends that correspond to a lessening of ethical restrictions on law firm marketing. According to a 1982 memorandum, Skadden, Arps’s goal was to “enhance the reputation of the firm and insure its continued viability and its ability to earn substantial income for its partners….” Skadden, Arps did this by aggressively developing new business.
According to Caplan’s book, Joseph Flom has described the takeover movement positively: “Merger and acquisition activity has performed a critically important function. Companies have become leaner and meaner.” As a key feature of its marketing strategy, Skadden, Arps cunningly analyzed the business environment for opportunities that could gain advantages for its clients.
Skadden, Arps went beyond the services offered by typical firms, aiming to work harder and longer at solutions to their clients’ broader problems. Skadden, Arps seems to have filled a hole left by the “white shoe” law firms of Wall Street: Many more established firms would not handle takeovers for fear of upsetting their longstanding corporate clientele. Beyond innovations in client development, Skadden, Arps pioneered new fee structures. For example, the firm instituted a revenue-generating practice of charging corporate clients retainers. In return for paying a sizable retainer, the client could expect to have Skadden, Arps available as counsel in the event of a hostile takeover. This also prevented potential acquiring companies from using Skadden, Arps against a client on retainer.
Trends in the American business climate contributed in part to the amazing revenues gathered by the firm. Takeovers, the field in which Skadden, Arps gained its greatest dominance, became an increasingly popular option in corporate America for several reasons. Individuals, who represented an increasing segment of post-World War II investors, demanded shorter-term returns on investment than had earlier investors. With such pressures on the annual bottom line, corporate management needed to find ways to sustain growth in the face of increasing global competition. Further, takeovers grew in fiscal size as well as in number in the 1980s as the price of stocks rose.
In the 80s, companies were offered new vehicles to raise large amounts of capital, such as leveraged buyouts (LBOs) and junk bonds. In an LBO, a buyer could acquire a target by getting a loan secured by the target’s assets. If the ratio of secured assets to outstanding debt was high, the bonds used to leverage the takeover were known as junk bonds. In other words, junk bonds basically represented high-risk, unratable debt. Companies attempted to use junk bonds to acquire larger ones, increasing the demand for law firms with significant mergers-and-acquisitions experience.
Law Firm Governance
Since its inception as a partnership with no formal agreement, the firm has changed into a limited liability company (LLC), a hybrid juridical form. LLCs were created by state legislatures as ways of infusing partnerships with the corporate feature of limited liability, while allowing them to retain their partnership characteristics. According to Caplan, profits in Skadden, Arps, Slate, Meagher & Flom, LLC, are split between members by an eight-member committee. The committee looks at the members’ quality of work, their hours billed, profitability of their respective practice areas, and their contributions to firm management. Since the late 1970s, Skadden, Arps partners (now, members) have been some of the highest paid attorneys in the country.
Skadden, Arps has taken novel steps in law firm governance. In 1990, the firm changed its management structure to operate less like a partnership and more like a typical American corporation, emulating a board of directors. The firm also developed the Rainy Day Fund, for a law firm a financially ultra-conservative measure, which provides a means of leaving the firm with enough money to carry all expenses for six months in case of emergency, as explained by Caplan.
With approximately 1,000 attorneys in 21 offices, Skadden, Arps, Slate, Meagher & Flom is one of the largest law firms in the world. We provide a wide array of legal services domestically and internationally to the corporate, financial, industrial and governmental communities. In the United States, we represent a broad spectrum of clients, from small high-technology start-up companies to more than one-third of the Fortune 250 industrial corporations, as well as many financial and governmental entities.
Since our first non-U.S. office opened in 1987, Skadden, Arps has expanded into major financial centers, as well as emerging market economies, around the globe. International matters constitute a growing percentage of the firm’s business, as U.S. companies seek new investment opportunities abroad and governments worldwide move to privatize state-owned industries. As a reflection of this new global marketplace for legal services, we now have a total of 12 offices in Asia, Australia, Canada, and Western and Central Europe, in addition to our nine U.S. offices, and substantial practices in areas such as Israel and Latin America.
Traditionally, Skadden, Arps has hired and promoted based on merit, progressively recognizing employees, including legal secretaries, paralegals, and clerks, from all segments of society. For example, Skadden, Arps promoted its first female partner in 1981. For the long hours and stress, employees at the firm are well compensated. At rates competitive with any law firm in the world, first-year Skadden, Arps associates make $85,000 per year and can increase their earnings to $178,000 annually after seven years. Those levels of compensation are earned by long hours: Lawyers at Skadden, Arps have been known to bill over 2,000 hours per year, as well as doing an average of 42 hours per year on free legal services for the poor.
The employees working in the Skadden, Arps Manhattan office are afforded all the implements required for a modern-day corporate meritocracy. The office has been designed as a large 24-hour work station. The facility includes state-of-the-art office equipment, all-night telephone receptionists, a fitness center, and law library that never closes.
Skadden, Arps handled its first tender offer in 1964, and Flom worked on a number of deals in the 1970s that defined the firm’s reputation as a leader in corporate takeovers. “The firm’s turning point occurred in 1974 when Flom represented International Nickel Corporation and successfully won control of a target company, ESB Inc.,” according to Caplan. Flom saved Chicago’s Marshall Field from a takeover attempt by Carter Hawley Hale in 1975, by delivering a clever piece of advice. The firm advised takeover target Marshall Field to build stores where Carter Hawley Hale already had outlets. This potential saturation of any particular market could be seen to have anticompetitive effects under the Sherman Act, thereby inviting the possibility of Federal Trade Commission scrutiny of the merger. The antitrust aspects of the takeover overly complicated the deal. As a result of this advice, Marshall Field made itself an extremely unattractive takeover target. Flom’s reputation for aggressively defending corporate-takeover clients in ways such as in the Marshall Field deal solidified his firm’s reputation in mergers and acquisitions. In the late 1970s and through the 1980s, Skadden, Arps was involved in almost every major merger and acquisition in the United States.
Its reputation as the nonpareil law firm in an exciting field brought attention to Skadden, Arps. While law firms typically were reserved and press-wary, Skadden, Arps has regularly garnered the type of media attention previously reserved for the most public of corporations. For example, journalist Steve Brill featured the firm in a major Esquire article as well as in the first issue of American Lawyer. The firm also attracted its share of glamour in other ways. In the early 1980s, the former president of MGM, Frank Rothman, became a partner in the Los Angeles office of Skadden, Arps.
Setbacks, Lessons for the Future
Despite its reputation as a competent and respected corporate firm, Skadden, Arps has stumbled at times. Pennzoil v. Texaco serves as a textbook example, literally, of a spectacular defeat for the firm on an unprecedented scale. As told by Caplan, the firm’s client, Texaco, acquired Getty Oil, a prudent move, according to many legal experts at the time. Unfortunately, in so doing, Texaco was found to have interfered with prior contractual relations for the sale of Getty Oil to Pennzoil. As a result of that tort, Pennzoil was awarded the largest judgment in history—$10.5 billion. A procedural error on the part of Skadden, Arps may have contributed to the high award. Skadden, Arps passed up the opportunity to have the case tried in Delaware where juries, reportedly, do not favor granting such high awards.
Skadden, Arps also failed in preventing a book about the Mossad, the Israeli intelligence agency, from being published. The firm had been engaged by the government of Israel to keep the book off the shelves because it contained information that could threaten the lives of Mossad agents. Although the book was published, the commotion raised by the firm’s efforts served as free publicity, piquing interest in the book from the public and multiplying the book’s sales.
Skadden, Arps, Slate, Meagher & Flom successfully read major shifts in the business environment and made a series of noteworthy innovations, particularly in mergers and acquisitions. In so doing, the firm irreversibly changed the practice of corporate law and the environment of Corporate America. Skadden, Arps has risen to the pinnacle of global American law firms.
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—Edward C. Ingram