Leaders League catches up with Edward Lee, a partner at Wachtell, Lipton, Rosen & Katz. Lee has been instrumental in several of the US’s largest deals of 2019, not least Bristol-Myers Squibb's purchase of Celgene and United Technologies's acquisition of Raytheon (around $90bn each). We discuss deal strategies, shareholder activism and what makes Wachtell different.
You’ve personally helped steer several mega-mergers this year. What were some of the quirks, complexities and most interesting and exciting elements of these deals, as well as of Salesforce’s $16bn purchase of Tableau Software?
The United Technologies deal came out of a deep, longstanding relationship between the firm and UTC. We’ve seen the company evolve through some significant M&A transactions that we’ve been fortunate enough to be a part of. It was also incredibly complex: UTC is simultaneously separating the company into three while engaging in a major aerospace merger of equals with Raytheon. The complexity provided an opportunity for lawyers to play an important role, even more so than in many other transactions.
Salesforce is a newer client. We’ve had a relationship with them for a number of years, but our first real transaction for them was last year: their acquisition of MuleSoft, the largest they’d ever done at the time. An interesting element of the Tableau Software deal was that it was an all-stock merger structured as a tender offer as opposed to a one-step merger. While relatively uncommon in a stock deal, we encourage our clients to consider that path whenever possible; it can be very smart and effective because – given the right set of facts and proper execution – you can end up closing much more quickly than through a one-step merger transaction.
With MuleSoft, we used a similar structure: it wasn’t all-stock, it was cash-and-stock, and Salesforce was able to close that deal in about six weeks, which for a multibillion-dollar US public company transaction is lightning-fast.
Even by Wachtell’s standards, the sheer number of high-profile, high-value deals it’s led on this year has been remarkable. What are the secrets of the firm’s success?
We’re much smaller than our competitors. That closeness and familiarity among all of our colleagues helps maintain a very clear culture and focus. There’s no confusion about what our mission is: to provide the absolute highest level of service at all times to our clients, in their most critical matters. We have a relatively narrow set of things that we focus on, two pillars of which on the corporate side are M&A and shareholder activism, and we focus on doing them really, really well.
The lockstep compensation at our firm ensures that there’s no internal competition: we’re all rowing in the same direction in the interests of our clients. We have incredible senior leadership, starting with Marty Lipton and Herb Wachtell, who serve as role models and examples of what our culture is all about.
Our clients understand that we have one office, in New York, but have an incredibly global practice, and routinely handle some of the most complex global matters out there.
What have been the most interesting trends in the corporate and M&A market in the last year or so?
There’s the continued strength of strategic M&A, driven by a couple of factors. Favourable economic conditions overall lead to more optimistic management teams and boards that are more open to taking some risks; favourable credit markets, which have sustained themselves for a very long period of time, have obviously supported M&A. We’ve had some choppiness and bumps in the road in terms of equity valuations, but overall, if you look at the last 5-10 years in the US market, we’ve had favourable equity market trends.
Another large driver is the pace of technological change. It has disrupted industries: what you used to call media ten years ago is totally different to what you’d call media today, for example. Technology has changed how these industries and companies compete, and what they’re doing and offering, such that many companies are looking to M&A as a way to capture some of that technology and be at the forefront of some of the change.
How often does successful shareholder activism translate into long-term profitability for the target company, given that most M&A-driven campaigns are compelled by the desire for a sale?
It’s incredibly fact-specific. I’m sure you can find examples of companies that have done well after an activist came on board. There are also plenty of examples where it’s been a total disaster, and the activist’s thesis did not work out but the activist was long gone before the stock took the hit. So it doesn’t really work to generalise.
Shareholder activism is also affecting the regulated industries. Do activists have to tread more carefully here? Are they less successful in these industries?
Activists are subject to the same laws as everyone else, so need to comply with whatever regulatory requirements there are when investing in companies in regulated markets. It does strike me as limiting the possibilities for an activist: often a regulated company has only so much flexibility in what it can do with its capital structure, or how much debt it can take on, for example. And there’s a reason these regulations exist. It’s usually not in anyone’s interest for some of these regulated companies to not have these constraints.
I guess you know about the Windstream case, in which hedge fund Aurelius bought a voting position in Windstream and forced it into bankruptcy while also shorting the stock. Have concerns about such behaviour had any effect on the industry?
The firm has written a fair amount about “debt default activism”, as we call it. We think it’s troubling, and hope that the regulators and courts will eventually recognize that it is a potentially disruptive (if not destructive) force. We are advising our clients about the threat that these situations can pose, and being careful and mindful of these developments as we structure transactions or advise on financings.
Companies generally are aware of it, and if they’re well-advised it’s something they’re monitoring. While I wouldn’t say there’s been a sea-change in behaviour, issuers and lenders are considering these risks and beginning to take steps in loan agreements and other contracts to help mitigate them.
How should regulators respond to the increasing power held by investors over both major corporations and mom-and-pop shops?
There are a number of proposals out there designed to encourage or support companies that are doing the right thing by taking a longer-term perspective on what value-creation is.
One specific example of where a regulatory change would be welcome relates to ownership disclosures. Currently, shareholders of U.S. public companies that cross the 5% ownership threshold do not have to report that for ten days. We feel like that’s much longer than appropriate or necessary, and that the SEC regulations in this regard are incredibly outdated. Most of the developed world has a much shorter window for disclosure in that context. For some reason, the notion that more disclosure and transparency is generally a good thing does not seem to carry the day when it comes to shareholders crossing a major ownership threshold. During that ten-day period, activists or hostile bidders can continue to accumulate a much larger stake than 5%, such that in some cases, by the time the mandatory disclosure comes around, a significant change in ownership is a fait accompli.
More generally, our hope is that more and more institutional investors come around to the view that it’s in their interests and the interests of the investing public for companies to think about value from a longer-term, sustainable perspective. Hopefully there’s a private solution that comes in the form of major institutions, both active managers and passive funds, and other stockholders, building a market consensus that boards that focus on creating value from a long-term perspective deserve their support.