February 2008 Archives

Consider your reactions to these three hypothetical scenarios:

• In light of slack demand, BMW announces a combination of price cuts, rebates, and financing incentives that would save you 15%. More or less likely to visit a dealer?
• The Dow Jones Industrials are down 15% year to date. More or less likely to add stocks to your portfolio?
• Reflecting softened deal flow in their area of expertise, a boutique firm that would be a nice fit with your firm announces revenue down 15% year over year. More or less likely to invite their managing partner to dinner?

Of course all three scenarios are structurally all but indistinguishable. So why would your instinct be to run to the BMW dealer, hold your fire on further stock investments, and postpone the dinner invitation for another few quarters to see what happens?

The good news, such as it is, is that if those are your reactions, you're in ample company. Actually, the first two scenarios—the "15% off sale" on BMW's and on stocks are by now a classic example of the irrationality of homo economicus. We love getting a deal on goods and services (and new homes, anyone??), but when investments are "on sale," we run for the hills.

But here at "Adam Smith, Esq.," we don't cover BMW's or the stock market, so let's focus on scenario #3.

Fortunately, yesterday morning's New York Times published a piece, "Mergers in a Time of Bears," speaking to #3. It describes a study published in this month's Academy of Management Journal (evidently unavailable online) which it summarizes thus:

"Most mergers fail.

"If that’s not a bona fide fact, plenty of smart people think it is. McKinsey & Company says it’s true. Harvard, too. Booz Allen Hamilton, KPMG, A. T. Kearney — the list goes on. If a deal enriches an acquirer’s shareholders, the statistics say, it is probably an accident.

"But a new study puts a twist on the conventional wisdom. It’s not that all deals fail. It’s just that timing appears to be everything. Deals made at the very beginning of a merger cycle regularly succeed. It’s the rest that fall flat."

The statistical analysis behind this provocative (but intuitively attractive) proposition must remain opaque, not only because the primary source seems unavailable, but because, as theTimes describes the methodology somewhat unhelpfully: "The professors measured the acquirers’ stock appreciation or deprecation by using a fancy calculation of what they call “abnormal returns,” which examined share prices five days before the announcement of the acquisition and prices 15 days later. The math is complicated, but they say the “abnormal return” is predictive of stock performance in the future."

Be that as it may, and taking the good professors at their word, what's really going on here?

My emphatic diagnosis of what is not going on here is "Think Different." What is going on here is the herd mentality affecting behavior and decision-making at the highest level. And we are reminded that that is no way to outperform the market. "Baron Philippe de Rothschild, ever an opportunist, is said to have advised, 'Buy when there’s blood in the streets.'" Warren Buffett has clearly subscribed to this advice, if not to its precise expression at the hands of Baron Rothschild.

The moral of this to me is clear: Being a victim of bandwagon effects is no way to exercise leadership and in spades it is no way to steal a march on your competitors. I assume you all noticed that Latham announced last week the simultaneous opening of three new offices in the Middle East (in Dubai, Abu Dhabi, and Doha). This is not shrinking-violet behavior, and it's not batten-down-the-hatches behavior. In my opinion, it's straight out of the Corporate Finance 101 playbook: Increase portfolio diversity, reduce Beta, maintain returns.

But you have to be willing to diversify. Buy more stocks. Schedule dinner with that managing partner. Or, as the Times less circumspectly puts it, "C.E.O.’s should stop being such scaredy-cats. While everyone else is battening down the hatches, go make a deal."

So once it's in The Wall Street Journal it must be a real phenomenon, right?

I'm referring to today's "Why BigLaw Is Bracing for a Leaner 2008," along with its companion piece on the WSJ Law Blog.

A sampling of the evidence adduced behind the hypothesis of leaner times:

• "'Firms will see their work slow down this year,' says Regina Pisa, chairman of law firm Goodwin Procter LLP. 'There's no question about it.'"
• "'We have an uncertain environment for revenue growth in 2008, and that is the kindest thing I can say,' says Dan DiPietro, who works with large law firms as the client head at Citi Private Bank Law Firm Group."
• "Law firms 'are very much participants in the broader economy; we're very influenced by what is happening in the world,' says Greg Jordan, global managing partner at Reed Smith."

What's to be done?

Bill Perlstein of WilmerHale and Cesar Alvarez of Greenberg Traurig offer inarguable advice:

• A.  Watch associate and staff headcount like a hawk.
• B.  Watch real estate commitments even more closely.
• Take a scalpel, but not a meat cleaver, to your expenses (if you've done A & B, there's not much left here).
• Bill promptly and stay on top of receivables.

Those all amount to "known knowns"—things we always should be doing, that are plain as day, and which have an obvious impact. 

But the "unknown known"—the thing that we also know will have a tremendous impact, but we can't predict whether that impact will be good or bad—is whether the fabled a-cylicality of law firms' business will hold true this time around as it seems to have, faithfully, in the past.  Greg Jordan, notably, is predicting that it will not work out for us this time, and that the storm clouds of this down cycle will rain on us as well. 

I remain in the posture of the "worried optimist."  I believe the almost across-the-board repricing and re-evaluation of lending will, relatively soon, spark a fresh wave of both litigation (pointing blame being the first reaction to anyone caught with their financial pants down) and of creative and time-consuming restructuring work on the transactional side as the flow of credit which is so indispensable to the economy's functioning resumes.  And the new loans, lines, and facilities won't look like the old ones:   No more "covenant light" deals.

But if not covenant light, then?—covenant "heavy."  Which takes lawyers.

Maybe when Ron Papa, chair of Proskauer's corporate department, is "walking the halls" to see "who's working at night and on weekends," this is what he's seeing.

Tuesday I attended one of the regular lunch-time meetings of the ABA's "Back to Business Law" project which describes itself as "a pilot project sponsored by the ABA Section of Business Law, [to] provide periodic continuing legal education programs and informal networking opportunities for attorneys who temporarily leave active practice in law firms or corporate settings (including women who leave for a period of months or years in order to care for children) but remain interested and engaged in business law issues."

This is surely a laudable initiative, as all too many participating in and commenting upon the appalling rates of attrition among female lawyers content themselves with merely "viewing with alarm" and doing nothing whatsoever concrete to ameliorate the situation.  (Indeed, faithful readers of longstanding may recall that I reported on this initiative once before.  If you'd like information on how your firm could get involved—or, perhaps as importantly, information on how to launch a parallel initiative outside New York City—please take a look at my earlier column.)

Tuesday's meeting was at Skadden Arps, where the presentation on the current ongoing credit crunch was by Peter Neckles, a Skadden partner whose practice focuses on corporate borrowers and institutional lenders, with a particular emphasis on restructurings, refinancings, workouts, and debtor-in-possession loans.  After rehearsing the sine-wave behavior of financial defaults, with recent local maximums in 1991 and 2001/2002, Peter explained the pain associated, across the economy, with "The Great Deleveraging" that we may now be about to experience.  As The Wall Street Journal reported serendipitously on the day of the meeting, sucking credit out of the economy is both deeply painful and constricting and can be a phenomenon—like the pumping up of credit during the prior "leveraging" period—that feeds on itself.  Here's how both those "snowballs" work:

•  When Debt Was Good: People bid more for a house because banks were willing to lend more. That helped house prices rise and gave the bank more confidence about lending yet more. So people borrowed even more and built an addition or bought a new car.
•  When Debt Becomes Bad: Banks decide they need to call in lines of credit. As some borrowers are forced to sell assets, prices fall. Banks get spooked by the falling value of collateral and cut back even more on lending.
•  How Bad is Bad? In Japan, despite massive government borrowing and five years of a near-zero interest rate on overnight borrowing, the prices of shares and real estate declined by 40% to 70%. In the U.K., house prices dropped by 40% in the early 1990s, after taking inflation into account, but share prices rose.

 And the devil of it is that there's not much the Fed can do this time:   Witness Japan's mid-1990's experience with zero interest rates.  If the economy is in a deflationary period, anyone who borrows must expect to pay back the loan with more valuable dollars/yen, and against an asset (the collateral for the loan) that is diminishing in value.  This is obviously the obverse of borrowing during inflationary times:  Inflation is the debtor's greatest champion, enabling borrowers not only to repay with cheaper currency but, perhaps, to refinance the loan against the increased value of the collateral. 

Marty Feldstein, chairman of the Council of Economic Advisers under Reagan, and now a professor at Harvard, pointed out precisely the Fed's predicament yesterday, also in the WSJ (emphasis supplied):

"The collapse of the credit markets began last summer when the subprime mortgage crisis demonstrated that financial risk of all types had been greatly underpriced, that the market prices of complex financial assets overstated their true values, and that the credit scores provided by rating agencies are not to be trusted. Because market participants now lack confidence in asset prices, they are unwilling to buy existing assets, thus preventing current asset owners from providing credit to new borrowers.

"The lack of confidence in asset prices also translates into a lack of confidence in the creditworthiness of other financial institutions, impeding the extension of credit to those institutions. And because financial institutions do not even have confidence in the value of their own capital and in the potential availability of liquidity, they are reluctant to make new lending commitments.

"It is not clear what can bring back the confidence in asset prices that is needed for credit to flow again."

Peter talked about how each downturn was the same as, and yet different than, every other:  "It's not 'Groundhog Day,' but it's close."  But even though there are clearly differences he sees on today's landscape vs. earlier episodes, including the existence of ~$45-trillion (notional value) of derivatives outstanding, and Sarbanes-Oxley, with its increased penalties for filing too "sunny" 10-K's, Peter talked about the human ingredients that never change.

The first reality of human nature is, according to Peter, that most senior executives of companies now coming under financial pressure think they're very smart.  "Imagine tossing an infinite number of coins a thousand times; one of them will come up heads every single time, and you know what that coin will think?  'I'm really smart!  None of the other coins figured out how to do what I just did.'"

This can lead to a false sense of denial about the severity of the crisis and an equally false sense of optimism about how well things will turn out without the need for drastic intervention.

The second reality is that a financial "death" (of a corporation, an investment fund, etc.) is highly analogous to a human being's death, at least insofar as how people react to it.  As we've known since Elizabeth Kubler Ross' On Death & Dying, people need to navigate through the five stages of grief:

• denial
• anger
• bargaining
• depression, and
• acceptance.

Clients whose firms are facing financial distress or even death are no different.  They will deny the problem is severe, look for people to blame, attempt to create short-term or unrealistic fixes, refuse to deal with it at all, and only then will they accept the reality of downgraded debt, impaired collateral, reduced cash-flow, and be ready to deal with their counter-party realistically.

Until then, Peter noted, you as an attorney and counselor can, effectively, do nothing.

Is that a "back to business" lesson?  I believe it doesn't get much more business-like than Peter's lesson about human nature.

While we're all obsessing over the sub-prime crisis, the credit crunch in general, the housing market's retrenchment, the inability to mark to market CDO's, the devilish tendency of "liquidity" to be robust when you don't need it and nonexistent when you do, whether worldwide financial institutions' losses and writedowns will total $150-billion, $250-billion, or some other number entirely, and the implications of all of this for our firms in terms of practice groups and geographic focus, it may make sense to stand back, take a deep breath, and look at what's going on with global capital markets over the long run.

Stepping up to this particular plate is one of the most familiar suspects: McKinsey.

In their "Long term trends in the global capital markets," they offer the following perspective:

• Globally, financial assets are on a growth tear, and this should be expected to continue.
• As a consequence, financial markets are deeper than they ever have been.
• Cross-border transactions and investment links have never been stronger.
• Emerging markets are continuing to surge, outpacing GDP growth in those economies.
• New sources of capital are emerging.
• Japan continues to be challenged.
• The euro is emerging as a potential worldwide rival to the dollar, as European cross-border transactions accelerate.
• Nevertheless, the United States has unparalleled strengths, and despite all the ink being spilled over "sovereign wealth funds" and the like, the actual composition of foreign equity ownership might surprise you.

Now, to unpacking some of this wealth of data and analysis.

Growth of financial assets

Over the past 25 years, all financial assets (the value of all bank deposits, government debt securities, corporate debt securities, and equity securities) have grown strongly: From 2006 to 2007 alone, +17% from $142-trillion to $167-trillion. Bank deposits are a decreasing share. This shows the "CAGR" (compound annual growth rate) of equity securities' value over the past 10 years to be 10.4%, private debt securities 10.7%, government debt 6.8%, and bank deposits 7.8%. (It's heartening that the slowest growth has been government debt.)

Financial market growth outpacing GDP

"Financial depth" is the ratio of a country's financial assets to its GDP, and the good news it that it's been increasing consistently across all global regions. Why is this good news? More liquidity, more capital access for borrowers, better risk allocation.

In 1990, only 33 countries had financial assets whose value exceeded GDP; by 2006, 72 did. Likewise, in 1990 only 2 countries had financial assets triple their GDP; by 2007, it was 26.

Growing cross-border links

Cross-border investments are at an all-time high, making us more financially interdependent across the globe than ever before. If cross-border investments are deemed to include foreign investments of multinationals, ownership of foreign debt and equity by investors, and foreign lending and deposits, it totals $74.5-trillion at the end of 2006, or about half of all global financial assets.

Of greater interest is the changing composition of this investment. Ten years ago the US was the predominant hub. Today, while the US is still first among equals, the eurozone and the UK have built important links to emerging markets, and the Middle East is emerging as a major player on the global stage.

Here are the schematic cross-border flows, first the $31-trillion of such flows in 1999 and second the $48-trillion of such flows in 2006 (constant dollars):

Of particular note here is not just the overall growth, but trends in its composition:

• The US more than maintained its share, as did the mature economies of the UK and the Eurozone.
• In relative value, Japan lost ground.
• The strongest ties (red arrows) remained between the US and the UK and the Eurozone.
• Flows to Latin America more than doubled.
• Whereas in 1999 many of the linkages showed less than $1-trillion of movement (light blue/grey lines), by 2005 those weak links had all but disappeared.
• The emerging economies of Russia and Eastern Europe, and of "emerging Asia" roughly tripled their participation in the global economy, on this measure.
• But the most stellar performance of all came in the Middle East's increasing integration into the global financial economy, with flows more than quadrupling.  (And you were wondering why Latham just announced the simultaneous opening of three offices there, in Abu Dhabi, Dubai, and Doha?)

Emerging markets emerge

Last year, one quarter of the entire growth of global financial assets arose from emerging market economies. And they still appear to have substantial running room, accounting for only 14% of financial assets but 23% of global GDP.  And although bank deposits are still the most valuable asset class, reflecting these economies' immaturity, they accounted for 35% of all IPO value in 2006, up from 10% in 2000.  Chinese companies alone raised as much in IPO's in 2006 as did all companies in the eurozone combined.

New providers of capital

You would imagine that the world's richest countries would be the pre-eminent suppliers of global capital, but just because that's logical does not mean it's true. In fact, emerging markets are, as we all know, the largest suppliers of capital, with outbound foreign direct investment, at $139-billion in 2006, doubling from 2005 and sextupling from 2001.

But the flow is not just one-way. A total of $700-billion of inbound foreign direct investment took place in 2006, amounting to 6.4% of those countries' GDP. In other words, the developed and the developing world are linked in the capital markets as never before.

Here are the net capital flows (outflows - inflows) in constant 2006 dollars (billions) for 34 emerging markets including Brazil, China, India, the Philippines, Russia, South Korea, and Thailand (among others):

The continuing ennui of Japan

There are almost too many ways to enumerate the continuing weakness of Japan, but here are a few:

• Despite its proximity to emerging Asian economies, it accounted for just 6% of foreign funds invested there.
• Its government debt is truly enormous, amounting to 150% of GDP and one-third of all its financial assets.  Not counting that debt, its financial depth ([value of financial assets]/[value of GDP]) would essentially be at the 1990 level.  In that same period, the financial depth of the US has increased 168 percentage points and the eurozone 173.

The sources of direct investment into the emerging Asian countries in 2006 (totaling $2.2-trillion) show the US with a commanding lead at 29%, Hong Kong plus Singapore plus Taiwan at 24%, the UK at 18%, the eurozone at 14%, and Japan's slice smaller than "the rest of the world:"

The strength of the euro

While the euro's rise against the dollar is by now old news, what's less well known is that in the spring of 2007 the total value of all euros in circulation surpassed that of all US dollars in circulation for the first time—and there may be no looking back.    And while central banks and other financial institutions still hold two-thirds of their reserves in dollars, the euro's share has grown from 18% in 1999 to 25% today.  It is probably already the most popular currency for companies issuing international bonds.

The US' relative strength

But it's far too soon for Yanks to despair. 

The US remains the most liquid and largest financial market, with nearly one-third of all assets, and the strongest absolute growth rate of any market in the world.  Also on the positive side of the ledger is that only 5% of US financial assets constitute government debt.

And we keep attracting nearly 25% of all global inflows, as the largest single destination for foreign direct investment—as well as being the largest single source of outgoing foreign direct investment.

Foreign ownership of equities

Given all the alarms raised about increasing foreign ownership of US assets, where do you suppose the US ranks in foreign-owned equity as a percentage of all outstanding equity, compared to, say, the Eurozone, the UK, and Japan?

Dead last, by a long shot.  Here are the figures, for 1990 and 2006:

At 14% foreign ownership (today), the US trails all other economic regions by far, and is just barely ahead of emerging Asian markets in its proportion of domestic control.

Where does this leave us?

At the most fundamental level, if you ever doubted globalization is here to stay, get over it. 

At the strategic and tactical levels, as you look at the ongoing market turmoil, with new reports seemingly daily of another name-brand institution taking a big writedown or another arcane corner of the credit markets getting the flu, take a deep breath and have the courage to raise your eyes above the short-term chaos towards the horizon.

• The US is not sliding into global capital markets irrelevance.
• The axis of power in Asia is shifting from Japan to China.
• The eurozone will continue to matter more than ever.
• The Mideast is emerging from its provincial, resource-heavy and passive stance to becoming a globally aware, capital-heavy and active player.
• Cross-border flows are enormous and look primed to escalate even further.

Then ask yourself what capabilities your firm has to capitalize on these trends.  If you don't like the answer, now, when the conventional wisdom seems to be advising "hunker down," may be the time to pick up some capability for less than it would have cost you a year ago.  And if you do like the answer, I'd advise pretty much the same:  Steal a march on your more timid competitors so that you're prepared to emerge from this period of stress more capable and more broadly positioned than before.

Hard to do, you're saying?  With some of your key practice areas showing severe signs of stress? 

Yes, you must address the current smoke before it becomes a fire.  But what you cannot do is to permit "sweating the small stuff" to be the enemy of building on the big stuff: Financial globalization with a vengeance.

Guilty as charged on all counts.

(With thanks to The New Yorker.)

By now it's been amply reported that 55 of Anderson Kill's 126 lawyers are leaving for Reed Smith, effective February 1.   In classically hyper-ventilating fashion, the Brits (Legal Week) reported that Reed Smith "has swooped, ...taking almost half the fee-earners."  Adding to the somewhat melodramatic coverage given the story were confused and even conflicting statements initially coming from the two firms.  For example, on law.com the two firms couldn't seem to agree on the number actually departing, with Reed Smith sticking by the figure of 55 and Anderson Kill rather obliquely calling the number departing "fluid."  Meanwhile, on the widely read WSJ Law Blog, their second story about it said:

"Law Blog colleague Amir Efrati spent a good part of today tracking down the story behind the story. The Law Blog’s conclusion: given how little the firms agree on the circumstances surrounding the failed merger, it might be just as well that they didn’t tie the knot."

I decided I'd prefer to get to the bottom of things on my own, so last weekI had a chance to catch up with Greg Jordan, Reed Smith's managing partner, and the real story is a bit more complex (and human, and nuanced) than the immediate and somewhat sexed-up reports would have had it.

First, here are some of the basic facts:

• As noted, the deal is effective 1 Feb 2008
• A total of 56 lawyers out of about 120 at Anderson-Kill are coming over to Reed Smith:  25 partners, 3 counsel, 27 associates.
• Some  of the key personnel who came over include:
  • Jeffrey Glatzer, a bankruptcy litigator, and former Anderson Kill firm-wide president and CEO
  • Lawrence Kill, an antitrust lawyer and a name partner
  • James Davis, managing partner, Chicago
  • John Ellison, managing partner,  Philadelphia
  • Steven Cooper, head of litigation, and  J. Andrew Rahl, Jr., head of bankruptcy, both members of the executive committee.

As for how the talks began—and they were merger talks at the outset—Greg reported, which is not news, that Reed Smith is always on the lookout for ways to build  key practice areas, and since insurance recovery work is an important practice, the talks with Anderson Kill were logical. 

Another aspect of the early reports was also correct:  That the merger talks ultimately broke down over conflicts.  The exact nature of the conflicts, however, is slightly different than typically implied—it was not that Reed Smith represents large swaths of the insurance industry and Anderson Kill typically sues the insurance industry—but rather that the two firms found themselves representing different interests in some large bankruptcy proceedings.  (The rules and customs of the federal bankruptcy court are, shall we say, beyond the scope of "Adam Smith,  Esq.," but suffice to note that they are a land unto themselves where, among other things, even knowing and informed  consent to waiving potential conflicts is often a non-starter.)

Things then got complicated. 

Whether or not the conflicts were irreconcilable, ultimately, it was simply too hard—quite understandably—to ask  one or both of two groups of dedicated lawyers who had worked long and hard on sizable matters to resign their client representations.  And so the merger talks broke off.

But introductions had been made and some unmistakably positive impresions formed.  Soon, some senior Anderson Kill partners came back to Reed Smith and asked if they could still merge if they could  do it with almost everyone instead of everyone.  Reed Smith's response was that since it wouldn't work as a "whole firm" merger, then it was really up to Anderson Kill to solve their partnership issues and work out any alternative they'd like to propose, but that  Reed Smith would entertain continuing discussions if they could do that and there was anything they wanted to come back with.

Ultimately, the Anderson partners did resolve their issues and Reed Smith extended offers to 57 lawyers at Anderson Kill and 56 accepted.  As Greg somewhat ruefully put it, "it ended up being a heck of a lot more complicated than a straight merger would have been."

Does Greg have any regrets as to how it played out?

"In terms of the business for both firms, going forward, absolutely not!  For us, it's one more step in our  plan of filling in  gaps in our  practice areas, helping us build out our litigation and restructuring practices, and continuing to invest in our key offices in New York, Chicago, and Philadelphia.  And as for Anderson Kill, we think, they are going to do very well going forward; they have a good group and a good plan and we wish them all the success in the world."

Absolutely no regrets?

"Well, I have to admit  the way it  was reported made us look a little predatory—that was unfortunate and unfair.  But  I guess I understand it made for a better story."

What, then, are we left to learn from this?   My read is that both firms—and, on the whole, the individuals  involved—are going to be far better off in the long run.  And I don't think this is happy talk.

One of the peculiarities of the practice of almost any individual lawyer, and one of the few abiding truths in our world, is that some people are better off having a platform behind them that provides a diver

unse practice set, high capacity when needed, and a relatively ambitious geographic footprint, and for others those characteristics are irrelevant at best and an expensive and irritating distraction at worst.

My working hypothesis about all this, then, is that the people involved understood that—intuitively and subconsciously if not analytically and with cold rigor—and made  their self-enlightened choices.

Where I come from, that's the way the market is supposed to work.

And don't we, after all, see this all the time on a smaller scale (one admittedly not lending itself to breathless leads in the press)?  Don't we see people migrating laterally from smaller boutiques, regional and specialty firms, to larger national and international platforms, and don't we  also see exactly the reverse?  This was simply a bunch of people doing both those things simultaneously.

Rarely do I review books that disappoint, but there's a first time for everything, and I want to report that in my opinion David Nasaw's 850+-page  Andrew Carnegie (Penguin:  2007) is skippable.

This is a shame.

Carnegie, aside from being perhaps the most successful entrepreneur and businessman of the Gilded Age next to John D. Rockefeller, was a rags-to-riches story, one of the greatest philanthropists in modern history (in inflation-adjusted dollars), and, notably, a Scot.  First, a bit on Carnegie's life itself, and then more on why I can't recommend this treatment.

Carnegie arrived in Pittsburgh, then the center of industrial North America, in 1848 at age 12, son of a rather feckless and unsuccessful father and a hard-working mother from Dunfermline, Scotland.  With only the most rudimentary education, but an energetic, sunny disposition, and no fear of hard work, he started as a messenger boy in the telegraph office—the key hub in the only information network that mattered in those days—and soon became the most sought-after telegraph operator in the company because of his speed and accuracy.  Connections there (only the powerful regularly sent and received telegrams) enabled him to gain an introduction to the local manager of the Pennsylvania Railroad where, not yet 20 years old, the president offered him the opportunity to buy shares in another company (with a loan) and shortly thereafter receive his first dividend check:

"I shall remember that check as long as I live," he wrote many years later. "It gave me the first penny of revenue from capital -- something I had not worked for with the sweat of my brow.''Eureka!' I cried. 'Here's the goose that lays the golden eggs.'"

Spoken like the true capitalist that he was. 

By 1865 his reported income was $38,735, roughly $5.6-million today (according to Nasaw—not independently calculated by me), and by the time he sold Carnegie Steel to J.P. Morgan in March 1901 it was worth $400-million, or perhaps $80-billion today (same caveat). 

What few realize about Carnegie was that his  insatiable drive for more and more wealth, without limit, was tied linearly to his conviction that it was his duty to give it all away by the time of his death—so that, the richer he became, the more beneficent he could be.  Now, depending on one's view, this is either charming, or perverse, or a transparent excuse for rapacious behavior.  Here's how Carnegie expressed it, in decidedly Spencerian and, to our ears, antiquated, terms:

"Carnegie formulated a 'gospel of wealth,' relying heavily on Herbert Spencer, that rebutted 'protests against the unequal distribution of wealth by arguing that the common good was best served by allowing men like himself to accumulate and retain huge fortunes. The more wealth that landed in wise hands, the more that could be given away -- wisely -- by the retired capitalist acting 'as trustee and agent for his poorer brethren, bringing to their service his superior wisdom, experience, and ability to administer, doing for them better than they would or could do for themselves.'"

Despite his lack of formal education, Carnegie was the classic autodidact and after the Civil War he began offering regular unsolicited advice to US Presidents and other luminaries.   Oddly full of insecurities for one so spectacularly successful, he didn't marry until his early 50's, although the marriage then was by all accounts remarkably happy and strong.  His work habits could be said to be odd, at the very least; he spent months and months of every year far away from Pittsburgh, either in New York (a full day's journey and more) or in Scotland, managing by telegram, with only the lightest finger on the tiller, delegating essentially everything (including the notorious, murderous, put-down of the Homestead steel strikers) to his managers on the ground.

Finally, by the time he died in 1919 he had nearly succeeded in his goal of giving away his entire fortune.

Now, what's wrong with this picture?

As full as it is of Carnegie the man (almost too full:  the book could easily be cut by 200 pages without material damage to its narrative thrust), it's almost devoid of insight into Carnegie the entrepreneur.  We only learn by inference how relentlessly innovative and determined he was. 

In a sense, he was in the perfect place at the perfect time.   As I said, Pittsburgh was the hub of industrial North America in the second half of the 19th Century and Carnegie's claim to wealth and fame was of course steel-making.   It was fortunate his parents saw fit to settle there rather than, say, New York City or upstate, and it was incredibly fortunate that the great continental build-out of the railway network was about to commence, which (we now know) would create immense demand for steel rails.

Prior to the Civil War, steel could only be made in small batches of 50-75 pounds or so at a time, making it prohibitively expensive for widespread industrial-scale use.  Rail track was made of iron, which rusted, wore out, and even shattered under heavy loads.  It was only when Henry Bessemer invented his eponymous converter that steel could suddenly be made at the rate of 25 tons at a crack (with enormous energy savings to boot), opening up the railroads as major league customers. 

In 1860 the entire United States produced about 1,600 tons of steel, but by 1900 Carnegie Steel alone was producing more than the entire output of the British steel industry.

"Voila," you may be saying?  Perfect place at the perfect time?

My question is slightly different:  How is it possible that no one but Carnegie saw this perfect confluence of immense demand (railroads for rails) and sudden ready supply (the Bessemer converter process).

Of course, it's not possible in the slightest; it would have been as plain as day.  And this is where Nasaw utterly fails to lend insight into why Carnegie Steel came to dominate and not, say, Frick Steel or Rockefeller Steel or (say) O'Reilly, Schultz, or Mancini Steel, there being plenty of Irish, German, and Italian immigrants alongside the Scots.

Reading between the lines, my diagnosis is that Carnegie was the master of creative destruction, including creatively destroying his own not-so-old mills by replacing them with new and improved equipment as soon as it became available.  He ran the mills relentlessly, 24/7, and was not in the least afraid to sell at or below cost in order to keep his hyper-productive mills running at the expense of competitors.  But these are conclusions one must infer, as they are not explained—certainly the economic and business consequences of his practices are not explained.

If I'm right, Carnegie's true competitive genius lay in his courage to continuously destroy his own competitive advantage in order to redouble it with the next generation of equipment and processes.  I am sure he never heard, much less uttered, the phrase, "If it ain't broke...."  Nor—listen up, lawyers—would he have countenanced the question/objection, "Who else is doing it?"  If no one else is doing "it" (it being the next generation in steel-making), that was precisely Carnegie's golden opportunity.

(Parenthetically, we may note that the sad dinosaur carcass that US Steel, successor to Carnegie Steel, became in the second half of the 20th Century was precisely because of its highly risk averse culture and its refusal to embrace the "mini-mill" technology introduced by the Japanese steel industry and such nimble domestic competitors as Nucor, which relied heavily on recycled steel as an input and produced relatively small-bore and unimpressive products such as thin rolled steel for kitchen appliances rather than massive trusses, stanchions, and I-beams.)

The ultimate question about Carnegie's life, of course, is whether his philanthropy trumps his ruder business practices or vice versa.  On this Nasaw prudently withholds judgment.  For my part, I think his almost furious philanthropy redeems whatever he may have done to amass his wealth.  Business standards 100 and 150 years ago were not as they are today, and it's blinkered and unfair to judge him by our nobler sensibilities (say we with loud self-satisfaction).  Some of what he did surely would qualify as insider trading today; other behavior was, as noted, murderous strike-breaking; and still other was simply pressing advantages without mercy.  But from the very earliest of ages he was driven, I believe, not by wealth for his or its own sake, but in order to multiply what he could give away.

According to Wikipedia, between 1883 and 1929 Carnegie and his trust funded the construction of 2,509 libraries,1,689 in the United States, 660 in Britain and Ireland, 156 in Canada, and others in Australia and New Zealand among other places. At the turn of the last century, more than half the libraries in existence in the US were Carnegie funded. He had vowed as a very young man to see to it that no one should be deprived of books growing up as he had been, and he came shockingly close to achieving this dream.

A complex fellow indeed.  I'm sorry this enormous effort by the indisputably talented Nasaw did not gain my critical favor.

"'The issue isn't 'integration,' ' [Barton Winokur of Dechert] says. 'I think that's a garbage word people use."

He's talking about integration of laterals, a key issue on which The American Lawyer has just given us a helpful scorecard, in the form of a report detailing moves over the past year, tracking 2,423 lateral partner moves and ranking firms by biggest winners and biggest losers, in terms of partners lateraling in and partners lateraling out. Not surprisingly, some firms rank high on both scales, notably:

• Greenberg Traurig, with 60 in (first place) and 24 out;
• Hunton & Williams, +58, -24;
• Reed Smith, +51, -51;*
• K&L/Gates, +24, -40;*
• Bingham, +48, -24.

[*Both these firms have experienced high levels of merger activity recently and, if I understand the way TAL explains its methodology, partners acquired in a merger are not counted in the "lateral" report whereas those same partners would be counted as losses if they leave subsequent to the merger. If my reading of their methodology is correct, the net partner acquisitions for these two firms are obviously much stronger than these numbers imply.]

These are only representative, and you should look at the whole chart; assuming their methodology is sound, TAL has done a nice piece.

But here's the interesting question. Let's assume we can all go after lateral partners with a vengeance if we are so inclined (and have the headhunters' budget line to afford it): But can we keep them?

[Pop quiz, which regular readers of "Adam Smith, Esq." will know the answer to: What percentage of new equity partners at large law firms (>250 lawyers) last year were home-grown vs. lateral? Answer: 52%/48%.]

More than ever, the answer to that question matters. Some firms have institutionalized, programmatic approaches to bringing laterals onboard. For example, Orrick has "the fishbowl," wherein laterals meet as many as 100 Orrick partners in the span of a few days. Here's the protocol:

"The fishbowl takes place near the end of recruitment. According to partner Peter Bicks, who heads recruiting efforts in New York, what comes before it is exhaustive. After initial interviews with a lateral candidate, several partners prepare a memo of at least five single-spaced pages, which is shown to both the candidate and to all Orrick partners. The memo covers the candidate's personal background, client relationships, compensation and billings history, and time spent on nonclient matters. It also includes proposed compensation at Orrick and two to three years of economic projections. (If the move is consummated, the memo serves as a business plan.)

"With memos in hand, Orrick partners on both coasts attend fishbowl meetings with the candidate. In person and by videoconference, they can discuss their practices and potential cross-marketing possibilities with the new prospect. And the candidate sees, through the sheer number of partners taking part, how seriously Orrick takes lateral hiring. 'Making a lateral move is a big deal,' Bicks says. 'People want to feel comfortable and know you're paying attention to them.'"

Excessive? Not if you're serious about making lateral acquisitions--and having them stick.

But back to Bart Winokur's condemnation of the "garbage word" "integration." What's he talking about?

I view what he's driving at, and how lateral recruitment works (or fails) as akin to introducing a new species into an ecosystem. If it's a condign, fitting, and salubrious ecosystem for the species (which means a two-way fit), we have a win. Or not.

Firms that are consistently successful in lateral recruiting talk about things like "the platform," "the runway," and "becoming part of what we're doing." These words suggest the right concept, which is whether the portfolio of capabilities and skills the lateral brings can complement the network of clients and contacts and practice specialties the new firm can offer.

I've had two recent conversations that illustrate this.

The first, with the managing partner of an AmLaw 10 firm, recapped how they pursue laterals: First, last, and only, for capability. Never for clients, and never for a book of business. In fact, this firm doesn't even ask about portable business when laterals are being recruited. What they hope, instead, is that the lateral will immediately become absorbed in matters at the new firm, engaging them in understanding the way the firm collaborates and truly getting to know their new partners in the only way possible, through dealing with them on cases. Imagine never even asking about a lateral's book of business: This is "think different" land.

The second was with a senior manager with a high level of responsibility for lateral recruitment at a large-ish boutique that specializes in a couple of closely related industries, into which the firm has deep, deep Rolodexes. He reported that if they spot a potential recruit with a complementary practice that they might be interested in, a mere whiff of the firm's contact database almost immediately suggests ways for the new lateral to jump-start their practice.

These are why, I suggest, the word "integration" is, indeed, garbage.

It's not about anything as wimpy and flex-wristed as integration. It's about powerful business combinations, about building capability to serve core clients, about matching individuals to platforms, about building out your key practice areas and deciding which are peripheral.

And did I mention culture? Laterals need to be a fit, or their half-life will be nasty, expensive, and short. Invest your own time and that of your most senior colleagues, and indeed, invest the time of everyone who will "touch or concern" the new arrivals. Take this "sweating the details" story to heart:

"Richard Welch, the managing partner of Bingham's Los Angeles office who came to the firm through the merger with Riordan & McKenzie in July 2003, marvels at Bingham's attention to detail. 'If there is a pile of papers at a 60-degree angle in front of your desk [at the old firm], it will be there in the new office,' Welch says. 'That means you come in and are able think about how to serve clients, not 'How do I get an e-mail out today?' '"

If they're half your equity partner pipeline, you can afford no less.