Meet the US’ most profitable law firm.

Meet the US' most profitable law firm.

The Rise of Wachtell, Lipton, Rosen & Katz: America’s Pre-eminent Boardroom Adviser

Big Law enjoys a long and prosperous life, as demonstrated by “The Partners: Inside America’s Most Powerful Law Firms,” written by James Stewart over four decades ago. Despite the changing landscape of the legal industry, the book’s prominent firms continue to thrive. Cravath, Swaine & Moore, Sullivan & Cromwell, and Kirkland & Ellis maintain their position as Wall Street’s go-to firms for high-stakes legal matters. While some less fortunate firms have faded away, the evolution of the industry has brought about new partnerships, such as the recent merger between Shearman & Sterling and a British rival.

Interestingly, Wachtell, Lipton, Rosen & Katz received only a minor mention in Stewart’s book. However, today, the omission of this influential firm would be unthinkable. Established in 1965 by New York University graduates, Wachtell has become America’s pre-eminent boardroom adviser. In the first half of this year, Wachtell was consulted on transactions worth a staggering $100 billion, and their partners were handsomely compensated for their expertise. According to American Lawyer, last year, Wachtell’s partners each earned $7.3 million, with only Kirkland & Ellis surpassing them.

The exceptional profits generated by Wachtell are not their only unique characteristic. While other firms expanded their reach globally, Wachtell chose to remain focused on its New York City headquarters, employing fewer than 300 individuals. This boutique approach and the lack of a formal partnership agreement contribute to its distinctive culture. Partners are compensated based on seniority rather than individual contributions, emphasizing the firm’s emphasis on meritocracy. A Harvard Business School case study outlines the firm’s guiding principles, with one stating, “The firm is not a business.”

This unique structure aligns with Wachtell’s specialty: advising American executives on high-stakes, company-defining deals. The firm’s reputation blossomed in the 1980s, and since then, its clients have relied on their expertise during turbulent times. Martin Lipton, one of Wachtell’s founding partners, played a crucial role in introducing several groundbreaking concepts. His most famous invention, the shareholder-rights plan, also known as the “poison pill,” helped companies defend against hostile takeovers by threatening to issue new shares. Lipton’s influence also extended to stakeholder capitalism, the practice of CEOs considering interests beyond shareholders. These concepts were adopted by prominent business leaders and organizations, solidifying Wachtell’s impact on corporate governance.

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Critics argue that Wachtell’s innovations primarily serve imperial bosses rather than curtailing the excesses of financial capitalism. Moreover, the firm’s academic standing may have less influence on its bottom line nowadays. All corporate advisors must consider the number and financial capabilities of potential clients. However, by making American executives their top priority during critical moments, Wachtell positioned itself strategically, reaping significant financial rewards. Unlike most law firms that bill clients per hour, Wachtell often charges a fee based on the value of the outcome, similar to investment bankers.

Nevertheless, not everyone is entirely pleased with Wachtell’s practices. X (formerly Twitter) sued the firm in July, claiming that the $90 million fee it received for the Elon Musk case was unconscionable. Twitter’s shareholders benefitted greatly from Wachtell’s expertise, as the value of their stocks could have been approximately $7 billion lower had Musk successfully backed out of the transaction. These high-stakes cases highlight the immense value that Wachtell brings to the table.

So, what lessons can other corporate advisors learn from Wachtell’s success? While some aspects of Wachtell’s operating model are applicable only to smaller firms offering high-value services, the key takeaway is the importance of focusing relentlessly on one’s strengths and rejecting the allure of extensive growth. Additionally, with technological advancements revolutionizing various tasks, such as valuation calculations, companies should expect to outsource commoditized activities, reducing the need for junior staff. On the other hand, complex decision-making in uncertain situations, where language nuances and egos come into play, will remain highly valuable. Therefore, survivor firms are likely to adopt the Wachtell model, employing fewer associates, and subsequently increasing profit margins.

As fundamental transformations loom over the lives and careers of bankers, lawyers, and consultants, the rise of Wachtell, Lipton, Rosen & Katz serves as an intriguing case study. Through their specialization, unique structure, and unwavering focus, Wachtell has positioned itself as the go-to advisory firm for America’s top executives, reaping substantial rewards along the way. In an ever-evolving industry, adapting to new challenges and leveraging one’s distinctive expertise can lead to lasting success.