“When I was a young man I had my doubts about institutions. But, as it happens, you grow up and come to think maybe they are not so bad. This is one of America’s great institutions.”Evan Chesler, head of litigation, Cravath Swaine & Moore
“Are they the best? They certainly think they are.”
Managing partner, New York rival
There was little to suggest, when RM Blatchford founded his eponymous legal practice in 1819, that it would emerge 185 years later as arguably the most celebrated firm in the US commercial market.
The firm, renamed and in part reborn as Cravath Swaine & Moore in 1944, would have to wait 50 years before it built its reputation as one of the emerging band of ‘white shoe’ firms advising the new US oligarchs in the rapidly-growing economy of post-war America.
Far more than just riding out one of the most volatile and controversial periods of global capitalism, it would adapt and ultimately thrive in a US legal community transformed by the great crash of 1929.
This was the period, driven by the towering presidency of Franklin D Roosevelt, that led to muscular market regulation and the country’s first unambiguous acceptance of federal intervention. It also laid the foundation for the US’ modern legal market and was to give rise to a new generation of law firms.
That Cravath was to survive this dramatic shift is a considerable achievement, yet one it shared with a handful of near contemporaries, notably its younger cousins and nearest rivals Davis Polk & Wardwell and Sullivan & Cromwell.
But working out how the firm managed to achieve its rarefied place in the world’s legal capital, despite bucking the market trends of its competitors, is another matter entirely.
Cravath, like Wachtell Lipton Rosen & Katz, although for very different reasons, is a firm that appears at once the quintessential Wall Street practice and yet strikingly different from its peers. Consider for a moment what this institution has built. Pound for pound, only the upstart Wachtell could rival the firm’s M&A practice (and then only for the past 15 years).
The firm’s deal portfolio reads like the blueprint for modern America’s business map. “The firm grew up as a corporate firm, building on M&A, capital markets and banking,” says Cravath’s head of corporate Kris Heinzelman.
It was Cravath that Time Warner turned to in its historic $165bn (£87.2bn) merger with America Online; that Conoco turned to in its $35bn (£18.5bn) merger with Phillips Petroleum; and that Vivendi turned to in its $34bn (£18bn) three-way merger with Seagram and Canal+.
Its client list, which includes giants such as Bristol-Myers Squibb, BAT, Levi Strauss, IBM, Johnson & Johnson and Unilever, reads like the Who’s Who of corporate America.
Historically, it is this client base that has set Cravath slightly apart from its rivals, which have largely built their practices on instructions from financial institutions. Despite its long-running links with that most venerated of Wall Street institutions, JP Morgan, Cravath has remained a firm driven by its corporate rather than its banking clients.
Corporate reputation notwithstanding, Cravath is regarded for more than just its M&A work. In addition to respected practices in the less glamourous areas of environmental and tax law, Cravath’s capital markets practice is a market leader, particularly in high-yield work, with the firm unsurprisingly leveraging off its corporate core to forge a premier issuer-driven practice for clients such as Campbell Soup, Canada Housing Trust, Bayer and American Tran Air.
The firm has also represented underwriters such as JP Morgan, Credit Suisse First Boston, Goldman Sachs and Salomon Smith Barney.
And in a firm that grew up in the corporate arena, the rapid emergence of Cravath’s celebrated litigation practice is a remarkable phenomenon.
“Unlike most Wall Street firms, our litigation team grew as a free-standing practice rather than as a service arm for the corporate department,” Cravath head of litigation Evan Chesler says. “Most other firms that developed their litigation practices did so to serve corporate clients.”
While Cravath’s corporate reputation stretches back to the 1800s, its litigation practice has only come to prominence during the past 30 years. Fittingly for a firm whose corporate practice hinges on advising on some of the biggest M&A deals in history, Cravath’s contentious pedigree was cemented after defending the largest civil litigation suit the US had ever seen.
The epic case, which stretched from 1969 to 1982, arose when the Department of Justice alleged that IBM was holding a monopoly over the market.
“We defended IBM for more than 13 years,” recalls Chesler, then an associate on the case. “The case saw 600 million documents produced and led to 21 private civil cases. We only lost one of the 21, which was reversed on appeal.”
Significantly, IBM was not a client of Cravath’s before the case. For a firm whose corporate department was held in such high regard, the fact that IBM was secured as a client by the litigation department stands out.
But the epic proportions of the case, while defining the litigation department’s importance to the firm, also presented Cravath with a serious worry. “We thought we would have nothing to do once the case was over, because the IBM suit was such an intensive, time-consuming case,” Chesler explains.
The fact that Cravath had drafted in scores of litigators to deal with the scope of the case left the practice vastly over-manned when the suit was abandoned in 1982. Fortunately, other clients were quick to step forward to fill the vacuum. “After the Department of Justice dropped the charges, we found that clients were lining up for our services,” Chesler continues. “And they have not stopped.”
But the firm has built itself on more than the strength of its practices alone.
Culturally, it has become one of the most respected brands in the US legal market.
Like most of its white shoe rivals, it retains a pronounced strand of conservatism.
“Not much has changed in the firm over recent years,” presiding partner Robert Joffe says. “We stick to our main principles of practising US law, of not hiring any lateral partners and of keeping our lockstep compensation.”
The idea of undertaking a merger is unimaginable for the modern day Cravath, although the firm would not exist had Blatchford not linked up with a rival firm, Seward & Griswold, in 1854. It has not taken a lateral partner since 1943.
While this commitment to non-lateral hiring is a good illustration of the collegiality of the firm, it has proved a hindrance in adapting to market trends.
Without the capacity to hire laterally, the firm has been unable to fully take advantage of one of New York’s most booming areas of recent years: bankruptcy. During the previous economic downturn in the early 1990s, the firm started a small bankruptcy practice with two junior partners to develop the necessary expertise. The practice was ultimately phased out when the work dwindled.
Flexibility notwithstanding, Cravath believes the benefits of its no-laterals policy easily outweigh obvious disadvantages. And in truth, the firm has proved able to move into more lucrative new areas, most notably in the late-1980s when it broke into the emerging hostile M&A sector.
In any case, the firm claims such hires are rendered unnecessary by its much-revered, self-branded rotation training system, the Cravath Way, which is designed to create partners expert in a broad spectrum of corporate law.
Each new associate is assigned to one of 15 sub-groups spanning the corporate practice, such as M&A, banking, real estate or London. Each sub-group has two to four partners with associates working purely with those partners for up to 18 months before rotating to another sub-group.
The litigation department runs a similar rotation system but is not divided into sub-groups. Instead associates are assigned to one partner before being moved on.
“The Cravath Way creates an incentive for partners to train associates because they work with them for an extended period of time, meaning both lawyers really have to work at a decent relationship,” Joffe says.
Even the firm’s rivals are impressed. “The model is unmatched not only for depth of knowledge but also as a recruiting tool,” says one. “It makes every associate an expert in everything.”
“You can really see the difference in Cravath’s graduate pitches,” says another. “They tend to say: ‘At other firms you will get lost in large departments and between partners. At Cravath, I am married to you for 18 months, so I had better make it work’.”
“Cravath is often said to be the best post-graduate law school in the US,” Chesler says. “We are the only firm that exclusively re-populates our ranks from law school.”
However, even inside the firm, partners acknowledge that the Cravath Way is not without its drawbacks. Partners have to constantly adapt to working with new lawyers as the associates they have trained are moved on. Clients can also find it hard to adjust when familiar associates are switched to different sub-groups.
A consistency within the partnership is also necessary for the success of the scheme. “In order for the Cravath Way to work, the firm needs to have first class partners,” Joffe says. “There can be no ‘star system’ as that creates a hierarchy where associates will want to go with the stars and avoid the others.”
But even for the fortunate associates that do win a place at the firm, attaining partnership is no easy task. According to Joffe, a third of all associates leave within three years, with a third more leaving by the end of the fifth year. It is only the few that last the average eight years that get considered for partnership.
With only 80 partners, the firm has a strong collegiate atmosphere, a fact also reflected in its system of remuneration. Until the 1960s, the firm, like most of its Wall Street rivals, operated a purely merit-based system. Its switch to lockstep created a unique instance in the US market of swapping an ‘eat what you kill’ system with lockstep.
One mythical story that explains the overhaul involves the legendary Paul Cravath, undoubtedly the driving force behind the firm’s postwar development. When a group of junior partners, unhappy with the merit-based system that saw Paul Cravath scoop 50% of all the profits, went to the big man himself to demand a change, Cravath’s reaction summed up the predicament. “What you do with your half of the profits is up to you,” Cravath is said to have replied with mock magnanimity.
Heinzelman takes a pragmatic view of the system. “The lockstep system is key to the firm not only for the partners but for the clients,” he says. “It means that a client is always a client of the firm, so they receive the best advice from the best lawyers without any bickering over who gets points or credit for the work.”
While UK firms generally use lockstep as a management tool, the fact that Cravath has no executive committee or a written partnership agreement demonstrates the firm’s belief in the equality of its partners.
The key for a US lockstep (aside from Cravath, only Wachtell, Davis Polk and Cleary Gottlieb Steen & Hamilton operate such a system) is bottom line profitability.
Cravath’s hefty profitably — its partner profits of last year were a good $250,000 (£132,265) ahead of its main rivals — is due partly to the fact that its partnership is less than two-thirds the size of Sullivan & Cromwell’s, which boasts 144 partners, and Davis Polk’s, which has 146. The firm is still able to have a full, in-person partnership meeting every Monday.
Cravath’s structure and size, and its US law-only work, have meant it has not had to follow the same business development route as its New York rivals. But in such a fast developing market as New York, can the strategy that has seen the firm prosper over the last generation see it equally well through to the next?
For the moment, the firm’s central corporate department is continuing to thrive despite pressure from new entrants such as Wachtell and Skadden Arps Slate Meagher & Flom, both of which have entered into the top-tier of M&A advisers over the
past 20 years.
But with firms like Weil Gotshal & Manges or out-of-towners Kirkland & Ellis and Latham & Watkins gaining on the traditional market leaders, Cravath and its rivals face more competition in their New York backyard than ever before.
“The New York pie is shrinking for everyone: the number of firms is growing and there is only so much legal work,” one rival says. “Cravath needs to grow the number of lawyers [it has] and be in different markets.”
While Davis Polk and Sullivan & Cromwell have opened around the world, Cravath maintains only its Manhattan HQ, plus a small London satellite
outpost.
If anything, the firm is scaling back its international spread following the closure of its nine-year-old Hong Kong office in 2003.
The ditching of the office cannot easily be dismissed, although the firm’s partners remain phlegmatic over the move. “The boldest thing this firm has done since I was here was to launch in Hong Kong,” says Heinzelman. “The second boldest thing was to close Hong Kong.”
Unlike CMS Cameron McKenna or Dewey Ballantine, both of which cited the flagging economy as the reason for scaling back their Hong Kong presence in 2003, Joffe insisted the slump in the Asian market had nothing to do Cravath’s strategy u-turn.
“The market just does not offer enough premium work for legal services for which clients will pay premium rates,” he said at the time.
But can Cravath sustain its top-tier status by focusing on such a limited supply of premium work at a time when the legal market is becoming ever more globalised?
Joffe is keen to rule out any radical departures from type. “We cannot go for the short-term needs of the firm,” he says. “If we decided to follow the [trend for] international expansion and lateral hiring, we would probably have to break the lockstep system and there would likely be a drop in quality,”
The fact that 30% of Cravath’s client base is already non-US-based is a major factor behind the firm’s US law-focused path.
“Cravath is basically an international boutique,” one rival says. “It has bridged the gap and struck the perfect balance between Wachtell and Davis Polk.”
Joffe is unequivocal about Cravath’s strategy. “The aspiration of the firm in the international arena is to be doing top-end international transactions that are governed by US law,” he says. “This means that the firm does not need to do a lot of deals to keep busy and profitable.”
Cravath’s condensed partnership means that this is a sustainable model, at least for the foreseeable future. The firm has built up an amazing self-perpetuating brand to serve its clients and its lawyers.
It has arrived at a business model that, despite both its quirks and qualities, has bound it to a certain strategy and structure. The firm now risks degrading its highly regarded brand, and perhaps even some of its credibility, if it ever does ditch any of its intrinsic values.
But inevitably, brand is nothing without substance and as long as Cravath continues to produce an unusually high proportion of the best lawyers in the US and to win work on the top corporate and litigation matters, it will continue to be seen as one of the best law firms in the world.
Ironically, for a firm that has merged, changed its name countless times, dumped its compensation system and hired lateral partners, the newly conservative Cravath seems comfortable with the structure and direction it has settled on over the last few generations.
It is also a reminder that, despite the firm’s carefully crafted image of unchanging commitment to a single model, Cravath has shown a considerable ability to adapt, radically if necessary, to an ever-changing business environment while sustaining its underlying values.
Whatever the firm does in the future and whether the market does force it to change its business model again, one thing will be for sure: it will do it the Cravath way.
