Those Guns for Hire

Shooting it out for McGraw-Hill and American Express

"Corporate takeovers are analogous to feudal wars, and the lawyers are the mercenaries."

--Lawyer Martin Lipton

Marty Lipton might have added that the courtroom has replaced the board room as the main jousting arena, and that whenever a company wants to stage--or defend against--a raid, its management usually calls up either of two New York lawyers. One is Lipton, a partner in Wachtell, Lipton, Rosen & Katz. The other is Joseph Flom, a partner in Skadden, Arps, Slate, Meagher & Flom. Both experts in the exquisite art of making tempting offers or executing legalistic delays, they have opposed each other in most of the big-name raids of the past decade.

Now they are squaring off again in an especially vitriolic takeover fight. While American Express Co. was secretly plotting its $880 million bid for McGraw-Hill, it quickly hired Joe Flom, 55, in part so that McGraw-Hill could not get him first. McGraw-Hill countered by hiring Lipton, 47. Says an investment banker who has worked with both: "On offense, Flom is a tiger. He pretends there isn't any law and acts accordingly. On defense, Lipton comes up with innovative, ground-breaking lawsuits."

Last week Flom showed some of the qualities that have made him the undisputed "King of the Takeovers." In a bold move, American Express sued McGraw-Hill for libel and "publicly disseminating false and misleading statements designed to induce McGraw-Hill shareholders to reject American Express's tender offer." Attackers do not expect to be loved, but they rarely sue for libel. The 22-page complaint was aimed at silencing Harold McGraw, the publishing company's chief, who earlier in the week took out ads harshly attacking American Express, its chairman, James Robinson, and its president, Roger Morley.

McGraw called the Amexco bid "illegal, improper, unsolicited and surprising," and charged that Amexco "lacks the integrity, corporate morality and sensitivity to professional responsibility" essential to McGraw-Hill's operations. He claimed that Robinson had agreed last summer not to bid for McGraw-Hill after his informal overtures had been turned down, and that he was now guilty of "an unprecedented breach of trust." McGraw thundered that Morley, by continuing to sit on the McGraw-Hill board until the bid was made, "clearly violated his fiduciary duties to McGraw-Hill and the stockholders ... by misappropriating confidential information and conspiring with American Express" to acquire McGraw-Hill on the cheap. McGraw wound up with a threat to sue Morley, Amexco and each Amexco director. The next day McGraw and Lipton filed suit asking for $500 million in damages should Amexco be successful in its bid.

The odds do not seem good for McGraw-Hill's management. In tender offers over the past ten years, the target company has been acquired 85% of the time either by the initial aggressor or by another bidder. Even Lipton, who with his pale, bland face and dark shapeless suits looks like an ambitious bank clerk, admits: "Cash offers are rarely defeated." Two years ago, he fended off Congoleum Corp.'s cash offer for Universal Leaf Tobacco. Says a Wall Street merger and acquisition specialist: "Marty tied Congoleum up for over eight months in the courts, and it got mauled so badly that it finally went away." The legal strategist representing Congoleum was Joe Flom.

Flom, a small, slight man with thinning gray hair and a forehead wrinkled in a perpetual look of surprise, seems to prefer representing raiders. He has also directed skillful defenses, notably his "Jewish dentist" defense in 1975 for Stern-dent, a manufacturer of dental equipment under attack by Magus Inc., a holding company that is 10% owned by the Kuwait Investment Co. Flom sued Magus for not disclosing that many of Stern-dent's customers were Jewish and might not buy from a company partly owned by an Arab government agency. The argument was such a successful public relations ploy that Magus eventually gave up.

Flom and Lipton first faced off in 1959, when Harvard-trained Flom represented management and Lipton, a graduate of New York University, represented a group of dissident shareholders in the United Industrial Corp. proxy fight. It was a draw. As Lipton recalls, "Joe got four seats on the board and we got four seats." Their first big tender fight was the $84 million Colt (Flom) takeover of Garlock (Lipton) where the term "Saturday Night Special" was coined to describe Colt's lightning raid. It is impossible to estimate which lawyer has a better winning record because even when one loses he usually gains some advantages--in price or terms--for his client.

Both men are workaholics. Both are also members of the "Regency Mafia" group of businessmen, bankers and politicians who breakfast most mornings at Manhattan's Regency Hotel, making deals and complaining about the price of their orange juice ($1.60). A takeover that involves much litigation can run up six-and sometimes seven-figure fees. In addition, Flom is on retainer to numerous corporations that part with $50,000 annually just to keep him from coming at them in a raid; Lipton has been bond counsel to the city of New York.

Their firms, long considered upstart midtown outfits, were located in anonymous high-rise office buildings a $6 cab ride from the tonier downtown Wall Street firms. These firms disdained takeover work because of its past association with hungry and raffish conglomerateurs.

In the past several years, however, Wall Street firms have begun to do takeover work. Davis Polk & Wardwell, for example, defended Carrier Corp. but lost out to Lipton, who represented the raider, United Technologies. Flom was not involved because he was on retainer both to United and Carrier. Indeed, Lipton and Flom are so prominent that a partner in an old-line Wall Street investment banking house says admiringly: "No one else can even shine the shoes of the top two."

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