Private Equity

November 2006

www.americanlawyer.com MMarket MMakers In a year dominated by deals, no firm fared better than Simpson Thacher. That’s the reward for three decades of sharp lawyering and intense client focus. Here’s how they built a juggernaut.

By Amy Kolz

Simpson Thacher & Bartlett just had the kind of summer that private equity lawyers dream about. The firm’s two top private equity clients, & Co. and , were on a dealmaking binge, and Simpson was at the center of the action. The deal that caught everyone’s attention was the $33 billion leveraged of hospital operator HCA Inc., announced at the end of July. It would finally break the record of RJR Inc.’s $31 billion buyout in 1989. And Simpson, which advised KKR on RJR 17 years before, had the coveted role of representing the private equity consortium. But that’s just the beginning. The New York–based firm worked on KKR’s multibillion-dollar purchases of stakes in Royal Philips Electronics N.V.’s semiconductor unit and France Telecom’s yellow-pages publisher, both announced within ten days of HCA. And it advised Blackstone on a triple-header in June: the $8.9 billion buyout of , Inc., and Trizec Canada Inc., the $4.3 billion purchase of Inc., and the $870 million acquisition of Encore Medical . Of course, it’s been a good year for many in private equity. Leveraged totaling $209 billion were announced in the first eight months of 2006, accounting for 24 percent of all merger activity, according to Thomson Financial. Ten of the largest 15 buyouts ever, including SIMPSON’S RICHARD BEATTIE (LEFT) AND KKR’S STARTED WORKING TOGETHER IN THE EARLY 1970S.THEIR RELATIONSHIP HAS HELPED SIMPSON BECOME A PRIVATE EQUITY POWERHOUSE.

P HOTOGRAPH BY J OHN A BBOTT DAVID SORKIN, ONE OF THE LEAD M&A PARTNERS FOR KKR (LEFT), AND CHARLES “CASEY” COGUT, SIMPSON’S GLOBAL HEAD OF

the $21.7 billion deal for pipeline operator , Inc., and the $17.4 billion buyout of retailer Albertsons LLC, have been announced this year. And marquee funds continue to attract billions of dollars from investors. Blackstone, for example, raised $15.6 billion for its latest global fund earlier this year. The tidal wave of activity Fraidin, a Kirkland & Ellis partner who has to draw more law firms into the area. And has been beneficial for just about anyone represented private equity firm Forstmann as consortium and international deals be- who calls himself a private equity lawyer. Little & Co. since 1979. come more common, longtime Simpson But Simpson Thacher is a little bit Simpson’s success in private equity clients are seeing a greater number of different. In addition to KKR and Blackstone, began with these two clients. The firm was competing firms in action. regular clients include Silver Lake Partners, present at the Hellman & Friedman, and Vestar Capital birth of the When Simpson chairman Richard Beattie— Partners. Simpson has been at the table in buyout industry more than 30 years ago then a 33-year-old associate at the firm— 20 of the top 30 private equity transactions while working for the young cofounders of first started working with KKR cofounders involving a U.S. buyer or seller since 2001, KKR. And a decade later, it would expand Jerome Kohlberg, Jr., Henry Kravis, and according to research firm Mergermarket. its business with the emergence of George Roberts in 1972, the three were far It has advised private equity buyers in nine Blackstone. Following these two clients, from masters of the universe. The 28-year-old of the 15 largest announced LBOs to Simpson reassigned lawyers, broadened Kravis and the 27-year-old Roberts were date, and it represented the seller in practice groups, and expanded overseas of- associates at the investment Bear another three. fices. The firm made private equity a Stearns, toiling under 46-year-old corporate The New York–based firm’s dominance priority, and it developed an expertise in the finance manager Jerry Kohlberg. The is more arresting when it comes to KKR and field that would be difficult, if not trio was working around-the-clock on Blackstone. KKR, which has $25 billion impossible, to replicate. “Simpson’s private “bootstrap acquisitions,” the equivalent of under , has retained Simpson equity franchise is by design; it’s not a today’s . And they needed in all but two of its 30 transactions valued at fluke,” says Blackstone’s Friedman. “The a lawyer. Simpson senior partner Donald more than $1 billion since 2001, according reason they are so dominant [in private Oresman, a friend of Kohlberg’s, asked to Mergermarket. (Simpson represented equity] is they set about it as part of their Beattie to help out. the selling company in those two business plan over 20 years ago.” Back then, bootstrap acquisitions and transactions.) And Blackstone, which has Today KKR and Blackstone contribute management buyouts were rare. Legal raised $30 billion in private equity assets, approximately 15 percent of Simpson’s documents had to be created from scratch. enlists the firm on more than 75 percent of gross revenue. Other private equity clients Many hadn’t even heard of its private equity transactions, according to add another 5 percent. (Simpson’s gross these types of deals. Beattie remembers Blackstone’s chief legal officer and former revenue for 2005 was $727 million, Kravis explaining the mechanics of a Simpson partner Robert Friedman. It’s an according to The Am Law 100.) The two are to the CEO of North eye-catching number, considering that among Simpson’s top five revenue-generating Carolina–based Boren Clay Products in Blackstone has announced 58 transactions clients. They have generated 9–15 percent 1973, and the chief executive pulling in the past 32 months alone. of the firm’s revenue over the last 20 years. Beattie aside and asking: “Can this guy BRUCE ROGOVIN “None of the other leading law firms in (The exception was in 2001, when few deals really raise $16 million to buy my company? private equity have two really big private were being done in the wake of 9/11 and How can he do that?” equity clients that concentrate so much [of the stock market’s decline.) They did buy Boren, but even the their] work to the extent that KKR and Empires, of course, are always at risk of wizards back in New York doubted the Blackstone do with Simpson,” says Stephen ruin. The private equity frenzy continues potential of the LBO business. Simpson has been at the table in 20 of the top 30 private equity transactions involving a U.S. buyer or seller since 2001. Much of that work stems from its relationship with KKR and Blackstone Group. “None of the other leading law firms in private equity have two really big private equity clients that concentrate so much [of their] work to the extent that KKR and Blackstone do with Simpson,” says Stephen Fraidin, a partner at Kirkland & Ellis.

was hesitant to devote resources to such “They viewed Henry, George, and Jerry as fact, Latham worked on the financing a novel structure, and management young upstarts.” for two of KKR’s largest transactions, RJR questioned how the deals would fit into the Then there was the firm’s reluctance to and the record-setting buyout that predated bank’s traditional business of trading and expand west. Until 1999, Simpson was only it, the $8.7 billion buyout for Beatrice advice, says Beattie. in two U.S. cities, New York and Columbus Companies, Inc., in 1986. “In retrospect, it Frustrated, Kohlberg, Kravis, and Roberts (the home of longtime client American was ridiculous, because we had more left the bank to set up KKR in 1976. Electric Power Company Inc.). KKR’s banking capability, but we kept representing Beattie (a newly minted partner) and his Roberts was based in San Francisco and the lending community, not [the private colleagues followed the pioneering trio and wanted lawyers in his time zone. Simpson equity] buyers,” says Cogut. (Latham ended up working on some of the fund’s— didn’t have an office on the West Coast, so continues to represent KKR today, although and the industry’s—earliest transactions, Beattie introduced Roberts to John the relationship is no longer defined by including a $106 million buyout of L.B. McLoughlin, a Latham & Watkins partner geography or financing expertise. Latham’s Foster Company in 1977. he knew in California. role has diminished vis-à-vis its New York Beattie’s early work with KKR fostered a This abdication of the West Coast would counterpart over the past decade. The firm sense of loyalty with the client that would threaten Simpson’s market share. Though has been involved in just six of KKR’s largest pay off handsomely. During the Carter the firm continued to work on transactions 30 transactions since 2001.) administration, he left Simpson to serve as that originated with KKR partners in New Simpson began to overcome these the general counsel of the U.S. Department York, McLoughlin built a relationship with stumbling blocks in the latter half of the of Health, Education and Welfare. In his California-based partners who were 1980s. The novelty of buyouts wore off as absence, KKR turned to Kohlberg’s good orchestrating their own deals. The KKR and other LBO pioneers became friend Joseph Flom at Skadden, Arps, geographical divide meant that for much of increasingly active during the decade’s Slate, Meagher & Flom for many of their the 1980s and early 1990s, the two law firms M&A boom. Investment , such as transactions. But when Beattie returned to shared much of the work. Not going to and , the firm in 1981, Simpson again became California with KKR was probably a approached Simpson for advice on entering KKR’s preferred counsel. mistake, admits both Beattie and Charles the explosive market. Simpson represented Despite KKR’s allegiance, there were “Casey” Cogut, Simpson’s global head of Manufacturers Hanover in financings for still obstacles at Simpson. Like the mergers and acquisitions. Simpson had its LBO players such as Forstmann Little and managers at Bear Stearns, Simpson share of deals, advising KKR on buyouts Clayton, Dubilier. And M&A partner Thacher’s senior partners were leery of the such as Amstar Mortgage Corporation, Robert Friedman was advising , private equity business. Even in the early Wometco, Duracell, and Primedia, Inc. But a top M&A client, in its burgeoning eighties, the buyout club was still a small Latham led the charge on several buyout business. one, limited to players such as Forstmann investments, such as Safeway Inc., Mega-transactions, such as Beatrice and Little (founded in 1978) and Clayton, Owens-Illinois, Inc., and American RJR, brought a new celebrity to LBOs. Dubilier & Rice, Inc. (founded in 1978). Re Corporation. Simpson partners working outside of private Simpson’s business was based on traditional Geography on a smaller scale also equity began to appreciate the potential legal corporate work for public companies weakened Simpson’s primacy as KKR’s fees involved. The firm’s fee for the RJR and big financial institutions, such as adviser. Before 1988, the firm had two buyout alone was more than $20 million. Manufacturers Hanover Corporation (a offices in Manhattan—corporate lawyers (Simpson grossed $201 million in 1989.) predecessor to today’s JPMorgan Chase & were downtown and the bank finance The 200,000 hours spent on both deals, and Co.) and Lehman Brothers Inc. Simpson’s lawyers, who served longtime Simpson their subsequent restructurings, financings, private equity skeptics lumped leveraged client Manufacturers Hanover, were and sales of businesses, further cemented buyouts into the same category as hostile uptown. The seven-mile divide meant that the relationship between Simpson and KKR tender offers, another emerging deal conversations between the two groups were partners. Simpson partner David Sorkin, structure, and the firm wasn’t sure it infrequent. And so the firm didn’t corral the one of the lead M&A partners for KKR, wanted to participate in these aggressive resources of their senior lawyers for earned his stripes with the client on the transactions. “It took a lot to convince my KKR. “[By the mid-1980s] Latham had Beatrice sale of Playtex in 1986 and the RJR older partners to put the resources toward established the view at the client that they sales of Company’s fruit KKR [and private equity],” says Beattie. had better banking lawyers,” says Cogut. In and processed food businesses in 1989. DEALMAKERS: (LEFT TO RIGHT) PARTNERS PHILIP “PETE” RUEGGER;WILSON NEELY,WHO HANDLES BLACKSTONE WORK; AND REAL ESTATE CHIEF GREGORY RESSA

At the same time, the birth of a second key private equity client would deepen Simpson’s commitment to the industry. In 1985 two alumni of longtime client Lehman Brothers, Peter Peterson and Stephen obeying the first-come-first-served rule of banking expertise for their buyout clients. Schwarzman, formed an M&A boutique conflicts, could only represent one. Neither And when private equity deal volume called the Blackstone Group. (Peterson, the client liked giving up their regular attorneys picked up in the mid-1990s, Simpson former Lehman chairman and co–CEO, when they lost the race. In the late nineties, devoted bank and bond finance lawyers had lost a power struggle two years before.) after several years of discussions, Beattie exclusively to private equity. Today, 30 The pair decided to expand into private persuaded KKR and Blackstone to allow partners and more than 90 associates focus equity in 1987 and turned to Simpson’s Simpson to represent both in a simultaneous on acquisition finance, a team that has Friedman for advice. Friedman had the auction, using their separate teams. It was doubled in the last 15 years, says partner requisite buyout experience, had worked an impressive feat of client diplomacy. “We James Cross. with Schwarzman during his Lehman days, worked very hard to convince them that we Private equity clients rave about and unlike Beattie, he was not consumed could do this and still be loyal to both,” Simpson’s technical and market expertise. with KKR. says Beattie. “We’ve worked with a number of parties, An early private equity convert, Clearly, it was a good deal for Simpson. and I consider them the best in the Friedman set about building a team of As the competition for attractive buyout business,” says Silver Lake Partners lawyers to service the burgeoning fund. targets grew with the private equity managing director Greg Mondre. Simpson’s Though the lawyers serving KKR had the market, the firm no longer had to pin its extensive experience representing both most experience with buyouts, they were hopes on an auction to one bidder. lenders and borrowers gives the firm committed to the already established Although dual representation has been an advantage when negotiating credit client. “It would have been too big an less frequent when KKR or Blackstone agreements for their private equity clients, internal battle to move people off KKR,” participate in a consortia of buyers (some he says. Simpson’s financing expertise has Friedman says. So he targeted associates of whom might be more skeptical of even earned the firm entry into transactions and young partners who were toiling in Simpson’s wall), the firm has had two where it lacks an M&A advisory role, such as other areas of the corporate practice. For different toes in the water in at least a the $21.7 billion buyout of Kinder Morgan, years, however, there was a steep learning couple of large transactions. Simpson announced in May. Wachtell, Lipton, Rosen curve for new recruits. Wilson Neely, for represented both clients in the 2003 & Katz was lead counsel for the consortium, example, who is today “the key go-to auctions for the $4.2 billion buyout of but Simpson acted as financing counsel partner” for Blackstone at Simpson, was an Nalco Chemical Company (Blackstone was for the group. M&A lawyer serving Manufacturers part of the winning consortium) and Having learned from its experience in Hanover who “didn’t know how to spell newspaper chain , California, Simpson also elected to follow ‘LBO’ on his first Blackstone transaction Inc. (Blackstone and its clients a bit more closely outside of New [in 1994],” says Friedman. Partners partnered with family shareholders York. After KKR and Blackstone established As KKR and Blackstone grew increasingly in a $2 billion buyout). offices in London in 1998 and 2000, the active over the next two decades, the As the buyout deals got bigger, Simpson firm committed to building a U.K.–based existence of separate teams helped to allay reconfigured its debt practice to capture a acquisition finance team. Simpson’s New BRUCE ROGOVIN tensions that either client would get less larger slice of the financing work. After the York lawyers had historically advised the than 24-7 service. There was occasional firm merged its two New York offices in buyers on the high-yield financing, a market friction, of course, when both clients were 1988, private equity partners started largely centered in the , but pursuing the same asset. And Simpson, exploiting the firm’s in-house credit and they had depended on local firms, such as The firm devotes a dozen partners each to KKR and The Blackstone Group, and some of the most experienced private equity partners work almost exclusively with the two. “We try to let everyone know that they’re going to get the same product,” says Charles “Casey” Cogut, global head of M&A at Simpson. “But clearly keeping the KKR and Blackstone teams available to principally represent those clients is a first priority.”

Allen & Overy or Clifford Chance, to advise of the 23 Despite the intimate relationships, threats the clients on the bank debt. M&A partners in New York spend at least to Simpson’s empire abound. The looming After a few years of false starts, in 2003 60 percent of their time on private equity question is whether the firm can maintain the firm snagged Allen & Overy partner matters. A group of partners in credit, fund its key relationships as KKR, Blackstone, Euan Gorrie to serve Blackstone and formation, capital markets, tax and employ- and others increase their investments others. Gorrie had worked for partner ee benefits spend anywhere from one- to overseas. European buyouts exceeded those Anthony Keal, who had a virtual lock on three-quarters of their time on private eq- in the U.S. last year, according to Thomson KKR’s bank debt financing work in London uity. Financial. Yet Simpson retains a U.S.–centric and whom KKR partner Johannes Huth The expertise has led to a host of other model. It has offices in London, Hong describes as the “doyen of the London strong relationships in private equity. Kong, and Tokyo, but with the exception of financing scene.” Two years later, Simpson Vestar and The have been a group of U.K.–qualified attorneys, the and Gorrie were able to lure Keal to the clients for more than a decade. The firm lawyers at these outposts practice only U.S. firm. Today, Simpson works on nearly all of has worked for Silver Lake Partners, a $6 law. Simpson can’t be a one-stop shop for Blackstone’s and KKR’s U.K. financings, billion technology fund established by private equity firms with global ambitions— in addition to work for clients such as Blackstone alumnus , since clients must retain local counsel when it Bank and PAI Partners. its inception in 1999. In recent years, comes to deals in international jurisdictions. Simpson has also identified and Simpson has represented just about every By virtue of its history and knowledge of groomed a next generation of private large private equity sponsor as lead both clients, Simpson often works alongside equity lawyers. “They always tried to counsel for a consortium. And the firm or even oversees local firms in any given highlight their star young lawyers,” says continues to court new relationships in transaction. Simpson was cocounsel to former KKR partner and Latham lawyer the sector, such as the energy-focused Freshfields Bruckhaus Deringer on the Saul Fox, who cofounded Fox Paine & investment firm, First Reserve. M&A negotiations in KKR’s $2.5 billion Company, a private equity firm. M&A But KKR and Blackstone come first. consortium buyout of SBS Broadcasting in partner Sean Rodgers, for example, Today, Simpson devotes a dozen partners 2005, for example. And the firm’s strong- remembers taking calls as a second-year to each to them. And some of the most hold in the U.S. and U.K. debt markets associate from Michael Michelson, one of experienced private equity practitioners, means it almost always wins the financing KKR’s most senior partners. Executive such as David Sorkin and Wilson Neely, business for a deal. compensation and benefits partner Alvin aren’t usually available to other buyout But in many European transactions, Brown has worked on KKR matters for 23 clients because they spend most of their Simpson can’t be in the driver’s seat. years, starting as an associate. Real estate time on KKR and Blackstone. “We try to Germany-based Gleiss Lutz was lead adviser head Gregory Ressa has worked with let everyone know that they’re going to get to Blackstone in its $3.3 billion investment Blackstone’s real estate investment group the same product,” says Cogut. “But in this spring, and since its inception in 1992. And tax partner clearly keeping the KKR and Blackstone Clifford Chance was lead counsel to the Gary Mandel has worked with Blackstone teams available to principally represent consortium in KKR’s acquisition of the 80 for almost a decade. The result is a those clients is a first priority.” percent stake of Philips’s semiconductor deep bench of both junior and senior The devotion has paid off. “We think of . Simpson still had significant lawyers who understand the implications them as part of our inner circle,” says roles in these transactions: In Philips, for of private equity. KKR’s Lipschultz. And there is a fair example, the firm led the subordinated debt “It’s not that there is just one really good amount of movement from law firm to financing, conducted due diligence, and private equity lawyer there,” says KKR client. Friedman became Blackstone’s advised the buyers on the acquisition partner Marc Lipschultz. “There is a whole chief legal officer in 1999, and two agreement. In many smaller deals, however, set of people that really understand all of Simpson associates have recently moved to Simpson’s role may be minor. The firm only the issues that surround a private equity in-house roles at KKR’s latest ventures, provided antitrust advice in KKR’s $345 investment.” Cogut says that nearly all of KKR Private Equity Investors, LP, million acquisition of a 75 percent stake in Simpson’s 31 M&A partners have had a the public acquisition fund listed in German recycling firm Duales System significant role in a private equity Amsterdam, and KKR Financial Corp., a Deutschland AG in 2005. “It’s somewhat transaction in the last two years, and 14 out real estate investment trust. frustrating for our guys over there,” Cogut EVERY SIMPSON M&A PARTNER, INCLUDING COGUT (LEFT) AND SORKIN, HAS WORKED ON A PRIVATE EQUITY DEAL IN THE LAST TWO YEARS.

acknowledges. “We keep our hand in [European transactions], but obviously the main show [for us] is here.” KKR and Blackstone have developed relationships with overseas firms including Hengeler Mueller, Ashurst, Clifford Chance, and Gleiss Lutz. Weil, Gotshal & Manges and Skadden, Arps are two U.S. firms with a host of international offices that have done work for Blackstone. And Latham & Watkins lured European private equity veteran Thomas Forschbach from Ashurst to their office in 2004. As Simpson’s private equity clients gain more experience with these local and international firms, the need to have Simpson involved at all in non–U.S. transactions might diminish. Blackstone’s Friedman & KKR’s Huth concede that while Simpson’s gross revenues BRUCE ROGOVIN from the two are likely to increase, their overall global market share of at least these two clients will probably diminish. Beattie, Cogut, and others say they are unfazed by this development and maintain that the firm’s international model won’t counsel. In the recent $19 billion consortium buyout of an Electronic Data Systems change in the near future. They aren’t buyout of , Inc., Corporation subsidiary in 2004. In 2005 persuaded that opening new offices across Blackstone turned to Skadden. In this case, Silver Lake turned to Ropes to lead the the Europe makes sense. And they believe it appears Blackstone might have been $11.3 billion consortium buyout of SunGard that clients are better served by Simpson sensitive to sharing Simpson with KKR, a Data Systems Inc. (Simpson advised the partnering with the best indigenous firms potential competitor in the auction following consortium on the debt financing). than by haphazardly opening branches KKR’s recent investment in the Philips For now, Simpson says it’s not going to across Europe. Nevertheless, the firm is semiconductor unit. Sources in the industry overthink its global or private equity sprinkling resources abroad. Patrick also speculate that Skadden’s prowess in ambitions. It’s just going to keep following Naughton, a New York M&A partner who strategic M&A, and Blackstone’s desire to its clients. That strategy has worked out has a relationship with KKR Asia head win referrals for its M&A advisory unit, remarkably well for them, after all. “I don’t Joseph Bae, moved to the Hong Kong office might have been factors. (Simpson is think we foresaw that in 1976 or 1986 that last spring. And the firm lured former cocounsel with Skadden on the financing for KKR or Blackstone would be as successful Shearman & Sterling partner Leiming Chen the Freescale transaction.) or have as big of a role in the deal world as to focus on China earlier this year. Simpson hopes that its expertise with the they have come to have,” says Philip “Pete” Global competition isn’t the only area for vagaries of club deals—it has served as lead Ruegger III, Simpson’s executive committee concern. As KKR and Blackstone continue counsel in more than 20 transactions—and chair. “We’ve been very lucky.” And for now, to participate in large consortium deals, they its experience with so many private equity at least, Simpson’s luck is holding. aren’t always going to get to pick the lead players will mitigate this threat. Certainly, lawyers. In the $6 billion consortium buyout though, club transactions provide an opening E-mail: [email protected]. of Stores, Inc., this summer, for other firms to impress Simpson’s This article is reprinted with permission from the November 2006 Blackstone deferred to ’s marquee clients. Ropes & Gray built a edition of THE AMERICAN LAWYER.© 2006 ALM Properties, Inc. All rights reserved. Further duplication without permission is preference for Ropes & Gray. And every relationship with Simpson client Silver Lake prohibited. For information, contact ALM Reprint Department at once in a while, Blackstone opts for other Partners following its $2 billion consortium 800-888-8300 x6111 or visit www.almreprints.com. #001-11-06-0002

www.simpsonthacher.com