by David Wong, Photography by Paula Parrish
In an increasingly complex and regulated world, lawyers are ubiquitous on Wall Street and in the City. They protect the interests of stakeholders, provide comfort for an investor, mitigate risks in corporate mergers and help achieve the myriad business objectives of clients. For the most part, lawyers provide a professional service appreciated by few and misunderstood by many.
Ask any practicing lawyer to describe what separates a great lawyer from a good one, and the response is almost invariably “A great lawyer puts his clients’ interests above his own.”
This was exactly the question we posed to BBeyond’s Inner Circle (BBIC) of finance luminaries and industrialists. A managing director of a multi-billion dollar investment fund had this to say: “There are lawyers who provide excellent professional service, there are lawyers who help change the law to serve their client’s interests, and then there is John Altorelli. After years of watching him solve problem after problem, I am still amazed by how honest, fair and respectful he is to everyone, even those who don’t deserve it. You go to John if you want to know the right answer — not just the answer you want to hear.”
As the co-chair of Finance Practice and a member of the executive committee of DLA Piper, the world’s largest law firm, Altorelli is one of the best in the business. In a white- shoe industry dominated by Ivy League lawyers, serving blue chip clients, John’s rise to the upper echelons of the legal profession as an outsider is nothing short of remarkable — a story of hard work, sheer determination, unrivalled ethics and a fierce loyalty to his clients.
Altorelli served six years in the United States Air Force before deciding that he wanted to be a lawyer. He lacked the socioeconomic background and pedigree of the typical white-shoe lawyer. Rather, his journey took an unconventional route. Lacking the financial resources to enroll in an Ivy League undergraduate university, he attended Southern Connecticut State University, where he graduated summa cum laude and was awarded the Henry Barnard Distinguished Student Award. Driven by a strong work ethic, he completed a four-year undergraduate degree in two years, while working 30 hours a week to support his family and to provide care for his elderly parents. He subsequently received a scholarship to attend the prestigious Cornell Law School, where he began his journey to the pinnacle of his profession.
Altorelli advises clients on mergers and acquisitions, private equity, structured finance and corporate finance deals, where he has been responsible for many landmark transactions. He represents some of the world’s largest and most respected companies and institutions, such as The Blackstone Group, Bank of America Merrill Lynch, AXA Private Equity, Jefferies & Co., State Street Bank, Oak Hill Capital and Abu Dhabi Investment Council.
When one of his clients was critically ill and hospitalised recently, Altorelli spent a week working and fielding conference calls out of a hospital ward. Not only does Altorelli care about the outcome of a transaction for his clients, he genuinely cares about the well being of his clients, too. “John Altorelli only represents clients that he considers his friends, and being his friend really means something,” the fund manager said.
Perhaps the ultimate testament for John Altorelli comes not from his own clients, but from those who have sat across the negotiation table from him. It is generally acknowledged that the best compliments come from one’s adversaries. For Altorelli, they don’t just come in mere words alone. Such is the extent of his reputation that even those who have sat on the other side of the table have employed his services the next time they required legal representation. Alec Fraser, a partner at DLA Piper who has worked with Altorelli for over 10 years, quipped,
“Opponents hire John despite the fact that they may feel like they were bested the last time. When the party sitting across the negotiating table from you subsequently hires you for their next deal, that speaks volumes for the quality of your work and your character.”
For such a serious lawyer, Altorelli does not take himself too seriously. When asked about how he converted opponents to clients, he laughed and said, “I make a point of having the best food in our conference rooms. I learned that from my mother. Everyone always wanted to come to my house for dinner.”
John Altorelli is a respected dealmaker with a reputation for honesty and fairness that many lawyers yearn for, but few ever earn. When his previous law firm, Dewey & LeBoeuf, ran into financial woes and joined a long list of casualties of the credit crunch, John started an assistance fund for employees of the firm who lost their jobs when Dewey filed for bankruptcy. He also convinced his current firm, DLA Piper, to give former Dewey employees priority in hiring for job openings.
John’s approach to deal making is part technical and part psychological. In addition to tracking the latest developments in the law, he incorporates the latest technology and industry research to ensure his clients make fully informed decisions. He recognises that dealmaking is about understanding the motivations of the parties and is able to quickly grasp the most complicated nuances of a deal and propose solutions that bridge the divide that often exists when parties are posturing for leverage. For him, the art of the deal is transcending the typical zero-sum game and providing a truly optimal win-win solution.
BBeyond had the opportunity to sit down with John Altorelli. If we had any preconceived notion that lawyers are corporate mercenaries hired to make or break a deal, John Altorelli laid waste to that. John is no soldier of fortune, but he spoke with an air of authority and assuredness often associated with men who spent their formative years in the military. He speaks with a strong American accent punctuated with legal and industry terms of art.
Through his choice of words, we sensed humility and integrity. Humility that probably stems from a strong work ethic cultivated from childhood, combined with a code of honour and coupled with a capacity for corporate law. Integrity is a quality we suspect was forged through sheer grit, tempered by military experience and sharpened with legal knowledge. Humility and integrity are not exactly values we expected to find in this industry, but neither is John Altorelli’s reputation.
BB: You’re known as a Wall Street power broker and lawyer, but lesser known is that you served in the US Air Force. Can you talk to us a little about that?
JA: I spent six years in the Air Force in the early ’80s. I worked in the engineering department as a construction project manager. Basically, I was involved with all the construction projects on our base. You get two jobs in the military: one job is your war skill, and the other job is your peacetime trade. I was in the 96th Civil Engineering Squadron, which is somewhat equivalent, on a much smaller scale, to the U.S. Army Corps of Engineers. The Army Corps of Engineers is responsible for most of the major infrastructure projects in the United States, such as dams and flood control. We were responsible for all construction and maintenance for the entire base. I received many months of training for this role, including learning how to draft mechanical and architectural drawings, specifications, materials testing and surveying.
In addition, I had to become an expert in government procurement rules and regulations. My wartime job was to conduct rapid runway repair and bomb damage assessments. Essentially, our team, which included all sorts of heavy construction equipment, would be dropped into enemy airfields immediately after our aircraft bombed them. Our job was to secure the enemy airfields, identify unexploded ordinance for disposal and repair the damaged runways in order for our aircraft to land. We basically took over enemy airfields so we could land, deploy and supply our forces as we advanced towards the next enemy objective.
During my tour, we shifted our focus from jungle and artic training to desert training as a precursor to the Gulf War and in response to a failed Iran hostage rescue attempt. We learned how to deal with the difficulties of operating in a desert environment, which wreaked havoc on equipment, and also how to deal with the kinds of obstacles that the enemy might deploy in the desert, such as reinforced barriers, moats with burning fuel and even more devious devices, such as IEDs.
BB: Being in the Air Force, what prompted you to go to law school?
JA: At that time I had a preference for engineering, having done so much construction project management. I felt the skills I had learned in the military were very useful, but there were so many legal disputes over contracts. I observed the way the government contracting process worked and realised that being a lawyer was a much better role for me. So that’s what I decided to do.
I went to a state college in Connecticut and I majored in business and economics, which was also good training for law school and corporate law. I went to Cornell Law School to study law, which was a great opportunity for me. It’s a great school with no distractions; you’re in a really beautiful campus in Ithaca, New York, and the quality of the faculty and the students was astounding.
BB: To your peers, you are known not just as a legal service provider but as a dealmaker. Does this only happen at the very top levels of the legal profession and what’s your opinion on this?
JA: Deals today are incredibly complex. We are in a highly competitive world and that makes it even more difficult. There are so many areas of law that must be covered. We have to deploy subject matter experts in areas like tax, anti-trust, securities, litigation, intellectual property, environmental, employment and benefits, real estate, insurance and many more. Yet there is tremendous pressure on costs. The amount of work that goes into a typical billion-dollar transaction is astronomical. My banker friends will laugh and scoff at me, but lawyers like to think that we do the vast majority of the work while receiving the lowest fees.
There’s so much competition for deals from private equity sponsors, hedge funds and strategic buyers that you’re always working on multiple auction processes. There is as much strategy and tactics in the auction process these days as in the actual deal process. You spend a fair amount of time using game theory to speculate on what other people are thinking, because everybody is trying to bluff you. You need to be part detective and part poker player. You have to advise the clients not just on the technical legal terms, but on the auction game itself. That is very much a part of the art of the deal. To some extent, that has become almost as important as the technical legal work – although we still have to do all the technical work too.
I don’t think the interplay between lawyers on both sides has changed much. I think what’s changed is the size of the deals and the speed in which they are completed. You’re seeing much larger companies that are being bought and sold. In addition, deals are more transnational. Very few deals in the billion-dollar range are not international in some respect, and that’s where my firm DLA Piper excels because of its global footprint. You have to deal with the competition laws in all of the different jurisdictions – not just in the United States. There are privacy rules, employment rules and banking regulations, and they’re different all over the world. So in order to do a deal today you have to get your arms around all of that yet do it quickly because you’re in an auction process.
Then, in order to actually close the deal, you have to obtain all of the required consents and approvals. Just trying to come up with a checklist of everything you have to do to transfer the title from one company to another and not miss anything is daunting. Those are really the drivers of the transaction costs, if you will: the time and the effort to conduct the due diligence to assess the risks and to determine how to transfer the assets.
BB: Does that mean that the large law firms will end up becoming bigger and doing all the mega deals, and the smaller players never able to get a foot in the door?
JA: I think the globalisation and the size of law firms have clearly indicated that there’s going to be perhaps 20 or 30 firms that are massive, and an even smaller number of mega international firms. But there are still going to be smaller boutique firms like Wachtell Lipton, Rosen & Katz. Although Wachtell is only in New York, they team up with local law firms in the jurisdictions required by a particular transaction. Global firms like DLA Piper are able to use their own lawyers in those jurisdictions, which we believe provides a more consistent and unified result for our clients. So I think that globalisation is clearly the way it’s going and that’s probably why DLA Piper is the number one M&A firm in the world. We did more M&A transactions than any other firm in the world in the last couple of years.
BB: Does taking equity participation in addition to fees align interests enough to offset the perceived conflict of interests?
JA: When we represent early stage companies that don’t necessarily have the means to pay our fees, we will consider alternative arrangements, which may include some equity participation. Equity in lieu of fees was much more prevalent during the late ’90s dot-com boom than it is today. We look at each client on a case- by-case basis. I typically only consider equity participation with clients that I have a lot of faith and confidence in and that I’ve invested with in the past, but it is not a model that we favour.
BB: In terms of deal flow, how are you getting your business? Is it mostly referred?
JA: For me, it’s pretty much based on referrals from existing and former clients and people I’ve worked with on the other side of deals. Within DLA Piper, I get referrals from other partners who have clients that need M&A, private equity or capital markets expertise.
BB: Why would someone you previously worked against hire you? Is it because they are afraid that you might be batting for their next opponent?
JA: Although that may be true in a small number of cases, they generally don’t hire me because they feel I out- negotiated them. They hire me because I was honest, reasonable and treated them with respect at all times. I helped solve problems and moved the deal forward.
When you treat people that way, with the respect they deserve, clients generally remember and they come back.
BB: You are known to have an extremely strong ethic; did your time in the military shape the way you currently practice law and can you perhaps share a few stories?
JA: Personally, if I take on a client, I have not just a fiduciary duty but also a moral obligation to them. If I cannot give them 100 per cent, then I won’t do it. It is not fair to the client. I think what I bring to the table that’s a little bit different from other lawyers is my project management skills. I suppose my time in the Air Force managing large scale projects helped develop my skills as a project manager, which translated early in my career into doing fixed-fee M&A transactions on a large scale. I did over 120 M&A transactions for one client on a fixed-fee basis.
Basically, I was able to do most of the transactions with just myself, a junior associate, a paralegal and my secretary. This was back in the early ’90s. I travelled from closing to closing with a laptop, a big HP laser printer and a couple of boxes of documents and office supplies. I had a rolling cart and I went from airport to airport with everything I needed to close the deals. In those days, every office had different computers, printers and software. You couldn’t be sure you could work on documents unless you brought everything with you. I basically carried my entire office on road trips.
During the dot-com boom, I worked on deals for a good friend who now is a senior member of Blackstone. We signed up over 50 acquisitions in a period of 60 days in what is called a poof IPO. The idea is to roll-up a number of similar small businesses into a large holding company and take the holding company public. The IPO consolidates the smaller companies into a single corporation and compensates the former owners through a combination of cash and equity.
BB: 50 companies in 60 days?
JA: Sounds crazy, I know. KPMG had to do all of the audits for three years on all of these companies. The securities filings were over 800 pages. We did a roll-up of Internet Service Providers and tried to take it public. In order to do that we basically had to sign an agreement to purchase all of these smaller Internet companies and put them together into one holding company. The holding company gets listed and we would use the proceeds from the IPO to pay for all these companies. It was a simultaneous signing and closing of an IPO.
BB: You did a transaction where Warren Buffet was on the other end of the deal?
JA: I worked on a deal for Capmark Financial Group where Berkadia (a joint venture between Berkshire Hathaway and Leucadia National Corporation) wanted to buy Capmark’s servicing and mortgage banking businesses. Mr. Buffet is a very tough negotiator so he didn’t want to do a standard deal where he becomes the stalking horse and gets a break-up fee if someone tops his bid. So we had to come up with a creative way to do the deal. What we ended up doing was buying a put from Berkadia, essentially the right to sell the business for a set price. Capmark paid 40 million dollars for the right to sell the business for around a billion dollars.
BB: Buffet sold you a put option? Can you tell us more about this transaction?
JA: Yes, because this deal was completed while Capmark was in bankruptcy, it is all documented and available in the public domain. I believe it is the first of its kind, and probably the only of its kind. In bankruptcy or the eve of bankruptcy, debtors often sell assets in what is known as a 363 sale. In a 363 sale, the debtor often signs an agreement with a buyer to act as the stalking horse in a subsequent 363 auction process. If someone tops the staking horse in the auction, the stalking horse is paid a breakup fee.
In the Capmark sale, instead of using a stalking horse, we essentially paid Berkadia the break-up fee upfront when we bought the put and then we went to shop the deal. We were told that Mr. Buffett won’t do stalking horse deals and because we had to comply with the requirements under the bankruptcy law, we couldn’t do the deal without a 363 auction. So the put was the only way to do the deal with Mr. Buffett.
We basically bought the right but not the obligation to sell him the business. If we had decided to close with Berkadia, then we would have deducted the 40 million dollar put price from the purchase price. But if we closed with someone else or there was a higher bid, Berkadia would have kept the put price.
BB: What would have been the alternative, if you somehow were not involved with this deal? What would have possibly happened to Capmark?
JA: I can’t really speculate on what would have happened if Capmark didn’t sell the business. Capmark was in bankruptcy and there was a substantialnrisk that the servicing contracts, particularly those with the Fannie Mae, Freddie Mac and HUD, would be terminated and Capmark’s creditors would have lost a substantial amount of the value of the business.
If the counterparties thought that Capmark was not going to be around or have someone like Buffett to backstop it, they would have pulled those contracts. With Buffett in the wings, it helped stabilise things and give us the time to go shop for the highest price. We ultimately did shop it and, as a result, we received 100 million dollars more for the business from Berkadia, even though we were told that they would never overbid.
BB: Does your negotiation work resemble poker?
JA: Sometimes poker and sometimes the game of chicken. I was working on another high-profile transaction where everyone involved in the transaction was a well-known industry heavyweight. They all were known as tough guys who made billions in the buyout game and none of them would budge an inch. They were all bluffing each other to see who would blink. The company ultimately had to shut down and it was a perfect example of overplaying a hand by guys who are so used to winning in a zero-sum game that sometimes they end up killing the deal. When you play chicken, and everyone tosses the steering wheel out of the window, ultimately everybody gets killed.
BB: What encapsulates why clients on the other side of the table would hire you and can you give us an example of this?
JA: A well-known private equity firm was on the other side of a contentious deal. I was not aware until much later that I apparently did not win over the key person on the other side because the negotiations got heated as they often do. However, that same person decided to hire me to help him on a hostile takeover when it started to go sideways, even though some pretty good lawyers already represented him. I think clients like the comfort of having someone who does the job and doesn’t kill the deal. People who work with me realise that I get the deal done without compromising on quality. I don’t compromise on the points that truly matter or lose sight of the goal. I don’t argue over stupid points, make specious arguments to support a weak position, deceive or mislead people or re-trade on issues, all of which are very important. I think that’s really my strength and clients value that.
BB: Private equity investors or M&A bankers think they have the power to create value during a transaction. How does the lawyer ‘create’ or ‘unlock’ value here?
JA: As my clients often tell me, it is all about the synergies. The bankers and PE guys focus on how they can eliminate inefficiencies and create synergies to unlock value when undertaking a merger. Lawyers focus on finding, evaluating and minimising risks. Both are important. Synergies are measurable I suppose, but how do you measure all of the risks that were avoided because we did a good job? I guess that is why lawyers don’t make the same fees as bankers. There is a ton of hard work that goes into these deals, beginning with the due diligence, before we get to negotiation of documents and the closing mechanics.
Most firms use junior associates for due diligence, but I tend to use more senior people who can really read and understand the agreements. We pride ourselves on doing a really good job of assessing the risks and then helping the client price it appropriately. That’s a very important task because a lot of people don’t know how to price risk, and the purchase price is based on due diligence.
BB: Can you give us an example of pricing with due diligence?
JA: Let’s take environmental risk for example. Suppose the target is potentially responsible for an
environmental spill and the total cleanup cost is estimated to be a billion dollars. When the government comes in, they name every party who either owned, leased or operated the site, regardless of whether the environmental spill occurred on their watch or not. They also name everyone who may have sent material to the site or received material from the site. There will be thousands of “potentially responsible parties”. Everyone is “jointly and severely liable” and forced to fight among themselves over their “contribution” towards the cleanup costs because everyone, even the smallest guy, could be on the hook for the whole cost. Imagine trying to assess the value of this risk.
BB: In cases like these, do you not consult the environmental engineer?
JA: Yes we do, but the engineers generally will only tell you the extent of the spill and the estimated cleanup cost. They are not going to tell you who is going to pay for it, and that’s the issue for the company who wants to acquire the target. We help assess the probability of winning or losing, the potential settlement value and the probable allocation of the contributions among the various potentially responsible parties. It is the same with patent litigation or products liability litigation. There are numerous instances in which a company is aware of a potential problem, but there is no claim out there yet. Nobody knows what the final dollar amount could be.
This is where we come in. We have experienced litigators who are able to provide some clarity about these matters and help price the risk. It is by no means infallible, but deals would not get done unless someone is able to do this with some precision.
BB: Speaking of litigation, does the judge’s track record play an important role?
JA: Yes, forum shopping is a very significant part of litigation strategy. For bankruptcy in particular, all the judges are fairly well known in their districts. Whenever I do a bankruptcy deal, the first thing we decide is where we’re going to bring it and I advise clients on the best course of action. For example, intellectual property and licenses are treated differently in New York and Delaware.
BB: If someone was thinking of hiring you, what is the value proposition that you bring?
JA: I think one pillar of the value proposition for us is due diligence. Certain transaction costs are fairly standard within a reasonable range, such as drafting, negotiating and closing mechanics. Regulatory approvals and due diligence often are the wild cards for costs. Depending on the deal, it could be a small undertaking or an enormous effort. I have been on deals with thousands of complicated investments in all sorts of structures. One way of saving the client money is to simply be better at managing the process. More importantly, if it’s done right there are no tails. This is something we do extremely well at DLA Piper. If a liability is discovered after the closingand you didn’t get an indemnification clause that survives the closing, you now know how much good due diligence is worth.
My personal value proposition is in understanding the numbers. Lawyers generally are not known as numbers guys, but I was a number cruncher with an econometrics background, so I tend to be more analytical when it comes to the numbers. Interestingly, bankers, who are numbers guys, don’t always drill down the way I do. I always find it interesting that so many deal people rely on rules of thumb and so-called market practice, which so often are meaningless in relation to actual results. For example, what are reasonable caps and baskets for indemnification provisions? How much real analysis of indemnity claims is actually done? You would think that there would be a fair amount of data and research available to show the frequency and magnitude of post-closing indemnity claims and that we would base our caps and baskets on that research.
Unfortunately, lawyers and clients generally just go with the current “market”, which varies widely during the business cycle and is based on averages of widely disparate deals. I try to employ a more analytical approach in which I attempt to put a dollar value on the potential risk based on the due diligence, the target, the industry, the types of risks, such as environmental or products liability, and then weigh that against the probability of incurring losses due to these risks. Unfortunately, I am in the minority on this approach and often end up living with the “market” terms, which probably have no correlation to the actual exposure you are trying to cover with an indemnity.