When
Ben Heineman left a post as a leading Washington lawyer to become
general counsel of General Electric Co. in 1987, the world was on the
verge of some remarkable changes. The legal and regulatory complexities
of an increasingly knowledge-based economy were multiplying. The
globalization of business was just kicking in. And a takeover boom was
setting the stage for corporations to make acquisitions a more regular
and reliable part of their strategies.
Heineman spent most of the next 18 years building and managing a
legal organization that helped make GE a leader in responding to these
trends. He took what was then a novel approach to in-house legal teams:
recruiting high-level legal talent in environmental, M&A and many
other specialties and, with backing from CEO Jack Welch and his
successor, Jeffrey Immelt, making lawyers full members of the business
team. GE now employs more than 1,000 lawyers in more than 100 countries.
This huge team does far more than just M&A, of course. Still,
acquisitions remain a big part of life at GE, and lawyers are important
members of deal teams there -- as evidenced by the company's senior
vice president of business development, Pamela Daley, having previously
been its lead M&A lawyer.
Heineman, now a senior partner at Wilmer Cutler Pickering Hale and
Dorr LLP and a senior fellow at Harvard's John F. Kennedy School of
Government, recently discussed some of the M&A aspects of his work
at GE with Corporate Dealmaker's Kenneth Klee in a telephone interview.
Excerpts:
Corporate Dealmaker: As you built GE's in-house legal capability, how big a focus was M&A?
Ben Heineman: A big part of the in-house expertise and
capability was the ability to do deals. Inside counsel, in my judgment,
should be directing all the legal activity for the business people on
all matters -- especially including big deals. And it is not just
M&A counsel, because obviously doing diligence and a deal correctly
involves antitrust, litigation, environment, tax, labor and employment
issues. ... All the legal disciplines come into play when you're
trying to figure out the risks and opportunities of the deal, beyond
just the core business issues.
My goal very early on was to hire world-class experts who were equal
to or better than people in firms. With our own in-house experts, we
could coordinate very efficiently, take very hard looks at all the key
issues. In many cases, in many big deals, it was our own [specialists]
who had to figure out the connection to our practices and policies on
the due diligence side and had to work with the business teams, both on
overall diligence and on integration. We got tremendous leverage by
having super legal experts on the deal team under [then-senior counsel
for transactions] Pam Daley.
Over time, Pam evolved as an important secondary negotiator, and in
some cases as a primary negotiator, for the CEO. Jack Welch and Jeff
Immelt had enormous respect for her analytic ability, her clarity of
thought, her negotiating ability. Our basic model was to hire a good
firm but try to staff [the project] reasonably thinly. You'd have a
senior partner matched with Pam and then maybe a junior partner, and
not a horde of people.
What role do the General Counsels at the business unit level play?
There was enormous variation in the degree of partnering between
headquarters and the business units. We tried to drive specialization
down from Fairfield. The first step was to hire the super-specialists
at Fairfield. But then in the big businesses -- aircraft engines,
energy, NBC -- they had their own specialists. And then it would pretty
much depend on the size of the deal. If it were pretty much a business
deal, then they did it, and the corporate folks would advise and help.
But as the deal got bigger and it was kind of a chairman's deal, we all
did it, because at that point, everybody was on the line.
How did the company's approach to due diligence change during your tenure?
I think we all got more sophisticated. And the most important change
was that the diligence and the integration plan were more integrated,
if you will. It wasn't just that you did due diligence and passed it
off to somebody else; we developed pretty robust routines that in
theory fed into each other. The diligence is going to yield pro formas
in a whole series of operating issues after the close. Integrating the
cultures, integrating the benefit plans, getting the synergies -- and
not losing a step. A number of these deals don't meet the pro formas.
So due diligence got more rigorous, more complete, and it became tied
to the post-closing plan.
How about the handling of legal risks?
The question really was always price. Occasionally there would be a
showstopper. You know, the place was too corrupt. Or the environmental
issues involved asbestos, which is sort of the Scarlet A -- we just
wouldn't do it. But often, you just had to figure out, what was the
price. If there were environmental problems that the target hadn't
seen, we understood our standards, and we'd estimate what the costs
were -- that would be part of the negotiation. If there was antitrust
risk, who was going to take it? Once you identified these things,
rarely was there a showstopper; there was usually an answer.
I'd like to think we started doing this in the late '80s or early
'90s. If you go to the CEO and say there's an $800 million hidden
environmental cost here, it's up to him to decide whether that can be
negotiated, or whether we're going to eat some of that -- those are
business decisions, assuming our work is good. And our work is very
professional. Because of our size and the large number of deals we do
every year, we have a lot of experience in, for example, understanding
remedial costs, or building compliance systems if they don't exist.
You mention "showstopper" issues. Any changes over time in the
reaction to, say, the fact that a target faces criminal charges for
paying bribes?
Yes. It used to be that five years ago, the Justice Department would
say great, GE showed up, they're going to clean up the compliance
programs, they're going to put their systems in place, they'll pay a
civil fine because that's just part of the deal. But increasingly, they
may want their pound of flesh, and the selling company has to go work
it out. And whether it's a criminal fine or some kind of personal
liability -- increasingly, we're not going to buy something with
criminal issues unresolved where it will be a GE criminal matter
post-closing, even though it had nothing to do with us.
My strong impression is that the world has changed. At least the
Justice Department on a bribery matter is not going to let you close
and go civil. You're either going to have to take the criminal action,
or the guy who's selling the deal is going to have to clean it up
before the close.
GE operates on a scale that few companies can approach. How relevant is your experience for other firms?
I never say that GE is the model. It may be a model. I can only
report on what we did and why we did it. Not everyone's going to have
the heft and resources that we did. But we have grappled with these
things -- and, hopefully, thought about them and thus have relevance,
even though we may not be a perfect fit for everyone. CD
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