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When he picked up the telephone on what had started out to be just another Monday in April, David Heller was surprised to hear the concern in his old friend Bruce Becker’s voice. He was even more startled to hear Becker’s reason for calling: the dreaded “B” word — bankruptcy. How was it possible that Becker’s company had crashed so suddenly? The two lawyers had been friends since the mid-1990s, when they met at their daughters’ Indian Princesses overnight field trips in suburban Chicago, trading war paint, powwows, and bows and arrows. By January 2000, Becker had succumbed to the new-economy bug, moving to Portland, Ore., to be the senior vice president of law and regulatory affairs for GST Telecommunications Inc. Not long after — and only one month before the April 2000 phone call — the two lawyers and their families vacationed together in Las Vegas. At the time, Becker showed no signs of worry as the two families relaxed in the sun, took in some shows, and tried their luck at the slot machines. The notion of bankruptcy was in fact a joke to the Vegas vacationers. At one point, Heller — a senior bankruptcy partner at the Chicago office of Los Angeles’ Latham & Watkins — picked up the lunch tab at a Mexican restaurant. “I remember that I took the check and said, ‘Gee, Bruce. It’s too bad that you aren’t in bankruptcy — then I could expense this,’ ” Heller recalls. “ And we both laughed.” No one was laughing during the phone call in April. Becker had started the day with Donald Bloodworth, GST’s new chief financial officer. “When Don came to see me, he was clearly shaken,” Becker recalls. “He said that he had been looking at the numbers all weekend, and he didn’t think that we had enough cash to carry us more than a few months. In short, we needed to consider a Chapter 11 proceeding.” Becker couldn’t believe it. At 47 years old, he had quit a stable job at a Baby Bell — as general counsel of Ameritech’s Long Distance Industry Services — and moved his family halfway across the country to work at the entrepreneurial end of the telecom spectrum. It wasn’t as if GST had been a barebones startup. The company, which sells telephone data and Internet services to businesses in the West, the Southwest, and Hawaii, had gone public in 1994. Since then it had raised more than $1 billion in debt, some of which was coming due in the fall of 2000. And therein lay the problem. Becker’s first call was to his old Chicago friend. The two had never worked together, but Becker wanted Heller’s take on the situation. And a referral to a good bankruptcy lawyer. Heller didn’t play coy. He told Becker he had the time to meet with the GST board when it convened later that month. While that conversation was taking place, Bloodworth was taking the bad news to Tom Malone, the company’s new CEO. “GST was one of many companies that was highly leveraged and starved for cash,” says Malone. Revenue had flattened, with no end in sight. “And that,” says Malone, “is a really, really bad thing for a high-growth company.” In many ways, Becker’s call was an early signal of the end of an era. The story by now is familiar. Dot-bombs from Portland to Los Angeles to Silicon Valley and its imitators nationwide have scorched the corporate subculture of biscotti, black T-shirts, and Palm Pilots. The news is nearly all bad for corporate and capital markets lawyers, but good for those in bankruptcy, workouts, and litigation. The law firms that helped inflate the bubble aren’t always equipped with the sort of lawyers who know how to pick up the shreds now that it has burst. GST started life as a client of Stephen Irwin, of New York’s Olshan Grundman Frome Rosenzweig & Wolosky. But a board shakeup in 1998 led the company to a new-economy giant, John Goodrich, a name partner at Palo Alto, Calif.’s Wilson Sonsini Goodrich & Rosati. Eventually some work — high-yield debt, a key part of GST’s financial strategy — moved to L.A.’s Irell & Manella with one of Goodrich’s partners, Meredith Jackson. Now that GST and many others have imploded, Goodrich recites a version of the Silicon Valley mantra — that crashes are an integral part of a startup marketplace: “Is this the cost of building new companies? That is the question. I hate to say it, but maybe it costs three dead ones to build a few good ones.” What makes a company thrive is the right combination of management savvy and promotional flair, he says. Those two talents don’t always coincide. When they don’t, a company may die. “Given what we do,” says Goodrich, “we see it a lot.” Latham sees a lot of it, too. The firm has handled the Northpoint Telecommunications bankruptcy, as well as informal insolvency procedures for such dot-coms as icebox.com, Imotors, Selfcare, Free Real Time, iam.com, and Direct Net Telecommunications. Partners in the firm’s Menlo Park office — which opened in 1997 and is the hub of the firm’s work in Silicon Valley — stress that Latham made a conscious decision not to throw itself willy-nilly into new-economy land; and that it was particularly skittish about the dot-com whirl. What once was derided by certain competitors as cluelessness now looks like a wisely conservative strategy. Michael Hall, a founder of Venture Law Group, who jumped to Latham in January 1999, has seen this world from both sides and can explain — with the benefit of hindsight — where Latham fits: “For a while … a lot of people were convinced that the world had changed, that everything was new and different — that the old guys were slugs … . We could have grown a great deal more quickly than we did … . There was a lot of back-and-forth about this, because we were worried that precisely what has happened would happen — that the bubble would burst. We are not claiming for a moment to be the only ones with insight. We are by no means claiming a second sight.” To be fair, Latham didn’t open in Menlo Park to do bankruptcy work either. Its startup clients include Tivo and the biotech portfolio that lateral partner Alan Mendelsohn brought with him last year from Cooley Godward. But now, one of Latham’s West Coast players turns out to be Heller, the bankruptcy whiz from Chicago. GST’s onetime potential is best illustrated by the swiftness with which Wilson Sonsini signed on as its law firm. Wilson Sonsini’s presence on any dot-com business plan or prospectus telegraphed that a company needed to be taken seriously. The right lawyers, like the right venture capital backers and computer programmers and board members, meant everything. Wilson Sonsini, more than any other law firm, could afford to be choosy. In GST’s case, however, the firm didn’t even bother playing hard to get. “I happened to be in Toronto for a meeting, and I got all these urgent messages from John Goodrich, saying, ‘Meredith, drop everything and get on a plane to Toronto. We have to interview with this client!’ ” Jackson remembers. “ I was, like, ‘Sure, I’ll drop everything and get in a taxi.’ It was funny.” Once Wilson Sonsini was on board, Jackson’s hopes for GST’s success were buoyed by what happened at a December 1999 Barclays Bank high-yield bond conference in New York. There, she met one of GST’s investors, who brimmed with faith in the company. “He said that he thought of GST like the tortoise and the hare, because so many of the CLEC [Competitive Local Exchange Carrier] companies were all smoke and mirrors: flash, but there was nothing there. But he thought GST was a good, solid business — that it was going to succeed and win the race,” continues Jackson. “And I said, ‘Great. because I am their counsel and I want them to pay me huge fees!’ “ But, in the end, she says, “It was a tremendous roller coaster.” No one would agree more than Bruce Becker. Although he had decided that he wanted to leave Ameritech, which had merged in October 1999 with SBC Communications Inc., he needed convincing that a company like GST was for him. Gradually, he grew intrigued, as a headhunter sold him on the adventure he would find out west at GST. “Now,” Becker chuckles, “had I known the company was about to go bankrupt, we would not have come out here. I’m goofy, but I’m not that goofy. But at the time, the prospects were mixed.” At that Barclay’s conference, Meredith Jackson picked up a memento: a candy bar that looked like a Nestle’s Crunch bar, except that the wrapper said “Credit Crunch.” Jackson says, “By the end of 1999, people were making jokes about the credit crunch, and by the second half of 2000 it wasn’t a joke anymore.” Which leads back to Bruce Becker’s fateful April phone call to David Heller. At the end of that month, Heller flew out to a two-day GST board meeting at the Hyatt Hotel at the San Francisco airport. Goodrich was there, too. But Heller was the star attraction. Chief financial officer Don Bloodworth took Heller aside for a private chat. “I just talked to him face-to-face,” Bloodworth explains. “We had never met, and I wanted to make sure he could give firm, hard advice based on what he heard from the consultants.” (Earlier that year, GST had hired Deloitte & Touche to analyze the company’s operations and options.) Bloodworth wanted the board to understand that none of the alternatives — for example, seeking more financing or selling the company without bankruptcy protection — seemed worth the risk. Chapter 11 looked like the only way out. “But not all of the board members agreed right out of the block,” he says. “And I just needed David to be firm.” Heller remembers the discussion as “the proverbial man-to-man” talk. “The fact is,” he says, “that it is very hard to get a board of directors to confront the fact that they are hopelessly in debt. He took me for a walk to find out if I was chicken or not.” Not to worry. “The board members’ appreciation for the situation ranged from immediate comprehension to, in my judgment, shock and dismay,” Heller recalls. The telecom market had not yet collapsed completely, and many still had faith in the capital markets. “I believed that my role would be to explain the unfathomable what-if,” Heller reflects. “The meeting took place over two days, but it seemed like an eternity. People talk about watching their lives unfold before their eyes. You could really watch the birth, midlife, and potential death of GST over those two days. We could watch GST’s corporate existence flash before our eyes.” Early on, Heller assumed that his trip to San Francisco would be a one-shot deal for Latham. “I remember thinking to myself that that was a piece of the business that I would never have,” he recalls, “because I had been selected to be the Grim Reaper, and it would take four to five visits from people like me to convince the board that they had real problems. But, to the board’s credit, they bit the bullet. And they did so with uncharacteristic speed.” To GST’s Malone, it was clear: The whole telecom sector at that point was on the precipice. The exit strategy was a sale, so speed counted. “This is like selling a house,” Malone suggests. “I did not want to be selling my house when all of my next-door neighbors were as well.” Latham was on the case. Heller immediately enlisted the full-time aid of partner Richard Levy, in addition to that of several senior associates. “I called them up from San Francisco and said, ‘Drop everything you’re doing!’ ” Heller says. After several telephonic board meetings in late April and early May, GST filed for bankruptcy in Wilmington on May 17, 2000 — “a day that will live in infamy in my career,” deadpans Bloodworth. After that, Becker explains, “John Goodrich just kind of disappeared.” Wilson Sonsini does not have a bankruptcy practice. Typically it farms its bankruptcy work out to Murray & Murray, a Cupertino, Calif.-based boutique. “There was nothing formal,” Becker says. “What John basically said on one of our last prebankruptcy board meeting phone calls was, ‘Once you are in bankruptcy, you don’t need me anymore. You will use Latham, and they will be your lawyers.’ He basically said, ‘You are in bankruptcy, and it is a different world, and you will have different counsel for that world, so I am out of here.’ We still have smaller relations with Wilson Sonsini in terms of [prebankruptcy] litigation. They have been a very good source for Latham when issues come up.” “We don’t do bankruptcy,” Goodrich confirms. “We feel that you end up with a conflict if you do both the bankruptcy and corporate side. All of us lawyers need to strive to make sure that we don’t end up on both sides of the problem.” One of the key decisions that GST and Latham made, as part of the Chapter 11 proceedings, was to put forth a “stalking horse” — a letter of intent indicating that Littleton, Colo.-based Time Warner Telecom Inc., an optical networks and broadband company — would be willing to purchase the company’s assets for $450 million. Having a potential buyer, explains Latham’s Richard Levy, calms customers and vendors. “With the stalking horse, we were also able to tell the world that we have somebody who wants to buy us,” Levy suggests. “So don’t give up hope.” After the May 17 filing, the creditors committee hired Milbank, Tweed, Hadley & McCloy and the Los Angeles-based investment bank of Houlihan, Lokey, Howard & Zukin. “Our first job was to say, ‘Get rid of the stalking horse,’ ” says Paul Aronzon, the Milbank partner in L.A. who handled the case. “ It was the combination of what we thought was a relatively low bid, coupled with a relatively large breakup fee, which Time Warner was asking for, that led us to say no. We wanted a more open process.” It worked. There would be an auction to sell the company. Alan Fragen, a Houlihan partner, says that timing was everything. “This is a different story because we got it done fast,” Fragen says. “We ran the process at a time when there were still credible buyers. Don’t kid yourself. The market has really changed. If we had to resell GST today, it would be a totally different story.” Fragen credits GST’s CEO: “Tom Malone was smart enough to surrender.” In late August 2000, GST hosted the auction in Latham’s midtown Manhattan office. Bidders gathered in several conference rooms. The opening bids ranged from $350 million to $452 million. But there were three days to go. At one point, Heller says, “Time Warner left, complaining bitterly about the process. I was nominated to get them back. It was about 3 a.m. I called their senior executives and begged, begged! And they ended up coming back … .All I will tell you is that I was on a cell phone on my knees. And I’ll leave it at that. On a cell phone on my knees.” “Well,” Becker, says, laughing, “all I know is that, whatever he said, he was very smooth about it afterward.” When it was over, Time Warner Telecom bought the majority of GST’s assets for $690 million, a discount of more than one-third from GST’s $1.1 billion book value at the time of the Chapter 11 filing. With the winner declared at the crack of dawn on Aug. 25, 2000, the very day the court had set to approve a sale, the parties dashed to a 7 a.m. Metroliner to make their court date in Wilmington. The sale was made final last January. GST is now down to a corporate staff of 15, including Becker. They spend their time selling whatever Time Warner Telecom didn’t want. This fall, the company will begin distributing the proceeds of the asset sales to its creditors, a process that it hopes to finish by the end of the year. Becker expects to close the bankruptcy in the first quarter of 2002. After that, is there a role for Latham? Heller doesn’t expect so. Typically, he says, a new client that is acquired out of bankruptcy evaporates; the new parent company has its own lawyers. In the case of Time Warner Telecom, that includes a number of firms. Paul, Weiss, Rifkind, Wharton & Garrison, for instance, was its firm of choice in the acquisition of GST. But don’t cry for Latham. At its peak, the case occupied four Latham lawyers full time. Some 15-18 others rotated in and out of the matter, as needed. Through March 31, 2001, the firm billed $3.2 million for its efforts. And, along the way, its GST experience made it attractive to new clients such as Darwin Networks and American Metrocomm Corporation. Meredith Jackson keeps that Credit Crunch bar in her office, as a reminder of the early rumblings that became a catastrophe. She can be philosophical now about GST. “How do you go from being such a fast-growing company to bankruptcy?” she asks. “It is depressing. You have a personal investment, and you want things to succeed. You get to know the people personally, and every time that you talk to them, they are hanging on by their fingernails. And you just tell them, ‘Hang in there! Hang in there! There will be light at the end of the tunnel.’ And in the end,” she sighs, “there just wasn’t.” Gay Jervey is a free-lance writer in New York.

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