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Mergers & Acquisitions: In the Trenches

For Dennis Hersch of New York's Davis Polk & Wardwell, engineering the Comcast-AT&T deal was a long endeavor, punctuated by hard decisions and tough tactics. "Dennis is also our kind of lawyer because he'll lawyer," says Comcast GC Arthur Block. "He's not just the king who delegates and doesn't want to get his hands dirty." In other words, the biggest deal of 2001 had Hersch's handprints all over it.

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Ten years ago, Philadelphia-based Comcast Corp. went shopping for a New York lawyer. The family-controlled cable television operator already had a local counsel, Wolf, Block, Schorr and Solis-Cohen, but it had adopted an aggressive growth strategy and, as general counsel Arthur Block recalls, increasingly found itself across the negotiating table from Wall Street heavyweights. Comcast wanted a counterpuncher, Block says, so that “the next time we found ourselves up against the Marty Liptons of the world, we’d have our guy.” Comcast found its lawyer in Dennis Hersch, who has headed the mergers and acquisitions practice at New York’s Davis Polk & Wardwell since 1988. Hersch “has grown to become one of the first guys I call to ask, ‘What do you think?’” says Comcast president Brian Roberts. “Dennis will also call me up to tell me when I have a bad idea.” In the past decade, Hersch has steered Comcast through a flurry of transactions, including a $1 billion investment from Microsoft Corp. and purchases of stakes in the Philadelphia Flyers and Philadelphia 76ers athletic teams, E! Entertainment Television and QVC Inc. Last year, Hersch oversaw Comcast’s biggest buy to date: the $72 billion acquisition of AT&T Corp.’s broadband business, by far the largest M&A transaction of the year. The purchase was preceded by a long bidding war with AOL Time Warner Inc. and Cox Communications Inc. — a bit of high-stakes poker in an otherwise lackluster M&A year. Hersch, 55, is no stranger to big deals. A Brooklyn native who has spent his entire 32-year career at Davis Polk, he represented Texaco Inc. in its merger with Chevron in 2000 and Qwest Communications International Inc., in its merger with U S West Inc., in 1999. The AT&T Broadband deal began with a failure. In 1999 Comcast was rebuffed in its bid for the cable television company MediaOne Group Inc., by AT&T, which was seeking to diversify. MediaOne became the core of AT&T’s broadband unit. But the diversification push was short-lived. By October 2000, AT&T announced that it would spin off the broadband unit as part of a larger plan to break AT&T into four different businesses. Comcast saw a chance to pick up the cable operation it had lost the year before, and from that point on, Hersch was booked. “Except for a few rounds of golf, I didn’t take any days off [last year],” Hersch says. Hersch initially advised Roberts to negotiate a friendly merger between Comcast and the AT&T cable business. Roberts took the advice, but, from January through March of 2001, the discussions were sporadic. Some say privately that AT&T management still preferred its original plan to take the unit public. By late spring it was clear that nothing would come of the talks. Hersch kept the pressure on. By April, in preparation for a possible hostile bid, he had begun assembling a team of investment bankers that included Morgan Stanley Dean Witter & Co.’s Paul Taubman; Merrill Lynch & Co. Inc.’s John Trousdale; Quadrangle Group LLC’s Steven Rattner; and J.P. Morgan Chase & Co.’s Robert Kindler. Then, on July 8, Comcast pulled the trigger. In a letter to AT&T, Comcast offered $44.5 billion in stock for the AT&T broadband unit. Hersch says it was a difficult decision, since he and Roberts knew that the move would both attract other bidders and rankle AT&T’s management. “No one likes to receive a bear-hug letter, especially on a Sunday morning,” says Hersch. AT&T rejected the offer on July 18 but signaled its willingness to hear competing offers. The bidding war was on. It was Hersch who pushed for peace, capitalizing upon his long relationship with AT&T’s lead lawyer, Richard Katcher of New York’s Wachtell, Lipton, Rosen & Katz — the same lawyer who represented AT&T in its 1999 bid for MediaOne. On Sept. 17, in a private suite at Philadelphia’s Four Seasons Hotel, Hersch and Roberts met with Katcher, Morgan Stanley’s Taubman, AT&T chief financial officer Charles Noski and partner Gene Sykes of The Goldman Sachs Group Inc., AT&T’s investment adviser. The subject was terms under which Comcast would enter the bidding process and sign a confidentiality agreement, which AT&T wanted before it would even share information about the broadband unit. Comcast had some conditions of its own. Before it would sign, it wanted an assurance that the Roberts family could have 30� percent to 35 percent voting control in the merged company. The final merger agreement gives the family 33.3 percent control. “That was a real breakthrough, ” says Hersch. “ Once we knew our governance issues were not preclusive, there was a playing field we could get on.” Eleven days later the confidentiality agreement was signed. For the next three months, Hersch led the attack, acting as the hub of information at daily meetings that typically included 20� to 25 people from four investment banks, two law firms, a proxy solicitation firm and a public relations firm. It was during these sessions, amid speculation about which companies were bidding, that Hersch’s experience paid off, colleagues say. “Every day it was something different,” says Davis Polk partner William Taylor. “Dennis made some outstanding judgments about what would be necessary to get a deal done.” There was plain old drafting work, too. In November, for example, Comcast needed a deal with Microsoft Corp., which held $5 billion in AT&T convertible preferred securities, to seal the broadband deal. Over a few days, Hersch and an associate hammered out a deal with Sullivan & Cromwell’s Alexandra Korry — whom Hersch had worked with in 1997 on Microsoft’s $1 billion investment in Comcast — to convert those securities into 115 million shares of the new AT&T Comcast Corp. The result will keep debt off the balance sheet of the company that will be formed when the deal receives final approval in the second half of this year. “Dennis is also our kind of lawyer because he’ll lawyer,” says Comcast general counsel Block. “He’s not just the king who delegates and doesn’t want to get his hands dirty.” In other words, the biggest deal of 2001 had Hersch’s handprints all over it.

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