The last tycoons: the secret history of Lazard Frères & Co

by William D. Cohan

  The firm was on an unprecedented roll, and Michel's leadership was winning some fast converts. "In any walk of life I have been in, you have six months to fail and two years to succeed," Michel told Euromoney in March 1981. "The first six months here [in New York] were crucial. The arrival of the people from Lehman was more than an accolade. It was manifest proof that important people outside, who had their professional life at stake, were willing to agree with me and the partners here that this was a place which had a great future. For the outside world, it was probably the most important event. But to me the most important and the most difficult task was to take hold of a nebulous something and that was not made very easy by the presence of Andre Meyer."

  One important convert, Damon Mezzacappa, then forty-five years old, came from Morgan Stanley, one of Lazard's main competitors, in March 1981 to establish at the firm a capital markets business. Capital markets--the underwriting and trading of stock and bond issues--had long been dormant at Lazard. Occasionally, it is true, Lazard would underwrite an offering for a favored client--such as the IPO of the Washington Post Company for the former partner Eugene Meyer, or of Avis for Geneen at ITT, or of Pearson, in the U.K., for the Lords Cowdray and their heirs--but after Andre Meyer's arrival in New York these underwritings were few and far between. From Andre's and Felix's perspective, the reasoning was simple. Underwriting required an ever-escalating amount of capital and a sales force of fancy brokers to sell the underwritten issues. With scale, it could be very lucrative and provide wonderful access to clients at the important moment of seeking capital. Accordingly, underwriting remains very competitive, with ongoing pressure on the prices firms can charge for the service. With the M&A business so ebullient and so profitable, requiring no capital, the logic was impeccable for Lazard to stay away from capital markets, where the competition was fierce. Michel, though, was willing to risk a bit more of the firm's slowly growing capital on the selective underwriting of stocks and bonds for the firm's growing stable of clients.

  For this task, he recruited the Harvard-educated Mezzacappa, "the Peacock," as he was known around the firm in later years because of his ramrod-straight posture, his impeccable dress, and his penchant for preening. Immensely charming when he wanted to be and tough as shoe leather when he had to be, Mezzacappa and his wife, Liz, who ran a travel agency, were fixtures on the New York social scene, looking lithe and resplendent in the pages of W and the Times's Style section cavorting with the jet set at their homes on Fifth Avenue, in Southampton, and in Palm Beach.

  At first, Michel offered Mezzacappa a 2 percent partnership stake, but then reduced it to 1.75 percent because, Michel told him, "It would be a mistake to bring you in at 2 percent because there are these guys, like Tamagni here and others, who are at 1.75 percent or whatever and I don't want to offend them." (Tamagni was actually at 2.25 percent, along with a slew of others such as Ward Woods, Frank Zarb, Jon O'Herron, Don Petrie, Lou Perlmutter, and Peter Jaquith. In 1981, 2.25 percent in New York was worth $1.125 million.) Mezzacappa experienced immediate culture shock. But, he said, "for me it was all about the future. I was either going to succeed or not. I was really quite sure I would succeed, and I saw it as a great opportunity, which it was because Lazard Freres needed me. Goldman Sachs didn't need me. Salomon Brothers didn't need me. There was definite evidence that Lazard had a banking franchise, either real or potential. They certainly had corporate relationships." But "they didn't know how to sell anything," he continued. "They had half a dozen guys down there, and they had weak leadership and very little authority and basically just syndicated this stuff and sold it into the Street and sold it, less reallowance, to bond brokers. I mean, if they were underwriting a deal for ITT, the rest of the Street would be out of bonds and they wouldn't know how to sell them, so they would sell them to a broker who would then sell them to another dealer." Here he laughed from the belly. "And so I met with a lot of animosity when I arrived."

  Lazard's fledgling capital markets department was then housed on the thirty-first floor of One Rock, one floor below where the high-powered partners, like Felix and Michel, sat. These operations could not have been more different from what Michael Lewis satirized in Liar's Poker about the trading powerhouse Salomon Brothers. There was no football field expanse of humming computer screens and ribald traders. Rather, there was a modest, decidedly low-tech, L-shaped configuration of consoles with strange buttons and attached phone headsets. Equity guys were to one side, debt guys to another. The municipal team was around, too.

  Mezzacappa first encountered resistance from the irascible Tom Mullarkey, who believed he ruled the roost on the thirty-first floor. "That was Tom's job, just to be difficult and not give anyone anything," Mezzacappa recalled. "He was trying to maintain his control of that floor, the trading floor." He then encountered Walter Eberstadt, a relative of one of Andre's favorite investing partners, Ferd Eberstadt. Mezzacappa became "quite fond" of Eberstadt over time, but at the beginning "he couldn't figure me out or what I was all about." Mezzacappa said he found that Stanley Nabi was running LAM "quite badly," with assets under management falling to $1 billion, from $1.4 billion when Nabi took over. And then there was Charlie McDaniel, who was running the trading operation. "A nice man but he wasn't building anything," Mezzacappa recalled. His first day at Lazard, Charlie asked Damon to lunch. "Charlie had a couple of martinis, and he sort of told me the way things ought to work, and I just kind of listened and took it all in," he said. Mezzacappa fired McDaniel five months later. "It was going to be my way, not his way," Damon said. His "way" meant recruiting about eight of his "guys" from Morgan Stanley, among them Mike Solomon, Phil Young, Harlan Batrus, Harry Rosenberg, John Connors, and Rick Levin. "We built a pretty good operation and made a lot of money for the firm," he said.

  And Mezzacappa made a ton of money for himself as well. Eventually, he worked his profit percentage up to 4 percent, which in the late 1990s was worth more than $8 million in cash per year, excluding the infamous side deal that he cut with Michel. That deal, on top of his $900,000 salary (at least in 1999) and his percentage stake in the overall New York partnership--which "became a bit of a sore point to the other partners," Damon acknowledged--equaled another 5 percent of the pretax profits of the capital markets business, with a cap of $3 million. One of his former partners said many of the bankers were "absolutely shocked" by how much Mezzacappa was making with his side deal and described him as a "ganef" (Yiddish for thief or scoundrel). "So for a while, I was making my salary, my 4 percent, and another $3 million," he said with a faint smile, a total of around $12 million a year by the late 1990s.

  ANOTHER INCREASINGLY CRUCIAL aspect of the effort to resurrect the Lazard franchise during Michel's first years in New York was the acute need to hire and train a new breed of junior bankers, known on Wall Street as associates, for the rapidly changing, increasingly analytical world of M&A transactions. At Lazard, being an associate meant nothing more than being an apprentice. Andre used to boast of only needing "a yellow piece of paper and a pencil" to do deals, a siren song that future partners like Jon O'Herron would still sing well into the 1990s. Felix used a slide rule to check numbers and still has not mastered the use of a computer. Michel, too, has no computer skills. When Loomis told Michel in the early 1980s that Lazard actually had a computer, he said, "Really? Where is this computer? I must go and see it." The need for associates with more relevant skills was therefore of only passing concern to them, for Michel rarely, if ever, worked on deals and Felix, being Felix, used other partners as his associates and they, in turn, used the hook of a high-profile "Felix deal" to get the best talent to work for them. But as Felix observed, condescendingly, other partners at the firm were now capable of executing M&A deals from beginning to end without his help. And these partners, chief among them the new Lehman recruits, needed able associates.

  Loomis recalled how the ground shook when Lou Perlmutter, the new partner from Merrill Lynch, put together the first client presentation book for Co
lgate, the consumer products company. "It was very controversial," he said. But Michel slowly began to get with the program and authorized the upgrading of the associate pool. In the winter of 1979, Sherwood "Woody" Small came from Lehman, and Philip Keevil came from Morgan Stanley, via Oxford, Unilever, and Harvard Business School. "Then for the first time, we considered people from business school," Loomis recalled, with great moment. Other firms had been recruiting from business schools for years. But not Lazard. Lazard's recruiting of young bankers--who, in truth, were thought of more as clerks than as young bankers, let alone as potential future partners--was limited to a highly restricted pool of family friends of the existing partners, sons of the rich and famous or of clients, and frustrated associates at elite law firms or at other investment banks. The decision to recruit from a business school led to the arrival in 1980 of two Harvard Business School classmates, Luis Rinaldini and Mina Gerowin, the first woman professional ever hired by Lazard and the last for another four years. Lazard would never be the same.

  Gerowin, who grew up in New Rochelle, where her father had a business importing fabric, had been a lawyer for Nestle in Switzerland and for the law firm Brown & Wood, and decided she wanted to be an investment banker. A family relative introduced her to Philippe Herzog, a longtime partner at Lazard in Paris and the brother of Andre's wife. She remembered interviewing with Herzog and a few other longtime Lazard partners at the dilapidated offices on Rue Pillet-Will in Paris. She noticed during her interviews that each of the Lazard bankers had a pronounced nervous tic. This made her nervous, too. "I mean, what are these guys up to?" she remembered wondering. "But I realized later that nobody has put a dime in for years and what they're doing is just brushing the peeling paint off their heads, and when I came out, there was peeling paint all over my head." She got an offer, and Andre decided she should start working in New York, even though she had interviewed in Paris. Gerowin was Andre's last hire. Mullarkey had promised her she would make just as much at Lazard as she had as a lawyer for Nestle. But the offer turned out to be $4,000 a year less. "And I didn't want to be their prisoner," she recalled. So she went to Harvard Business School instead. "Well, they kept saying, 'Where are you?' I said, 'You promised me more money, and if I don't get it, I'm not coming.'" After graduating from business school in August 1980, she joined Lazard in New York. "First of all, it was so dilapidated in New York," she said. "You're talking threadbare tan carpet. You would walk in, and a little old black man would be asleep on the front desk on the thirty-second floor. Fast asleep. There'd be a leather couch with its seams split open and a threadbare tan carpet and a dead palm tree that stayed there for at least five or six years. Charming."

  Soon enough she received the requisite advice from one of the old-time partners--in her case, Fred Wilson--about how to survive at Lazard: "Fred comes in and he lectures me, 'You know you have to understand life here, Mina, you're in the Byzantine empire and they were all in training. They're all baby barracudas. Felix is the biggest barracuda, but everybody's a baby barracuda. You gotta learn to swim. Then just remember, in the hallways you can survive anything but a direct hit. Learn to dodge.'" And her reaction to this advice? "Oh, shit," she thought, "what have I gotten myself into? And there was rule number one through ten, at the end of the day: Just never let them see you cry. Never."

  After Princeton and four years before attending Harvard Business School, Luis Rinaldini had worked in the office of the renowned architect Philip Johnson. He worked on the Sears Tower in Chicago and Avery Fisher Hall in New York. A friend recommended that he try to get a job at Lazard. "I didn't have a clue, because I was an architect," he said. He called Alan McFarland, one of the new Lehman partners, and McFarland told him: "You don't really sound like you have the right qualifications, so I don't know." McFarland, "probably to brush me off," suggested Rinaldini call Mullarkey. "Mullarkey's only job was to say no," Rinaldini remembered. "I must have called him ten or fifteen times"--Mullarkey would never take the call.

  Finally I called him on a Friday afternoon, and he was very funny, and he said, "Goddamn it, my secretary's gone, you got me! You are so bloody persistent you might as well come in here and see me." He sat me down and asked me a bunch of tough questions, and he said, "Look, I like you and this might work, but I don't actually have any influence on this process. The guy you have to see is Pizzitola. But don't think it means you are going to get a job here. All it means is that you get to see Pizzitola."

  So I went to see Pizzitola, and he asked me questions up and down: Who's your grandfather? Who's your father? Who's your mother? What's your uncle do? I couldn't figure out what the hell he was asking, and I finally realized he was just checking to make sure I wasn't related to anyone important or anybody that Michel knew or some friend of Felix's so when he booted me out the door he wasn't going to hear from somebody who would say, "How could you throw Luis Rockefeller out the door?" Once he established he could throw me out the door, he then started asking me why I thought I could do the job. I said, "Look, I think I am relatively smart, and more importantly I work harder than anybody I know. If someone is willing to stay up until ten, I'll stay up until eleven. If someone is willing to stay up until eleven, I'll stay up until twelve and get it done." It was sort of the right answer for a tough, grizzly old guy.

  Rinaldini was hired, and as he liked to say, "I was the first, the first Lazard associate hired out of business school because they always used to hire laterally."

  He shared an office with Arnold Spangler, "who was five years older and still being treated as an associate." What Rinaldini found was a "bunch of old guys, like my age now, who had been in business for a bunch of years...very serious senior guys, with three or four younger guys around to crunch their numbers for them, so it really wasn't an investment banking firm in the way we know it today, it was a collection of industry and finance specialists, and then they decided to hire a couple of people out of business school."

  Rinaldini, who went on to work extensively for Felix on deals for the next ten years, was well aware of his mentor's import when he arrived at the firm. "Felix had a reputation at the time that was both a little bit notorious and a little bit noteworthy," he said. "I was aware of a visible effort to manage it intelligently. He felt maligned by what had gone on in the ITT case and didn't feel that it was fair....I think the biggest issue on that was just that it was in the press and it was very visible in the press and it was just one of those things that was very unpleasant for him personally after all the work that he had done and all the effort that he had made to be prudent, conservative, and sound. I think he was concerned that after all that, people would only remember him for something that had the opposite connotation. But he certainly outlived that issue and came out the other end."

  THE LEHMAN BANKERS were behind these first tentative steps to hire the few younger professionals with business school training, rather than with legal training. On the one hand, their desire for the new MBAs paralleled their own success, which was palpable, doing deals at Lazard. They needed bodies to help them process the deals. But another phenomenon was at work as well, whether or not anyone at Lazard was cognizant of it. The early 1980s was the dawning of the age of widely available--and utilized--spreadsheet software. In late 1981, two software entrepreneurs, Mitchell Kapor and Jonathan Sachs, formed Lotus Development Corporation, outside of Boston, and began designing what became Lotus 1-2-3, the first commercially accepted spreadsheet software. It hit the market in January 1983. Lotus 1-2-3 was an immediate sensation, selling $53 million the first year, $157 million the second year, $200 million in 1985, and $250 million in 1986.

  Lotus 1-2-3 without doubt materially contributed to the quantum increase in M&A activity from the early 1980s to today. Of course, the spreadsheet software was simply a catalyst for a greater confluence of factors. To be sure, if the economic conditions were not ripe for change or if the CEOs of corporations didn't view mergers and acquisitions as a means of achieving their perceived goals or i
f they had been unable to execute on the promise of the deals they consummated (and in many cases, they did not), then the deal boom would never have occurred. "I think it really became the means by which previously disconnected parties were able to communicate with each other in a format and in a language that was common; it was a numercial language at some level that people used within their organizations and between themselves and their clients or their customers or whatever," said Jim Manzi, who became CEO of Lotus in 1984. "And as a result it became a very powerful lingua franca for what was going on in that age. I don't know that it was seminal, but it was a spark. I think that's probably overstating it, but I think it's absolutely a big piece of the zeitgeist at the time, you know it was the technical part of the zeitgeist." So just as the elimination of fixed commissions in 1975 forever altered the Wall Street landscape, so, too, did the viral utilization of spreadsheet software--first Lotus 1-2-3, which over time was overwhelmed by Microsoft's Excel--among bankers and their corporate clients shake up the established hierarchy. But whereas the ending of fixed commissions was a brokers' problem, the spreadsheet revolution utterly demystified the role of the M&A bankers. Manzi called it the "democratization of Wall Street."

  For the first time, the mystery of the numbers was eliminated. The deal alchemy that seemed to be the secret reserve of a select group of highly intelligent, experienced, plugged-in investment bankers was now available to all. Eventually, competition among financial institutions intensified to provide high-margin, prestigious M&A advice, as new entrants, such as commercial bankers, were able to do the same analysis as the investment bankers. Financial models could be shared among bankers and among their clients. Assumptions could be tweaked simply by altering a number in a cell. Multiple scenarios could be run quickly. How much one company could afford to pay for the shares of another could be determined easily. Internal rates of return could be calculated instantly, as could earnings dilution. A certain numerical precision overtook the world of deals--so-dubbed analysis paralysis.