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

by William D. Cohan

  This risk-taking extended to his approach to investments. One of these landed him front and center in an insider trading investigation by the British Department of Trade and Industry, or DTI, the equivalent of the SEC. In February 1989, Stern purchased a total of 320,000 shares, worth about PS4.7 million, of Consolidated Gold Fields, a British gold company, in the middle of a takeover battle between Consolidated Gold and Minorco, which was the Luxembourg subsidiary of a South African gold conglomerate owned by the wealthy and powerful Oppenheimer family. The Oppenheimers had long been associated with Lazard, first through Andre and then through Felix. At the time of its bid for Consolidated Gold, Minorco still owned 30 percent of Engelhard Corporation, a stake that came about as a result of a number of deals Lazard arranged in the 1970s. In 1986, Felix was on the board of Minorco for a year; then Jim Glanville took over his seat. By 1987, Bill Loomis was the Lazard representative on the Minorco board. The Lazard partners Loomis and Agostinelli represented Minorco on its hostile PS2.9 billion offer for the 71 percent of Consolidated Gold it did not already own. During a November 1988 meeting, Agostinelli spoke to Stern about Lazard's role in advising Minorco, but supposedly only as a "topical" indicator of the kinds of deals the firm was involved in.

  When DTI became aware of the familial relationship between Michel and Stern, the investigators "were concerned to ascertain whether the connection influenced, in any way," Stern's purchase of the shares. Under questioning, Edouard said he had never discussed Lazard's role as adviser to Minorco with Michel, Loomis, or Agostinelli. The investigators were not pleased that Edouard had not told them of his relationship with Michel at the outset, and so sought some answers from Michel himself. Through his lawyer, Michel responded that he had never discussed the Minorco bids with Edouard, nor would he have, and he had no awareness that Edouard had bought the Consolidated Gold shares. Aside from finding that Edouard "deliberately failed to ensure" that the information about his Consolidated Gold purchases was reported properly and that "we are surprised that it did not occur to him that the prudent course of action would have been to give careful consideration to the implications" before buying the shares, given his relationships with both Lazard and Swiss Bank, the DTI investigators concluded, in their public finding, "There is no evidence to suggest that either Minorco, Lazard Freres (New York or London), Mr. David-Weill or Swiss Bank Corporation had any knowledge of the transactions in ConsGold undertaken by M. Stern...and we have no criticism of them." In any event, Stern lost money on the investment after Minorco's offer for Consolidated Gold did not succeed. Another British conglomerate, Hanson, bought Consolidated Gold in August 1989.

  The findings of the DTI investigation notwithstanding, Michel made the decision, as he said, to "try" Edouard in the firm. Michel said he had read the DTI report and was "okay" with it. "I see it as a learning experience," he said. "Edouard is impetuous. He is someone who had success early. There are allowances for that. I have made allowances." But there was opposition to his hiring on both sides of the Atlantic. "In Paris there were people who didn't like him because they didn't like the way he had treated his father," Michel said. "In New York, there were people who didn't like him because they were questioning whether he was rigorous in his behavior." And the partners in London simply thought it wholly inappropriate for someone who seemed like a crook to be at Lazard. Bill Loomis, for one, was not happy about Edouard's arrival in New York. He had formed a negative view of him from the Minorco-Consolidated Gold incident. "I think it had a huge impact on Bill personally because he didn't like Stern from the moment he met him," one partner explained. Others were wary of his mercurial temperament. "He can be absolutely the most charming person, absolutely seduisant," said a banker who had been friendly with Edouard since childhood. "He's witty, very well read, and a great storyteller. And he can be so brutal that men twenty years older than he have left his office crying." Of Edouard, a former Lazard partner in London said, "There was only one person I ever met who made the hair on the back of my neck stand up, and that was Edouard." Added Peyrelevade: "When things didn't go exactly as he wished, he was capable of extraordinary verbal violence."

  But Michel plunged ahead anyway. And his logic for doing so, as always, was impeccable. "If you had to choose, in France, a natural leader for the firm, there are very few which would fit the theoretical bill as well as Edouard," he explained.

  There is a fellow who is obviously very enterprising, very, very smart, hardworking, and who is very at ease in the United States, who speaks absolutely perfect English, much better than I do, who has no relationship problems with Americans. They understand him right away. They don't feel he is a total foreigner. He is very wealthy on his own--which for a banker is useful and gives a degree of independence--and is the heir to a banking tradition. His grandfather--I love this one story of his grandfather--was on the board of Banque Paribas, and he was very deaf. They were reviewing credits, and they said, "We are lending 100 million francs to the Ottoman Empire," and he said, "What? What?" "Mr. Stern, we are lending 100 million francs to the Ottoman Empire." And he turned around and said, "A hundred million francs? I would not lend that to myself!" I cite it very often when I speak about banking because bankers forget that there are sums which you shouldn't be lending, even to the credit you adore the most, which is your own. You should just say, "This is ridiculous." So, now the fact that he had married my daughter, curiously nobody believed it, but it really did not enter the equation.

  Michel was correct that nobody around Lazard believed that Edouard was at the firm for any reason other than the familial relation ship. "Maybe I would have felt different if he was my son because maybe I would have related differently to him, but he was to me one fellow," Michel continued. "Not more, not less than my other partners. It was not because he was sleeping with my daughter that it made any difference. It didn't. Really. Nobody really believed it, they always, they all felt, well, it's more than it seems. No. It was simply an evaluation that--now, I knew that the fellow was not trained to be in an investment bank. He had been more of an entrepreneur, and basically he said so. He had two mothers in life: he had Jimmy Goldsmith and me. He didn't know which way he wanted to go, the Jimmy Goldsmith way or the Michel way." Stern spent much of the first two years at Lazard in New York but shuttled frequently between there and Paris. His New York office was on the thirty-first floor of One Rockefeller Plaza, near Mezzacappa's capital markets operation and one floor below his father-in-law and most of the other banking partners. He had a safe installed in his office, bolted to the floor. This was considered extremely odd even by Lazard standards. Every night, he put his papers in the safe. He was also said to keep a change of underwear in there as well.

  Stern was busy right from the start, mostly focused on private-equity investing as opposed to M&A advisory. On the heels of Corporate Partners' Phar-Mor disaster, Stern organized a new, $350 million private-equity fund, Jupiter Partners, focused on management buyouts. He put an end to efforts to raise a second Corporate Partners fund at a time when "there were a lot of questions about Lester's and Ali's judgments," one partner said, speaking of the two men responsible for Corporate Partners. Edouard sent packing Lester Pollack, the head of Corporate Partners. Much of the money for Jupiter came from Lazard partners. He recruited to run Jupiter a management team from outside Lazard, led by John Sprague, who had been one of the early partners at Forstmann Little. But Jupiter made some poor investments during the Internet bubble and, although still in existence, never lived up to expectations. "Jupiter turned out to be a total disaster for the firm," a partner said. "A total disaster." Some partners questioned the wisdom of Stern's decision to end the fund-raising for Corporate Partners II, which could have been a $2 billion fund despite its perceived troubles, in favor of the much smaller Jupiter fund.

  Stern also devised a strategy that proved disastrous for Lazard in Asia. He recommended, and Michel agreed, that Lazard open an office in Singapore and in Beijing, both headed up by proteges of
Edouard. "This sent a clear message," one Lazard partner said. "Stern was the man. Michel trusts him." Stern also set up a joint venture, called CALFP, with Credit Agricole, the large French bank, to structure complex derivatives for clients. Credit Agricole invested $50 million of the $75 million in capital the venture required; Lazard put up the $25 million balance. Edouard became the chairman of CALFP and received equity in the deal as part of his management arrangement. He could not serve as CEO of the venture, because the Bank of England would not permit it after the accusations that permeated the Minorco-Consolidated Gold deal. So Stern recruited Philippe Magistretti from AIG to head CALFP. He also recruited Bernard Saint-Donat to run CALFP in New York. The venture did very little business, and Saint-Donat and Magistretti squabbled from the outset. Saint-Donat thought CALFP "was a disaster" where the stated purposes of helping Lazard's clients access Credit Agricole's massive balance sheet masked the "hidden" purpose to create a hedge fund to "make a lot of money" for Lazard. When Saint-Donat complained to Stern that the joint venture was not working well, Magistretti got upset and fired him. Stern then arranged for Saint-Donat to get a new job working at Lazard in New York.

  CALFP ended up doing one deal of significance, for Televisa, Mexico's largest media company, and made around $50 million. After that deal, Edouard wanted to sell his equity in the joint venture. Miraculously, Michel and his sister, Eliane, agreed to buy Edouard's stake in CALFP for $50 million. Edouard had been given the stake for free. Shortly thereafter, CALFP was closed. Michel and his sister lost their full investment. "I was not sure absolutely that I would lose it," Michel said of that money. "Although it was more probable in my eyes that I would lose it than make it."

  Another blunder occurred when Michel asked Edouard to head up the effort to consolidate, into London, Lazard's capital markets business in all of Europe. Edouard offered the job as head of capital markets in Europe to two different people, Anthony Northrop, a longtime managing director in Lazard's London office, and Bernard Poignant, an outside recruit. Poignant got the job, and when Northrop resigned, the Lazard Brothers team was extremely peeved. "I had to clean up Stern's mess," Mezzacappa said. "It's clear that Stern had misled them both slightly." He was also said to have made unauthorized bonus promises on the sly to his cronies. Another time, after Lazard's distressed trading debt desk in New York had accumulated a very large position in the bonds of Eurotunnel, the oft-bankrupt builder and owner of the Chunnel between London and Paris, Stern decided to cause mischief by seeking to use his connection to the Eurotunnel CEO to get the firm hired as Eurotunnel's financial adviser in bankruptcy--an obvious conflict. Stern then called the distressed-debt trader and offered to abandon his effort to get the firm hired if he personally could, as a principal, get a cut of the firm's action in the Eurotunnel distressed debt (the idea is to buy the debt at enough of a discount to par value and hope that it trades up over time). Deeply offended by Stern's request--which had the odor of bribery--the trader promptly called Michel and told him of the conversation he had with Stern. Michel took care of Edouard on that one. Still, Mezzacappa, for one, had been impressed with the deal Stern negotiated with Credit Agricole. "Stern negotiated a hell of a deal with Credit Agricole," he told Forbes. "And he's gotten quite a lot of credit for that. He's been very successful doing what he's doing. But if he's ever going to run this firm, he's got to mellow out."

  After two years in New York, Michel decided Edouard should move to Paris and have the experience of working at Lazard there. This was consistent with Michel's pattern of giving a number of his young talented partners the chance to work in different countries over time. But the fallout from that decision was immediate: the first casualty was a young, ambitious French partner named Jean-Marie Messier. In the late 1980s, Michel had recruited Messier, then all of thirty-two, as a partner at Lazard from his position as the senior privatization adviser to Edouard Balladur, the French prime minister. Messier's arrival signaled to the younger generation at Lazard in Paris that there was some hope of breaking into the very restricted ranks of the Paris partnership, which had long been dominated by a politburo of the old warhorses Bernheim, Guyot, and Bruno Roger. Messier spent some time in New York before moving back to Paris and was very successful, very quickly. There was talk inside Lazard that he could be the One. Some at Lazard in Paris saw him as the second coming of Andre Meyer, the kind of brilliant outsider that the David-Weills had always encouraged to become part of Lazard and whose immense talent could lead the firm into the future.

  Messier was dubbed "le golden boy" and "a very smooth killer." Michel called him "the best merchant banker of his generation." When Messier returned to Paris from New York, he established a $300 million leveraged-buyout fund called Fonds Partenaires, with money from both Lazard partners and limited partners. It was the largest LBO fund in Europe at the time. The fund was successful, most notably with its 1992 investment in Neopost, the French equivalent of Pitney Bowes. Neopost went public in 1999 at EU15 a share and now trades at around EU82 per share. Over time, in addition to his principal investing work, Messier became one of the leading young M&A advisers in France. "On the advisory front, he was a genius," recalled Patrick Sayer, who worked for Messier at Lazard on both principal deals and advisory deals. Sayer recalled Messier's brilliance in convincing the Neopost bank lenders to give the company more time to solve its financial problems early on--a decision that worked out marvelously. Messier's only flaw at the time, his former partners said, was his chronic inability to return phone calls. This, of course, was a violation of one of Andre's and Michel's cardinal rules of always being available. "Which really proves that he was very thorough and engaged in what he was doing, a little to the exclusion of the other things that he should be doing," Michel said. "Which for a banker is an inconvenience. Because a banker, again, is at the service of his clients and he cannot ignore his clients to the benefit of one client who he's working with at the moment. That was his mistake. If I have to say, professionally, his drawback was that one. Otherwise he was one of the best bankers that I've met." The Jean-Marie Messier Award is given annually to the Lazard partner deemed the worst at returning calls.

  But within weeks of Stern's arrival at Lazard in Paris in 1994, Messier called it quits. Many partners are certain that Edouard's arrival convinced Messier the time had come to leave Lazard because his ambitions to run the firm one day could not be achieved in the presence of Michel's son-in-law. But Michel is not so sure. "One can debate," he said, "and I don't have the answer. And I would guess that Mr. Messier doesn't have the answer, either, whether the presence of Stern was very important, important, or not important in his decision to leave the firm. But clearly, again, it's the syndrome of succession. As soon as people have the feeling that there will be a succession, people who would normally cooperate nicely begin to distrust the other ones, saying, 'Ha, there is a chance it's him and not me.'"

  Michel and Messier talked about Messier's decision to leave the firm for several weeks. It became clear to Michel that Messier had it in his mind to run the firm. "Which I should have known, but I didn't," he said. "But it didn't shock me, because he was bright enough and good enough." Michel suspected, though, that Messier may have been too French to be the one to run the firm globally. "It's important to have somebody Americans relate easily to, and Messier I didn't see as one which Americans related to easily," he said.

  Just as Messier's arrival and success had been an inspiration to the younger bankers at Lazard, his abrupt departure broke their hearts. "At one point, Michel had to make a choice between Edouard Stern, who was the son-in-law, and Messier, who was a banker and a good one at that," recalled Jean-Michel Steg, a former Lazard partner who now runs Citigroup in France. "For me, that was the end, I knew I was going to leave. It's now clear I am working for a family. They're choosing the dynastic path rather than the best-qualified banker for establishing an advisory firm that will survive." Said another French partner about Lazard Paris after Messier's departure: "The
partners there look like those old photographs of the aging Soviet leaders watching the May Day parades."

  As predicted, Edouard was proving to be quite a handful. Nevertheless, despite his not being a traditional M&A adviser, his amazing intellect proved invaluable once he arrived in Paris. In the wake of Messier's departure, he helped resurrect the Paris franchise by bringing in a couple of big deals with important clients. He secured the mandate from the French government for Lazard to sell MGM, the movie studio, which Kirk Kerkorian then bought for $1.3 billion. And he advised L'Oreal on its $754 million acquisition of Maybelline from a buyout fund controlled by Bruce Wasserstein. He also had been the lead banker at Lazard in the privatization of Pechiney, a French aluminum company. "At first there was a lot of initial skepticism about Edouard just because he was Michel's son-in-law," one partner mused. "Then he had a huge amount of success in Paris commercially, so, generally speaking, people were very respectful because of that."

  The firm started indulging Edouard--what choice did it have?--in his passions for private equity, the Far East, and Lazard's unsuccessful foray into derivatives. Michel appointed Stern to a three-man oversight committee responsible for investing no less than $15 million a year of the firm's and partners' money directly into private equity. Felix even nominated Edouard to be part of the firm's executive committee. Still, in the French press, Edouard was known as "le gendre incontrolable," the ungovernable son-in-law.

  At the peak of his influence at the firm, in November 1995, Edouard was the subject of a profile in Forbes by the former Lazard financial analyst Kate Bohner Lewis. They had dinner together at the ultra-elegant Restaurant Laurent, near the presidential palace in Paris. When Bohner Lewis asked Stern about the incident with his father and the family's bank, Stern uttered his famous mantra, "I just detest incompetence," before adding for good measure, "My vice is I'm impatient--and my bad temper." He also told her that his ruthlessness was a key to his success. "It is not enough to be born with a good name," he said. "I have been sometimes brutal in my life. I regret that only because I have created an almost unchangeable image of myself to others. That is life. I have to live with it." Despite all the broken glass that Edouard's antics had created at Lazard, Michel defended him in the Forbes article. "I think everyone exaggerates the so-called animosity toward Edouard," he said. "I think Edouard is just the type of person who enjoys thinking he is disliked."