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

by William D. Cohan

  As McKinsey was working on its research and recommendations, two somewhat existential articles--in Institutional Investor ("Lazard in Search of Self") and in Fortune ("Can Lazard Still Cut It?")--tried to grapple with all the changes taking place and determine whether Lazard was still relevant. As always, the articles broached the question of who would succeed Michel. Somewhat surprisingly, given his short tenure as deputy CEO of New York, these articles--obviously based on reporting--began to dismiss the possibility of Steve being the One. He was said to be too desirous of a top position in Washington, should Al Gore be elected in 2000. But Fortune also suggested that Steve's partners in London and Paris wouldn't abide him running the whole firm. Institutional Investor quoted an unnamed client saying, "As long as Michel is still running things, I'd emphasize the 'deputy' in Rattner's title." Both articles mentioned a rather shocking possibility that Michel still hadn't fully dismissed the idea that he would one day tap either Edouard Stern or Bruce Wasserstein to run the firm. "Not me," Stern told Fortune when asked if he would possibly return; Wasserstein did not respond to questions on the matter.

  Lazard--and Steve in particular--suffered another blow in the fall of 1998 when Michael Price, then forty, who ran the firm's highly successful telecommunications practice, announced he was leaving to be co-CEO of FirstMark Communications, a much-hyped Madison Avenue-based startup telecommunications company in Europe. He called on telecom companies at Lazard because no one else was doing it and "because they were big." While his unusual combination of zaniness, fearlessness, and intelligence had propelled his success at Lazard independent of Steve, he nonetheless benefited immensely from Steve's rise. Steve paid Price well and allowed him to start and run Lazard Technology Partners, one of the firm's new private-equity funds. They were also quite friendly. But like so many bankers--and others--in the late 1990s who saw the rise of the Internet as a sure path to wealth and fame, Price couldn't resist the allure of Internet riches, despite living a rather modest lifestyle in Closter, New Jersey. "I spent my whole life advising the best and the brightest, and kept looking at these people and said, 'Why aren't I doing it?'" he told the Wall Street Journal. (FirstMark crashed and burned in the telecom meltdown; Price now works for Roger Altman's M&A boutique.)

  Price's departure was not only a personal loss for Steve, given their friendship and professional success together; it was also emblematic of yet another, wider problem at Lazard: aside from them having drunk the Lazard Kool-Aid, there was no longer anything to bind the partners financially to the firm. In the Internet era, when competitors were easily matching and exceeding the compensation of Lazard partners and then sweetening the whole package with stock options, restricted stock, and investment opportunities in private equity and venture capital, the firm simply could not compete. Lazard used to pay the best on Wall Street, all in cash, because its costs were so low and its margins so high. No longer. In addition to Price's departure, the longtime partner Michael Solomon, a twenty-year veteran, left to form his own private-equity fund. At the same time a ten-person convertible bond team at Lazard left for ABN AMRO, a large Dutch bank. Then, in another huge blow, in January 1999 John Nelson, vice chairman of Lazard Brothers and a prolific deal maker, left for the rival Credit Suisse First Boston.

  "There was nothing holding people together at Lazard," Steve explained. "There was no stock. Every other firm on Wall Street had these golden handcuffs. We had none. Everybody could leave for the next deal or for a signing bonus, and they did. So that made it all a lot more difficult." The impetus had never been clearer to take all necessary and immediate steps to restructure and merge the three houses into a single, global firm capable of providing its professionals competitive wealth creation opportunities, or what used to be called simply "more money."

  In August 1998, just before hosting President Clinton--then in the midst of the worst of the Monica Lewinsky debacle--on Martha's Vineyard at his annual August bash, Steve convened the management committee to begin to outline some of his feelings about a potential three-house merger, "particularly coupled with initiatives to address concerns about ownership and wealth creation," he wrote in what amounted to a manifesto that revealed the extent of the firm's existential crisis. Steve argued that the "consequences" to "merging badly" were "enormous." He criticized a preliminary merger proposal, as outlined by McKinsey, as "not logical" in its governance provisions, and specifically blasted as "unjust" the "underrepresentation" on various management committees of partners "resident in New York, who have consistently contributed a majority of the Group's earnings." Steve was prepared to postpone the pursuit of a merger for a year and instead to continue to "concentrate on improving the relationships among the three houses." In closing, he reiterated the importance of addressing Lazard's competitive disadvantages during the Internet bubble: "It is critical to show substantial progress on the issues of ownership, wealth creation and governance by the end of the year, when many of our colleagues will be reassessing career options."

  Throughout the fall of 1998, with McKinsey as their occasional sounding board, the senior Lazard partners thrashed around how best to combine the three houses. By all accounts, McKinsey had a rough time trying to craft a structure to satisfy the deeply entrenched partners in each of the three time zones. Some thought the McKinsey work had produced the equivalent of a camel--the "horse designed by a committee." "You ended up with this mishmash of a structure that wasn't any better than we already had, really," remembered one person familiar with the McKinsey work. Still, five versions of various proposals went back and forth across the Atlantic. Steve recalled: "It was all these things designed by committees, with this committee and that committee. Michel was still in charge of the whole thing, which was completely insane given what we had seen in New York. We understood how the place was running, and it would have been the exact opposite of how Jack Welch told us how to run something. The exact opposite. It made absolutely no sense." But, he continued, "some of the Europeans wanted it to stay as it was because they knew if we changed anything, they would end up further down the totem pole from New York." As these various drafts were circulating, Michel's posture with Steve was that he could live with the changes but he doubted whether the French or the English could. Michel said the proposal would fail not because of him but because of the Europeans. They were going around in circles.

  During the first week of November 1998, there was a regularly scheduled meeting in Paris of Lazard Partners, the holding company for the three firms. The meeting kicked off with a dinner on November 5 at Michel's mansion on Rue Saint-Guillaume. Since wives were invited to these quarterly meetings, Maureen accompanied Steve to Paris for the dinner. She returned to New York the next morning just as the meeting commenced in an overheated conference room at the nondescript Lazard Paris office at 121 Boulevard Haussmann. Steve went into the 10:00 meeting the next morning, a Friday, feeling ambivalent about whether the fractious group would ever agree on something as complicated and momentous as a full-blown merger.

  He was also rapidly coming to the conclusion that his career at Lazard was nearing its logical end, something he and Maureen had been talking about. The frustrations of the job--given Michel's iron grip and reluctance to change--were simply wearing him down. So he wasn't expecting much when Michel started the meeting off by going around the room eliciting comments about the draft proposal. While others were speaking about how they thought the merger should work, Steve made notes on the blotter in front of him. He wanted to talk last, and he sensed that Michel wanted that as well. When Michel called on him, at the very end, he had no prepared remarks but suddenly felt overwhelmed with emotion. By all accounts, he gave an impassioned "evangelical" plea for the merger, for doing the merger "right" and not getting "too cute" by succumbing to the various impractical compromises that McKinsey had fashioned. "We had to be one firm," Steve explained. "We had to have one direction, and we really couldn't fight this war with one hand tied behind our back. There was only one right way to
do it, and we could all be respectful of each other." After he finished his comments, everyone looked at him and, according to one participant, said, "You're right, why don't you just do it? And we should get on with it."

  Steve was more than a little giddy with this turn of events and the possibility of transforming the firm. Seconds later, as everyone was leaving the stuffy conference room, Michel pulled Steve aside and into his sparse office. There was a couch, the priceless Vuillard painting of his grandfather, and his desk, with nothing on it. Michel spoke. Imitating a French accent, Steve recalled his exact words: "'Look, I have only two questions about this. One, what will you do with Mr. Verey?' Because there was nobody in Paris who could run it. Bruno [Roger] didn't want to run it; he was a little old, and the younger guys weren't quite ready. That was an advantage we had. Verey was the problem. So he said, 'You know, whatever you decide, you should think about Mr. Verey. He's a good guy. If you humiliate him, he will leave. You should find a place for him.' I said, 'I understand all that. What's the second thing?' And he said, 'Me! You know, I think I can be helpful,' and I said, 'Of course you can, and I want you to be helpful.'"

  Despite the foreshadowing of this odd encounter with Michel, Steve was euphoric. He called Maureen and told her what had transpired and how it now looked like he might be finishing out his career at Lazard after all. With renewed vigor, he immediately set to drafting version six of the "Framework for Governance." "I said to myself, if I were starting from scratch and I wanted to do this right, what would I do?" He worked over the weekend, sending versions back and forth to Sally Wrennall-Montes, his assistant, indicating to her how the previous, unsatisfactory draft number five should be revamped and rewritten. In Steve's revolutionary blueprint, the old Lazard partnership agreement would be scrapped, along with Michel's absolute authority, and in its place would be established a more traditional corporate governance structure. This would be nothing less than the democratization of Lazard.

  "I set it up so that the partners in effect elected a board and the board picked the CEO," Steve said. "The board could also fire the CEO, and the board was mostly working partners. I was always prepared to basically live or die by what the partners wanted. This proposal basically codified that commitment and said if the partners aren't happy, they can vote you off the island." Instead of a typical board of directors, though, the newly merged Lazard Group was to have a twelve-member supervisory board, to meet twice a year, consisting of three "capitalists" (the actual owners of Lazard's equity, for instance, Michel, his sister, and Pearson) and nine "working partners." Michel was to be the first chairman of the supervisory board for an initial five-year term. The board would enjoy a myriad of powers, among them the ability to hire and fire the CEO and to approve the sale, merger, or initial public offering of the firm. During the first five years of Michel's chairmanship, though, he would have the unilateral right to veto such an event.

  Under Steve's construct, there was also to have been a nine-member management committee that would meet weekly and be chaired by the CEO. The management committee would make all compensation decisions as well as all decisions regarding promotion, hiring, and firing. The initial officers of the Lazard Group would be Michel, as chairman, Steve, as president and CEO, and Eig, Gullquist, Mezzacappa, Verey, and Braggiotti. Steve anticipated a formal announcement of the agreement to merge the three houses by Christmas 1998 and set the start of the new millennium as the "target date for full implementation." He circulated the revised term sheets to the relevant parties on Sunday.

  To the existing New York management committee, he attached a cover memo with some of his thoughts about his new proposal. "The organization described in the attached term sheet is intended to address the present inadequacy of the Lazard Group to respond to the competitive threat that it faces," he wrote revealingly. The extent of the proposed dilution to Michel's historic authority was now abundantly clear.

  THE BETRAYAL WAS swift. So swift, in fact, that Steve never even saw it coming. On Monday morning, Michel had the Paris partner Bruno Roger call Steve in his New York office. Roger, whom Steve described as a "very talented banker who clearly saw Michel as his most important client," complained from the outset of the call about many aspects of the term sheet. Along with the call, Roger had faxed to Steve a list of objections. "Michel had read the proposal," Steve recalled, "and realized it marginalized him. He gave Bruno all these reasons why it was a bad idea and told Bruno to call me, kind of 'as Paris,' to tell me why it was a bad idea." Of course, Roger played it straight during the phone call with Steve. It was only later that Steve learned the truth of what had happened from Braggiotti, who told him that Michel had "torpedoed it" and enlisted Roger as his messenger.

  Steve knew at that precise moment les jeux sont faits for him at Lazard as well. Both his clarity and his disappointment were total. "I think Michel was balancing two things," Steve said later. "What was right for the firm and what was right for him. The problem was that what was right for him consistently won out. While I think he knew that we had to do something like this, he was never willing. This moment finally exposed that, because until then he had been saying, 'I would appreciate this,' or 'This is fine with me, but the French will never live with it and the British will never live with it.' So we went into this meeting, and everybody with the possible exception of Verey, who was very quiet in the meeting, said, 'Great.' Now Michel had to come out of the closet in effect and say, 'Okay, it's about me. It's not about the English. It's not about the French. It's about me.'" A senior partner added that he believed Michel did not want Steve to have one more bit of authority. "That's why he had Bruno call," he said.

  Another partner remembered, incredulously, "Michel dictated the fax to Bruno, and Bruno sent it. He doesn't even deny it. And that fundamentally killed that deal." Damon Mezzacappa, Steve's close ally, remembered how excited he and Steve were after the Paris meeting. Mezzacappa, who had informed a few people he was thinking of leaving the firm, told Steve he would reverse course and stay on under Steve's leadership. "We were excited because I think we could have put the firms together and run them very effectively," he said. "The potential was just enormous." But after he heard about the call from Roger, "the whole thing came apart and that was the end."

  For his part, Verey was none too happy about the turn of events that Friday morning in Paris. He was every bit as ambitious as Steve. He had been head of Lazard Brothers for almost ten years and had helped resurrect the franchise by hiring a number of talented bankers and spurring them on to great achievements. He was not paid as well as Steve--due in part to the fact that London, in 1996, made half of what New York made, Verey got $3.5 million, whereas Steve was closer to $9 million--but he loved advising CEOs. He still proudly remembered the day, in October 1997, when the New York Times reported that Lazard Brothers was involved in five of the six large mergers announced in Europe that day. Verey and Steve were, according to Steve, "friendly rivals." Quite frankly, Verey wanted the job as Lazard CEO, too, even though he had no interest in moving to New York, the firm's locus of power since World War II. He held out some slight hope that Michel would consider allowing him to run the firm from London. Verey had a certain disdain for Steve's American-centric thinking, his apparent lack of appreciation of the firm's history, and his lack of understanding of the outside forces swirling around the two European houses.

  In London, Pearson, the U.K. publishing conglomerate, had been considering selling its stake in Lazard at least since the Texan Marjorie Scardino became CEO in January 1997. The rumors heated up again in May 1998 after Pearson purchased Simon & Schuster's educational publishing business for $4.6 billion. Conversations between Michel and Scardino about the sale were well under way by the November 1998 Paris meeting. Verey, who was on the Pearson board, felt Steve had failed to factor in how Scardino would react to his merger proposal. Then there were the series of interlocking French holding companies--some public, some private--all with funny-sounding names, that held a portio
n of Michel's (and others') stake in Lazard. Verey believed Steve had no appreciation for how these holding companies had to be integrated into the mix as well. The Paris meeting and the consensus that formed around Steve that morning, though, dashed Verey's aspirations. But even before Verey himself could begin to try to rectify the "Rattner putsch," as he called it, Michel had already counterpunched.

  Looking back on this unexpected turn of events, Steve fully comprehends Michel's convoluted, if crystalline, logic. "At that point, he wanted me gone," Steve said, "because that meeting--not to be immodest--but that meeting in that room in Paris was like the French Revolution.

  Michel saw me for the first time as someone who could rally the troops, not only in New York, which he had seen, but globally, in a way that was dangerous to him. At that point, it didn't matter how much revenue I produced. Michel's control of the firm was more important than the firm's success. He didn't fire me, but he was terrified about what might happen with me still rattling around." With Felix gone, Michel was the only person at the firm who could have stopped Steve. And he did.