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

by William D. Cohan

  Unlike Steve, Loomis eagerly complied with the directive to consummate the merger to Michel's precise specifications--with Michel as chairman and CEO. Some partners saw this as a disaster waiting to happen. "We did the merger with no management," recalled one. "We did it a little bit like the euro, you know, one common currency but no common management. Not even a central bank." Loomis wrote to all of the firm's managing directors on February 16, 2000, enclosing the documents, for their immediate signature, that would "formally unite the Houses of Lazard." The good soldier, Loomis displayed, with obvious literary flair, his unqualified support for the combination. "Lazard is unabashedly different in character and structure from the corporate cultures of any of our competitors," he wrote. "We rely on important individuals separated by nationality and united by belief in a business philosophy--Lazard."

  Loomis explained that the combined firm would initially have more than twenty-five hundred employees and pretax profit, on a pro forma basis, in excess of $500 million. As with most other firms but for the first time ever at Lazard, the firm would now pay its managing directors from one global profit pool and would establish a "worldwide common system" of appraisal, promotion, and appointments. He also shared with his partners the crucial initial conversion ratio of their historic New York partnership percentage into a new, global partnership percentage: for instance, a partner in New York who previously had a 1 percent stake in the profits of New York would now have a 0.5 percent stake in the profits of the combined Lazard. A fifty-basis-point partner in the global Lazard, assuming $500 million in pretax profits, would have been paid $2.5 million in 2000. As their stake in the profits had been halved, New York partners would be indifferent as long as the size of the whole pie had doubled. Simple mathematics. Anything less meant trouble.

  The agreements creating the new firm, now known as Lazard LLC, a Delaware limited liability company, were, no surprise, immensely complex. Exactly as had been feared by many partners, though, the documents were negotiated by a select few behind closed doors and drafted by Lazard's lawyers at Cravath, Swaine & Moore. The execution copies of the documents together with signature pages were dispatched by Cravath to partners worldwide with instructions to sign immediately so as not to hold up the merger. A number of partners, understandably upset, held the view that they had been presented with "a contract of adhesion," which they were being forced to sign or else risk losing their accumulated financial interests in the firm. Such contracts, typical of the language of an insurance policy, for instance, are drafted by one party and offered on a take-it-or-leave-it basis with little opportunity for the recipient to bargain or alter the provisions. No self-respecting M&A banker would ever allow his or her client to sign such a document without a proper vetting and negotiation.

  No surprise, Michel retained the ability to set all salaries and profit percentages for partners, and bonuses for nonpartners. The board was given many of the typical powers boards have, including the authority to approve, or not, any material merger, acquisition, sale, or disposition; any public or private offering of securities; and the selection of the chairman of the board, the chairman of the executive committee, and the heads of the three houses. Some of the atypical powers included the authority to remove any chairman other than Michel and the ability to approve, or not, the transfer of nonworking partners' equity interests. There was also a poison pill of sorts, requiring that any person, other than Michel or his friends at Gaz et Eaux or Eurafrance, who acquires more than 20 percent of aggregate profit percentages also purchase the interests of all the partners at the same price said person acquired the 20 percent stake. As for individual partners trying to transfer or sell their stakes, the documents made that next to impossible. Working partners "generally" would not be permitted that right, while nonworking partners and investors would be permitted to make sales only after Lazard board approval and after "offering their interests to the other members on the same terms as those that apply to the proposed transfers," whatever that means.

  After the merger, Michel--not including his family and affiliates--was to directly own just under 10 percent of Lazard LLC (9.9545 percent), which entitled him to about $22 million in current compensation if Lazard were to earn the $500 million that Loomis predicted it would in 2000. It is believed that Michel and his family took out about $100 million from Lazard in 1999. For his part, Loomis, as deputy CEO, would have to make do with a little more than $5.2 million. Unfortunately, the market had peaked--and the bubble burst--just as the ink was drying on the merger.

  Still, Michel waxed rhapsodic about the possibility of cooperation among the three houses. He told the Wall Street Journal, "It became clear that it was a good idea, a necessity. For us, it's a refoundation. We want to act as one without losing the different national identities." Ken Jacobs, the new head of banking, waxed rhapsodic about the power of the Lazard franchise. "The one asset we have is the reputation and credibility in the boardroom," he told the Journal. Adrian Evans waxed rhapsodic about Michel. Without Michel's "astonishing good humour and determination" the merger would not have been possible. Like Madonna, the firm would henceforth be known simply as "Lazard."

  In another, more ominous view of what the merger accomplished, Bruno Roger, the new head of the house in Paris and Michel's acknowledged consigliere, told a Paris press conference: "Lazard's is French again." Roger ruled the Paris office firmly, with a particularly Gallic combination of subtlety and complexity. "He's never straightforward and never where you expect him," according to one partner. "He has great insights and an extraordinary sense of minutiae, which is very helpful as an adviser. He's got a very black view of things but he also does infinitely detailed research. He thinks whatever can go wrong, will go wrong.... If you plan for bad news and the worst happens, the client is extremely thankful that you actually did plan for it. If that doesn't happen, then the client is happy anyway. Some people find him a bit peculiar--it is human nature that you want to grab on to some good news and you can't always live planning for the worst. He can." Jon Wood at UBS said Roger "was one of the most dishonest people you would meet in your whole life."

  STEVE RATTNER SPENT the second half of 1999 casting about for the right thing to do next. His decision to leave, although not announced at the time of Loomis's taking over as deputy CEO, was clearly reflected in his 0.125 percent ownership percentage of Class A interests that was circulated at the time the merger was closing. This percentage was a mere kiss, and not even a wet one at that, and was far below what it had been. It was also below the compensation of many of the most junior managing directors, reflecting his lame-duck status. In a repeat of his departure strategy from the New York Times years earlier, he held a series of breakfasts and lunches with other "important" people, searching for the answer about what to do next.

  Steve's decision came three months into the new millennium, days before the Nasdaq market peaked and at the same moment Lazard became one firm. Despite a distinct lack of principal investing experience, he announced he was leaving Lazard to form a $1 billion private-equity firm, to be called the Quadrangle Group, focused on making investments in the media and telecommunications industries. In an additional shock to the Lazard family, he was taking three Lazard partners with him: his proteges Peter Ezersky, then forty, and Josh Steiner, then thirty-five, as well as David Tanner, then forty-two, who had only recently joined Lazard to jump-start its principal investing business. (Steve also tried--unsuccessfully--to entice his former Lazard partner Jean-Marie Messier to join Quadrangle.) While having no experience in running a fund or even being a fiduciary for other investors, Steve had made a number of successful personal investments. The word around Lazard was that he had made a bundle investing in the distressed securities of his clients, for his personal portfolio, in the early 1990s.

  Quadrangle's success as a private-equity investor remained to be seen, of course. But regardless of the fund's future performance, Steve was again front-page news. By setting up his own $1 billion fund, Steve-
-by then one of the Democratic Party's biggest fund-raisers--had taken himself out of the running to be in Gore's cabinet, should the vice president have won the presidency in 2000. With their shocking departure, all four partners' Class A percentage interests were thrown back into the pool for future reallocation.

  The bursting of the market bubble on March 10, 2000, when the Nasdaq peaked intraday at 5,132, had a grave impact on Wall Street. Tens of thousands of investment bankers lost their jobs, and the compensation for those who remained was much diminished. Eliot Spitzer, the ambitious New York state attorney general (now governor), orchestrated the $1.4 billion Wall Street research settlement, and prosecutors began the steady stream of indictments of corporate executives from, among others, Enron, WorldCom, Adelphia, and HealthSouth.

  Not surprisingly, Steve had no trouble raising his $1 billion buyout fund, despite his lack of an investing track record and the stock market's collapse. With the help of the Monument Group, a buyout fund-raising intermediary, he more or less corralled his former media clients and their friends and his friends and whipped the thing together. He and his three partners committed to invest a minimum of $20 million in the fund, and certain of their family members agreed to invest another $10 million. Although the investor list is private, TALK magazine speculated it included the likes of Steve Case, Mort Zuckerman, Arthur Sulzberger Jr., Michael Ovitz, Andrew Heyward, Alex Mandl, Steve Brill, Lorne Michaels, and Harvey Weinstein. The Quadrangle Group advisory board consists of Marc Andreessen, Barry Diller, Amos Hostetter, Craig McCaw, and Rob Glaser--all of whom have put money into the fund (as have I, in full disclosure). Like most other private-equity funds, Quadrangle investors pay to the general partners--Rattner et al.--a fee of 1.75 percent per year, payable quarterly in advance, of the money committed to the fund. Put simply, as is typical in the buyout industry, Steve's friends and investors are paying him and his colleagues close to $20 million per year to invest their money, and then paying even more if and when the profits on the investments roll in.

  SO MANY THINGS went wrong so quickly for Lazard in the months after the consummation of the three-house merger that for many partners genuine fear quickly replaced whatever euphoria existed. That Steve intended to leave was well known, but by taking Ezersky, Steiner, and Tanner with him, he left a mortal wound in the firm's media and telecom business. The loss of Steve and his team was compounded almost immediately by the skidding U.S. public markets, which badly hurt Lazard's profitability in New York. New York had historically produced around 60 percent of the firm's total pretax profit, and at the time of the merger that fact resulted in New York being valued at around three times London and Paris. But as New York's business dropped precipitously during 2000, there was growing resentment in Europe at that original valuation and the partnership percentages that resulted for the Americans. Also, by the summer of 2000, word had begun to seep into the market of the sizable stakes that Bollore and Wood had bought in the four public French holding companies that controlled Lazard. Michel, now the CEO of the combined Lazard, became preoccupied with the threats posed by these gentlemen instead of focusing on the Lazard operations.

  Once again, several of the most important European partners started voting with their feet: in June, Nigel Turner went to the Dutch bank ABN AMRO; in Paris, Pierre Tattevin left for Rothschild, and David Dautresme, the newly appointed co-head of global M&A (with Ken Jacobs in New York), "retired." Coming on top of John Nelson's departure the year before, the loss of Turner "threatened Armageddon" for the M&A practice in London, according to one insider. There were also rumblings in the asset management business, which had been consistently generating $100 million in annual profit, that the co-heads, Eig and Gullquist, were restless and were pushing for the business to be spun off from Lazard.

  What's more, it was increasingly obvious that the merger itself was not working. "Six months into it, there was no merger integration," said one partner. "There was no backroom technology. There were no common standards on underwriting committees. You had hard underwritings being done in Paris with capital that was in New York, and no one in New York being told about it until after it was done, weeks after it was done. I mean things which--just commonsense kinds of things were not being done." And there was the ongoing problem of how to pay partners more competitively without the stock or options that public firms offered. Michel continued to resist calls for an IPO. "We may have to change our means of compensation," he told Forbes in September 2000. "Pay in money and also in hope." The senior partners quickly reached the conclusion that with ideas no better than that, Michel could no longer run the firm on a day-to-day basis. Just as Steve had foreseen two years earlier, the firm needed a real CEO.

  IN JUNE 2000, David Verey first articulated this view to Michel, which obviously was not without professional risk, not least because the merger agreement guaranteed that Michel could remain CEO until 2005. "I said to Michel on a flight to Toronto that we have to have a chief executive," Verey recalled. "He said to me, 'He has to be American.' I said, 'Look, I'm past caring, just do it. We have to have somebody who is prepared to be CEO.' He said, 'Okay, it will have to be Loomis.'"

  Another senior partner remembered hearing about Verey's conversation with Michel this way: "Look, I know I've always wanted this job, but I'm not going to be accepted by Braggiotti or Bruno or the guys in the States. The only one that can do it is Loomis.... You haven't run the firm, any of the firms, since the early 1990s. And now you're CEO, and you don't know the people. You don't know the business anymore. You haven't ever managed anything this complex before." This partner said that Verey's realization that he would not be accepted as the CEO of Lazard, while bittersweet, won him the respect of other partners. For a time thereafter, Verey had a tremendous influence on Michel.

  Yet again, there was a leadership crisis at the firm, but now further compounded by the conflagration started in Europe by Bollore and Wood. Although the formal announcement of his appointment as Lazard's first legitimate CEO would be months away (his appointment was announced in Paris on November 15), through the course of the summer and early fall of 2000 Loomis began assuming more and more of the day-to-day responsibility of the firm. As expected, he memorialized what he thought to be his mandate in a ten-page, single-spaced manifesto to the executive committee, drafted at its request, titled "Our Future Course" and dated October 24, 2000. Loomis began, "You each supported my appointment as Chief Executive Officer of Lazard. I am personally grateful. I am also professionally confident in our joint efforts on behalf of the firm. We will continue to benefit in our endeavors from Michel's participation as a strong Chairman who embodies the very essence of our partnership. Ultimately, however, I am also cognizant of my responsibility for the most difficult decisions and for the performance of the firm. The buck stops here."

  Loomis then outlined a series of specific steps he planned to take to help achieve his vision for the firm, a vision--without having any authority to implement it--he had been refining off and on for some twenty years. To avoid the "easy" path of selling the firm, he proposed an ambitious slew of new measures: from hiring new partners "of prominence" while increasing pay for the best-performing partners to creating a seriously complex equity-like security as a way to bind partners economically to the firm for the long haul. He also wanted to reinvigorate the firm's private-equity investing program by creating a new, $800 million fund that partners could voluntarily invest in as a further way to increase their wealth. But, Loomis outlined, there needed to be some tough-love measures as well: he wanted to cull from the partnership ranks the weakest performers and also said he intended to fire 10 percent of the global Lazard workforce, or 275 people, within the first three months of 2001. He also said he needed to raise $100 million of new capital from the existing Lazard investors to pay off the firm's financial obligation, negotiated by Michel, to Eig and Gullquist.

  Whether any of this reflected Michel's strategic thinking for the firm was unknown. But the one thing that was
now crystal clear was that Loomis was simply Michel's puppet. "I remain chairman," Michel said at the Paris news conference after announcing Loomis's promotion. "The chairman, which I am, has relatively extended powers." He later summed up Loomis's prospects for succeeding him: "It would not be abnormal for Loomis to become the successor when I disappear," a comment one observer said was akin to "cutting off Loomis at the knees when he had only just started in the job." Loomis seemed to understand well what was expected of him. "We've been through a period of turmoil and now need stability," he told BusinessWeek. "Without Michel's 100% backing, I couldn't be successful. He truly embodies the perspective of the firm." Still, Marcus Agius, the London chief, told the Wall Street Journal the firm was still troubled. "The mood was ghastly," he said.

  Just before the Loomis announcement, rumors circulated in Europe that Deutsche Bank was in talks to buy Lazard. Both firms denied the rumor, and the deal never happened. "We have no desire to sell," Michel said at the time. "We have no need to." Not surprisingly, in his first address to the firm as CEO, Loomis took up the boss's torch. "We are the independent and private alternative," he said. "It will remain so. We are not going to sell the firm, take it public or sell a major business." As part of the work to reach accommodations with Bollore and UBS, the accounting firm Ernst & Young valued Lazard at $4 billion, up slightly from the $3.785 billion "Pearson price." When BusinessWeek asked Michel whether the $4 billion represented a potential sale price for the whole firm, he reiterated that he had no intention to sell. But he added with a smile, "If we were to sell, let's say I'd be disappointed to only get that much."