The last tycoons: the secret history of Lazard Frères & Co
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Bruce Wasserstein, meanwhile, had just announced, in September 2000, the sale of his firm, Wasserstein Perella & Co., to Dresdner Bank in Germany for nearly $1.37 billion, plus $190 million for a retention pool, a price that certainly got the attention of the Lazard brass who had just a few years earlier rejected the combination with Wasserstein Perella because, among other reasons, it made no money. "The price was obscene," Alan Webborn, an independent research analyst, told Bloomberg.
Two weeks after Loomis became CEO, Michel announced that Credit Agricole had agreed to buy the Bollore position in Rue Imperiale, securing Bollore a EU290 million profit. Inside the firm all this was viewed not only as a terrible diversion but also as devastating symbolism. "Bollore caused just a huge distraction on the part of Michel and his French partners in 1999 and 2000," said one senior American partner. "And UBS as well. Just a huge distraction. And a distraction in a bunch of different ways. First is, I think it became obvious to these guys that they were no longer going to be able to run this place secretively with a relatively small ownership, both of Eurazeo and then all the chain companies and Lazard, forever. And second was, and probably the most important thing, is it created this chink in the armor of Lazard in continental Europe. And I think that hurt dramatically the firm's position in France. It shows you're vulnerable. I mean, when you have this mystique of power, this aura of power, and suddenly you are being attacked and the attackers are winning, it shows you're not as strong as you people think you are. And in France, that matters."
THE LARGER QUESTION for Lazard remained painfully unresolved: How was the firm going to be able to compete effectively against its historic rivals, Goldman Sachs and Morgan Stanley, which had remade themselves into hugely well capitalized global financial services firms able to attract the most talented bankers by offering the highest compensation and the best platform off of which to operate? The year 1999 was one of the rare instances when Lazard had fallen out of the top ten in the M&A league tables; Goldman and Morgan Stanley ranked one and two, respectively. The war for talent had reached the point where Bill Gates remarked that Microsoft's biggest competitor was not another software company but rather Goldman Sachs. "It's all about IQ," Gates said. "You win with IQ. Our only competition for IQ is the top investment banks." The Economist observed presciently about Lazard, "The crux for all investment banks is to be able to compete for the best talent. Ironically, says a senior banker with the firm, it might take a bear market to decide the issue for Lazard and to dictate whether the bank will have an independent future. If markets keep falling, the value of other investment bankers' share options will also fall. The gap between the rewards offered by Lazard and those of the rest of the pack would then narrow, extending the group's life expectancy as an independent entity. Now there's a good reason for a bank to be bearish."
Just as 2000 was closing, on December 11, the firm's executive committee was to meet for the first time with Loomis as CEO to review the firm-wide budget for 2001. Neither New York nor Paris had ever constructed a budget before, and as one partner observed, "The machinery, the culture to review it simply does not exist." That portion of the December executive committee meeting dedicated to reviewing the 2001 budget was postponed until mid-January, when the senior partners would have had time to review and vet the budget documents more thoroughly. The executive committee member Adrian Evans was further dismayed when he learned that while the firm had more revenue in 2000 than ever before, it was less profitable because expenses were out of control, especially in New York. "After an outstanding year, it is clear the economics don't work," he confided. "I wondered whether this is the Harvard Business School case that will be amusing future students on 'Lazard's decline.' If it is not to be so, we need to work now to redress our New York problems."
CHAPTER 18
"LAZARD MAY GO DOWN LIKE THE TITANIC!"
There was no question that by the end of 2000 or early 2001, Wall Street was in a full-fledged bear market, although the economists wouldn't confirm it until later. Almost from the day he took over as Lazard's CEO, Loomis had to figure out a way to manage through its consequences. It was not easy for him, and nothing he or Michel did made it any easier. Some partners thought Loomis's power dissipated right from the very moment Michel introduced him as the CEO at the supervisory board meeting in Paris. "That was the beginning of the end," one partner said.
Even if that was a slightly exaggerated rendition of events, it was not off by much. "Within weeks, Michel was undermining Bill every step of the way," said one partner then in a position to know. "He's undermining him with private conversations with Braggiotti before board meetings and all kinds of things which would be unfathomable with regard to how you would give a chief executive powers." But Loomis didn't help himself any, either, with his early decisions. From the outset, he had raised expectations among all the partners with his proposal to bestow upon them the funky "performance preferred" equity-like security, or if that proved impractical (which it soon did), some other incentive scheme.
To be fair, Michel knew that Loomis intended to get some form of equity security into the hands of partners, and by naming Loomis CEO, he seemed to be tacitly endorsing that idea. "Bill actually had come in on a platform of wanting to come up with something that provides long-term value to partners," one old Lazard hand recalled, "whether it was through private equity or it was going to be through some kind of partial ownerships that would then be recycled and bought back by the firm. So Michel kind of raised expectations a little bit."
To fulfill two other aspects of his manifesto--getting some points back from the capitalists to use to hire new partners and to pay some of the old ones better, and getting the capitalists to buy the new $100 million preferred--Loomis made a pilgrimage to Paris early on to speak to the non-David-Weill capitalists--the Meyer family, Jean Guyot, and Antoine Bernheim. He accomplished this twin mission successfully, but at a steep price. Said one partner: "He was told by them, 'Okay, we'll buy the preferred, but don't ever come back to see us again or ever ask for anything ever again,' on no uncertain terms. By these people who were no longer working here. And that got to be known by everybody in the firm." Although the working partners considered this a modest success, Loomis ended up tremendously upsetting the capitalists. "I mean, people thought that it wasn't nearly enough and it wasn't going to really sustain us going forward," a partner recalled, "but it was enough to get through the year end and make new partners."
Loomis's second challenge involved the technology banker Paul Haigney, hired from Wasserstein Perella as a partner in September 1999, to join the highly regarded partner Richard Emerson in the San Francisco office. In 2000, Haigney was a 0.625 percent partner, which put him in the middle of the pack (which still meant he was paid around $3 million). In February 2000, Haigney introduced Robert Davis, the CEO of Lycos (the Internet portal company), to the CEO of Terra Networks, an affiliate of Telefonica, the large Spanish telecom service provider and a Lazard client. In May 2000, Terra and Lycos announced a $12.5 billion combination. The deal closed in October.
By this time, Haigney knew that his close friend and partner Emerson was being wooed by Microsoft to become its senior vice president of corporate development and strategy. At the beginning of December 2000, just two weeks after Loomis became CEO, Microsoft announced that Emerson, then thirty-eight, would be leaving Lazard and joining the company. "Richard has been a gifted banker in the best traditions of Lazard," Loomis told the press. As Haigney no doubt suspected, Emerson's departure was another major blow to Lazard, even though the firm did become an occasional adviser to Microsoft afterward.
Haigney used the moment to demand an all-cash, three-year guaranteed contract, the first time a young working partner already at the firm had demanded such a deal. Either he would be given the contract or he would leave, he told Loomis. Lazard's executive committee debated the demand. Nobody wanted to lose Haigney, given his performance and how difficult it would be for Lazard to replace an accompl
ished technology banker at the top of the market. But the executive committee was firmly united against giving in to him for fear that it was completely antithetical to the historical Lazard compensation culture and because it would no doubt lead to other, similar requests, requests that Lazard would not be able to easily fulfill given its slumping performance. The executive committee voted it down. "But basically, Bill insisted that we do it, and that was it," remembered one partner. Haigney got his three-year guarantee, said to be some $4 million a year.
The executive committee minutes of January 31, 2001, confirm the approval of the Haigney contract but make no mention of the rancorous debate it ignited. Another member of the executive committee, while opposed to the decision, conceded there was at least some logic to it. "Now, you have to remember, this was against the backdrop of the TMT [telecommunications, media, and technology] boom," he explained. "Partner pay on Wall Street is out of control. We're trying to hire what's his name? Rob Kindler from Cravath, and he's getting a contract allegedly for $30 million from Chase instead. It's just all over. The numbers are astronomical. Wall Street is doing incredibly well. People are getting paid huge bonuses. The DLJ guys are walking around with a fortune from CSFB in the fall of 2000. Wasserstein's firm being sold for $1.6 billion in the fall of 2000 and then everybody finding out that this one partner at Lazard now has a guarantee and what about the rest of us?"
Loomis's decision was a watershed event. "All of us also knew that the instant he did this, the dam would break," a partner remembered. "We couldn't hire anybody, because we didn't have any currency to pay people with, so this whole thing was there and developed in 2000. But when this one partner got this guarantee and Bill came in, it just--the dam burst. Everybody here kind of felt like a huge dinosaur through this whole thing. And they felt like they were leaving their careers on the table versus going to other places."
Around the same time, just before Christmas 2000, there was a partners' meeting in London, presided over by Loomis, to discuss the firm's financial performance and talk about who did what during the year. This meeting was a disaster, too. There was tremendous anger among many of the partners. The Europeans felt they had carried the firm during 2000 and were on a growth trajectory, but under the terms of the three-house merger agreement their profit percentages were locked in for a couple of years. The Americans were also unhappy that their profit percentages had been halved just as the pie was shrinking. "Everybody in Europe wanted more points," remembered a senior partner. "Everybody in New York felt they were underpaid. So nothing worked." On January 2, 2001, Michel sent Loomis a handwritten fax from Cap d'Antibes on his Sous-le-Vent stationery. "Bill," he wrote, "on this first working day of 2001 I want you to know all the wishes I make for your success. All my life, since my early childhood, I have been proud of the firm and thanks to you it is with renewed belief that I think about our future. Your partner, Michel David-Weill." Michel's optimism--and that of the firm as a whole--would be sorely tested in 2001.
Indeed, within weeks, the stark reality of Lazard's financial difficulties became increasingly obvious to the firm's leaders. In preparation for an early January meeting in New York to discuss the 2001 budget, the senior partners in London came to the view that New York "has $50 million too much expense, provides 18% of the Lazard profit and receives around 40% of the Lazard profit share. Paris, London and the Rest of Europe were more or less the reciprocal: 40%-ish of the profit for 18% of the benefit in London and Paris and Rest of Europe approximately the same. This information is not yet before all partners but inevitably will be and it will cause a storm." The Brits were convinced "some sort of gesture needs to be made," for instance, a combination of all partners accepting a salary of $200,000, New York reducing expenses by $50 million or transferring a "significant number of partnership points" to Europe in 2001, or all of them together. "This would be a fine start," the London partner Adrian Evans wrote to Loomis.
Loomis explained to Evans, who recorded the exchange in his diary, that "Michel, with whom Bill had discussed the numbers, is of the view that to cut back now in New York is dangerous as there are no big hitters to depend upon, rather a lot of smaller hitters bringing in smaller deals." Evans further reported: "[Loomis's] belief is that any solution to the expense issue (which he also identifies as a $50 million overage) will demand the firing of a great many young, talented people and he clearly (and quite understandably) dreads it."
To get the French perspective on the firm's mounting problems, Evans and his longtime French partner Jean-Claude Haas had "our usual very frank conversation" over breakfast. The French just wanted to be left alone as their business continued to perform well, and partners there were of the view that they received little or no benefit from the three-house merger. Pondering this view, Evans swiftly concluded, "We will either work as one entity or die." He then reflected on how the firm found itself in such a tight box. "It is interesting to consider why we are where we are," he wrote. "Our great success has been largely due to Michel and his strange blend of pied piper and Louis XIV. Our problems--a chaotic, un-disciplined, un-run New York; an arrogant, uncommunicative Paris--are also due to him. London, of course, is not perfect and is viewed by other houses as isolationist, greedy, bureaucratic but I do know that London will change, indeed longs to change, but cannot do so until a Lazard strategy emerges that is credible and simple." The executive committee concluded that the performance in 2000 had been sufficient to hold the firm together, but 2001 would be the critical year.
The following week brought two more days of budget meetings in New York for the senior partners as part of the run-up to the much-anticipated executive committee meeting in Paris on January 31. As Evans sat in hour after hour of meetings, he began to make some observations about Loomis and his management style. "Loomis played an interesting, watchful game," he wrote, "and it became clear to me that what was happening in the room was a diversion. Loomis has clearly made up his mind to get a grip on the anarchic New York operation and will do so." What that meant, "all agree," is that New York "needs to take out a very large slug of costs and that to do so will mean partners having to go." In the further run-up to the January 31 meeting, word began to circulate among the European partners that Michel was "deeply and unusually depressed." It was not hard to see why. There was serious dissension among the troops. Many of them, if not all, had lost faith in their leader after the Haigney incident. The M&A market appeared to be in a serious slump. Michel added to the sense of despair when he told a French partner that he had decided unilaterally to add Georges Ralli to the executive committee as the result of "yet another threat to quit," this time for UBS Warburg (he had been offered $10 million a year for three years, guaranteed), in part because "everyone was unhappy." The stage was more than set for a divisive meeting in Paris.
For four hours, the committee debated the 2001 budget, which showed $17 million of expense cuts in banking (a $20 million decrease in the United States coupled with a $3 million increase in Europe outside of Paris and London), and eventually approved it with "big cuts" in New York "after quite a lot of self-justifications" from the New York partners. Loomis gave a little admonitory speech. "In a nutshell," Evans wrote, "he said that it was not possible for the firm to succeed if individual members of the Executive Committee behaved greedily, focusing on their own pockets. The insidious nature of one man telling another that Lazard could not make it would bring the firm down...." Several partners observed that as Loomis spoke his hands were trembling more than usual. Then, with five minutes left in the meeting--Michel had called for its end--Loomis announced without discussion that he had decided, and Michel had approved, that Georges Ralli, Dave Tashjian, and William Rucker would join the executive committee. He also announced, again without discussion, that he had unilaterally put together a new "equity scheme," which Michel had also approved, whereby Loomis had selected the top twenty-three partners in the firm to be awarded equity in Lazard equal to half their profit points, provided they stay
ed at the firm for at least five years and did not go work for a competitor. The objective of the plan was to retain "a core group of Managing Directors in the Firm."
This would have meant that about 20 percent of Lazard's equity would be put permanently in the hands of the top twenty-three partners--and no one else. That was it. No broad-based distribution of equity designed to energize the whole firm or give genuine authority to the firm's working partners. Obviously, this had been a compromise that Loomis had fashioned with his patron, Michel. Quite apart from the merits of the plan or of its philosophical underpinnings--which in any event weren't discussed, given the shortness of time--the reaction to Loomis's proposal was swift and visceral.
Obviously upset that Loomis had not consulted him and in "a rather excited voice," Ken Jacobs demanded to know how it would all work, and when the proposal could be discussed, since for the previous six months he had been "chasing abortive schemes and nothing had happened," and now this plan had been presented as a fait accompli. Jacobs's rebuke angered Loomis, whose hands were now trembling mightily. Evans recalled what happened next: "Bill appeared to lose his temper and said in a rising voice that this scheme was agreed, Michel had agreed it, and he had a list of the awardees. Reaching into his briefcase, he produced it and threw it on the table." The meeting broke up immediately. Evans bumped into Norm Eig, co-head of asset management, in front of Lazard's unmarked office on Boulevard Haussmann and asked him what he thought. "There will be trouble ahead," Eig predicted, his "eyes twinkling and with a big grin." "We're a $3 billion business and only one of my [guys'] names appears on that list."