The last tycoons: the secret history of Lazard Frères & Co (15 page)

Felix told the
The New Yorker
about this incident with Andre:

He made it crystal clear to me that nothing in the firm, however small, happened without his approval, and that he expected both recognition and gratitude. Anyway, he was an extraordinary man, a powerhouse; he had just gigantic energy, power and will. Andre could make people do things. He had volcanic, towering temper tantrums. He was very complicated. He had enormous complexes. He wanted to be loved. He had a great sense of buying and selling--things and people. He was the most ruthless realistic analyst of human character I have ever met. He could peel people and find their strengths and weaknesses. He was absolutely merciless in criticizing sloppy work. I fought him every day for twenty years. You had to. If you didn't fight him, you were finished. I am sure this is the only reason we got along. He destroyed a lot of people. But he could also be exceedingly generous. He made the fortune and the career of as many people as he destroyed--sometimes they were the same people. On balance, I owe him a great debt of gratitude, although I bear many scars.

Years later, Felix elaborated on his mentor: "Andre also had a Great Idea about Lazard. He looked at Lazard the same way de Gaulle looked at France. De Gaulle once said, 'I have a special idea of France.' And Andre had a special idea of Lazard as a kind of unique firm with unique qualities. And even if those qualities were not always as real as he thought they were, or as he wanted them to be, creating that image was certainly very good business."

But at this initial confrontation with Andre in 1949, Felix said he didn't care all that much what Andre thought, since he was thinking about leaving Lazard anyway in search of his coveted job in Oak Ridge or some other technology haven. He thought the Lazard job was a temporary one. Felix explained what happened then: "Andre said to me, 'Well, you know you're doing good work. Why don't you think about this business?' And I said, 'Well, Mr. Meyer, I know nothing about this business, you know.' 'Well,' he said, 'we'll send you to Paris and we'll send you to London and we'll send you to Basel, then you can see whether you like it.' So I thought, 'A free trip to Europe, why not?'"

In 1950, he essentially took an all-expense-paid odyssey through western Europe, using Andre's and his stepfather's relationships as touchstones. In London, he was assigned to Samuel Montagu's daily money market operation, where short-term loans were made and collected. His job was to go around and see who needed money or who had too much. He remembered that everyone wore a black homburg and that he never even owned a hat. "This was summer and I only had this vanilla-ice-cream-colored suit," he said. "And I went out to buy this black hat. It looked totally ludicrous." He met the well-known international banker Louis Frank, then head of Montagu. But he decided the experience in London was not for him. Next up was the newly resurrected Lazard in Paris. He met Pierre David-Weill and his partner Jean Guyot. But the chemistry wasn't right there, either. He found Lazard in Paris very social and not the right fit for a Jewish-Polish refugee. "Well, this was a time when social status was very important," Felix explained. "Paris was very much of a club." Then, a few months after Andre had bought for Lazard a minority stake in Les Fils Dreyfus, Felix went off to Basel to work in that firm's foreign exchange and precious-metals trading operations.

In 1949, Felix achieved his lifelong dream--to that point anyway--of becoming a U.S. citizen. His first act of citizenship was to be drafted, in the winter of 1951, and he was sent overseas to Goppingen, Germany, near Stuttgart. The good news was that on the weekends, he was able to take the Orient Express from Stuttgart to Paris to spend time with his father. He served his two years in the military, without incident, and when he got out in 1953, he worked for Cantrade, a new private bank in Zurich. While Felix remembered that his various whirlwind apprenticeships were not the norm at Lazard, he didn't think they were unprecedented. "It was done--maybe I flatter myself--partly to keep me in the firm and show me broader horizons and opportunities," he said. "At the time I was seriously thinking of going back to Europe and living there."

Instead, he returned to Lazard in New York in 1955 and became a legend. At first, he continued working at Lazard in foreign exchange. And he might very well have stayed doing just that had it not been for a chance weekend invitation from Phyllis Bronfman, the daughter of Samuel Bronfman, to come to the family's estate in Tarrytown, New York. Upon being introduced to Felix, Samuel, a great friend of Andre's and the patriarch of the Seagram fortune, asked him what he did. When Felix told Bronfman he worked at Lazard in foreign exchange, he received the invaluable advice to forgo foreign exchange altogether and focus on mergers and corporate finance, since these were the only aspects of the investment banking business that truly interested Andre. At first, Felix resisted making the change, in part because it would likely mean a pay cut and because he had no training in finance, economics, or accounting and could not read a corporate balance sheet. "Take the pay cut and do it," Bronfman insisted. Felix talked to Andre about making the switch. Andre didn't like the idea. "You don't know anything about it," he said. Felix told Andre he would go to business school at night if need be. Andre relented but, as Felix feared, his pay was cut to $15,000 a year, from $22,000.

"I went to work for a man named Howard Kniffin, who was head of corporate finance," Felix told the author of his 1983 profile in
The New Yorker.

I also went to night school to learn accounting, and to read Graham and Dodd on security analysis--dreadful, dreadful stuff. In addition, I was doing all the dog work that goes with running numbers on work sheets when one is trying to put companies together. I had a good sense of numbers, and quickly became very, very interested in how to put two companies together. I think that the reason I became quite good at working out mergers--at how to structure them--was that I had a feeling for the symmetry and the dynamics involved; when you get all through, the entity coming out should be stronger and better than what you had before, and the merger should be as seamless as possible. When it comes down to the essentials, you are dealing with greed and power. The greed has to be handled by the financial way that you put these companies together, so that, in the last analysis, everyone's interests are served. The power is a different matter. That requires as much negotiation as the financial side, maybe more. More deals break down on the power side than on the financial. There are valid issues of face, of authority, and of appearance. Of course, when I started under Kniffin I was simply given the task of analysing balance sheets, to determine statistically how best to make a merger or an acquisition. I used to sit through endless meetings of lawyers and accountants and read through contracts and work sheets to understand what was involved. I was kept with the drones and the paper shufflers and would, from afar, watch the principals disappear into Andre's office, and then I'd wait for the outcome to go back to my number shuffling. But that process taught me a very important thing; namely the nitty-gritty of what goes into making one of those deals. I can read a contract. I know what a tax ruling is about. I know what accounting is. I know what accountants can do and what they can't do. I know what is baloney and what isn't baloney. I know what lawyers will tell you and what you can believe and what you shouldn't believe, and I know where to press them. It is very important, at this point, that no technician can frighten me by talking about things I don't understand. I may have to rely on him or her for facts, but I don't have to rely on him for concepts. Too many high-level executives are prisoners of their staffs. They have never really done the nitty-gritty stuff, which is not terribly mysterious once you tackle it. And if you haven't seen these things the technicians can absolutely wrap you up in details, and you never find your way out. There are banking firms that are so big that the staff does all these things, but at Lazard we are so small that's out of the question.

Felix, much more risk averse than Andre, perceived great honor and prestige in being the middleman, the enabler. He was also able to convince corporate chieftains to pay him millions in fees for his advice, without the firm putting up a dime. "Firms used to do M&A for nothing," Felix explained. "Rohatyn is in total contrast to Meyer," Anthony Sampson wrote in the early 1970s, "with none of the traditional bankers' smoothness and deep camouflage, and a stimulating openness of manner. He has crew-cut hair, a piercing expression, talks fast in a high voice, drives a small Toyota, wears an old raincoat, seems oblivious to surroundings." Felix had "total mastery of figures" and "enormous drive." And like Meyer, he hated to lose and was a fierce negotiator, "like a terrier with a rat," one observer noted to Sampson.

IN MANY WAYS, Felix was the perfect man at the perfect time. Corporate America was on the precipice of creating conglomerate America, and Felix had the wisdom, experience, and gravitas to become the era's midwife--and to get paid handsomely for his services. The world got a peek at this revolutionary alchemy as early as 1962, one year after Felix became a partner of Lazard in New York, when Lazard advised Pechiney, a large French aluminum producer, to buy 40 percent of Howmet, an American manufacturer of aluminum castings for aircraft, for $18 million, some 36 percent above Howmet's then trading price in the market. The deal was a huge financial success for Pechiney--and for Lazard, which won most of Pechiney's follow-on M&A and financing business for years to come.

Felix and Lazard came to dominate the M&A business. While Lazard continues to be among the leaders globally in providing clients M&A advice, there has been a virtual explosion of purveyors during the past twenty-five years. It is hard to conceive in 2006 how inchoate--even quaint--the specialized and clubby world of M&A advisers was forty years ago when Felix pioneered it.

The key to Felix and Lazard's early success in the world of mergers was ITT--the International Telephone and Telegraph Corporation. Felix counseled the infamous Harold Geneen in the 1960s and 1970s as Geneen transformed ITT away from its roots in international telecommunications to become the symbol of corporate conglomeration--a journey that ensnared Felix in a political and legal maelstrom in the early 1970s and almost ended his career.

CHAPTER
5

FELIX THE FIXER

H
istorically, Geneen's banker of choice had been Kuhn, Loeb, another prestigious Jewish partnership. Over time, though, Lazard, Andre, and Felix made small inroads. But the baby steps became a giant leap in 1965, thanks to a then-second-rate rental car company, Avis. It turned out to be a fateful moment.

Meyer and Lazard first came across Avis in the summer of 1961. At that time, Hertz and Avis were battling for supremacy in the relatively insignificant business of renting cars, but the competition between them really wasn't even close: Hertz had revenues of $138 million, and Avis, with $24 million in revenue, was continuously unprofitable and struggling for its life. At the same time, Edward Rosenthal, the head of Kinney System Inc., was looking to expand his own tiny New York rental car business to complement his growing parking lot and funeral home businesses. Rosenthal and his son-in-law Steve Ross--who would later turn Kinney into what is now Time Warner--approached Hertz about buying the company, but Hertz had no interest. When they approached the struggling Avis, though, they were encouraged in their quest. As Kinney had never bought a business of the size or type of Avis before, the two partners sought the advice of David Sarnoff, then head of RCA. Sarnoff's nephew worked for Kinney. "Get in the car," Sarnoff told the Kinney executives. "I will take you down to see Andre Meyer." Andre and his "flunky," as Felix was then thought of--whom Andre brought along to meetings because "he knows how to use a slide rule"--together tried to broker a deal for Kinney to acquire the struggling Avis. But Ross ultimately declined, believing the risks too great.

Sensing a financial opportunity, Andre and Felix pursued the deal on their own, after their client passed, and won a ninety-day exclusive period from the company, then publicly traded, to see if it could pull the opportunity together. Somewhat out of character for the fiscally conservative Felix, he became the deal's champion. The two Lazard partners quickly ran into the problem perennially faced by financial buyers: to wit, who will run the company? They had nobody, could barely understand the nuances of the business themselves, and realized the current management was doing a lousy job. They needed to find someone who understood the car rental business and who could give them an honest and quick assessment of the Avis deal.

So challenged, Felix came up with the idea of asking a man named Donald Petrie to help. The imposing Petrie, with a face not dissimilar to a gargoyle on the facade of the Notre Dame Cathedral, was the former president of an international car rental joint venture between Hertz and American Express. In early 1962, he had just left the Hertz venture to return to practicing law, at a small firm on Long Island. "I get a call one day," Petrie recalled. "It was from Felix Rohatyn. I had never heard of Felix Rohatyn. The firm is Lazard Freres. I never heard of Lazard Freres. He says, 'Mr. Andre Meyer would like to meet you.' Well, I never heard of Andre Meyer, either. So I said fine, how do I do that? 'You come to the Carlyle,' Felix says.