The last tycoons: the secret history of Lazard Frères & Co (88 page)

The firm published 750 copies of an expensive slim, leather-bound, and heavily abridged version of its story, titled
Lazard Freres & Co.: The First One Hundred Fifty Years.
The author is unknown but likely was someone in the public relations office. At the end, the author wrote of Michel's perception that the firm's 150th year marked a time for "contraction and recentralization" and that he was "optimistic" that could be achieved. "The job he sees for now is to prepare the Firm for the next generation," according to the book. "This has been achieved in London with David Verey and his partners. It is being achieved in New York with Steven Rattner and his forward-looking, collegial decision making. And the movement toward a fully coordinated approach with Paris and among and between the three Firms has, and is, progressing each and every month. 'I do believe there is a soul which is quite independent from whoever is presently here,' David-Weill said. 'With every passage of a generation, there is always the question: "Okay, you were lucky. You had good people. But what happens next?" I believe that as long as the spirit is there, the people get recreated.'"

Since most of the top partners worldwide were in New York for the celebration, Michel invited about twenty-four of them to a meeting atop 30 Rockefeller Center. The partners of Goldman Sachs had voted a few days earlier to end the firm's 129-year run as a private partnership. The agenda for the very unusual Lazard meeting had two momentous items: Should the firm's three houses be merged into one, as the written history suggested that steps toward that ultimate goal were "progressing each and every month"? And should partners be given, for the first time, an actual equity stake in the firm, which would carry with it not only an ownership interest but also an ability to vote on important matters, such as taking the firm public or seeking a merger? Both were items that the partners at Lazard, unlike at Goldman, had no say in whatsoever.

Several partners who were there said the meeting was "inconclusive." That was true, but that accounting omitted a material event that occurred--Steve's rather offhanded suggestion that the firm consider an IPO. Michel's response was legendary. "We were up on the sixty-third-floor dining room with the management committee," Steve recalled. "There was one guy on the phone. We were struggling. I remember saying, 'One option is we go public.' Michel went nuts and said, 'Absolutely not.' He went around the room and said, 'I don't need you, and I don't need you, and I don't need you.' Then he pointed at the speakerphone and he said, 'I don't need you.'"

One thing was agreed, though. With Michel's blessing, and at Steve's urging, the firm hired McKinsey, the leading management consulting firm, to help sort through how the three houses could manage themselves in as closely a coordinated way as possible, as if they were one merged firm. There was also a desire to create a new set of management systems--regarding promotions, compensation, and accountability--that would reflect the best of what other Wall Street firms were doing.

Given Lazard's peculiar autocratic management history, the McKinsey agenda was radical stuff indeed. Calls went to McKinsey offices simultaneously in New York, Paris, and London to begin the assignment indigenously in each of the three locations. Forty-six managing directors were interviewed globally. Partner compensation was shared. Lazard's management practices were compared with the best practices in the industry. There seemed to be a high level of enthusiasm among the key partners in the various cities that the McKinsey study would be an important catalyst for making the governance changes needed to compete more effectively.

Steve was wholly supportive of combining the three firms but wary of the idea of providing actual equity in the firm to partners. "So many of the senior guys came from somewhere else," recalled the McKinsey partner Roger Klein, "so they didn't have to guess that there was another way to run the place. They just have to remember what it was like at Morgan Stanley or Goldman or whatever. And that made them less fearful of going in that direction because they knew it could be made to work. The firm was essentially operating on a model that other firms hadn't been operating on for twenty years."

Left unsaid, of course, was the fact that in the zero-sum world of power and control at Lazard, any McKinsey proposal for authority sharing was authority diluted from Michel, the Sun King. But at least at the outset, Michel seemed to be outwardly cordial and accepting that some changes needed to occur. For instance, at one point in the nine-month assignment, McKinsey suggested Lazard establish worldwide co-heads of its M&A business, as almost every major firm on Wall Street had already done. Lazard had never had a head of M&A. Over the years, Lazard had a head of banking--Loomis, Rattner, Wilson, and Rosenfeld--but since so much of the firm's banking business derived from M&A work, the idea of a separate head of M&A seemed redundant and needlessly bureaucratic. But McKinsey felt there was a need for Lazard to be able to deliver its product expertise--M&A advice--across industries and geographies. The new co-heads would be the ones to best coordinate the delivery of that service--again as most other firms had been doing for years. A conference call on the subject occurred in August 1998, with the Lazard team at their various summer retreats and the McKinsey guys in their offices. "Michel had previously been resisting that idea before we showed up," Klein recalled, after receiving permission from his client to recount the conversation. "On the phone he said, 'I don't think that will work.' I said, 'It works in a lot of other firms.' I gave him three examples of firms, and I named the guys. He said, 'Oh.'" The firm decided, for the first time, to make the appointments. Steve was very appreciative of McKinsey's help in getting Michel to accept this change.

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."