The last tycoons: the secret history of Lazard Frères & Co (95 page)

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."

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!"

T
here 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."