The last tycoons: the secret history of Lazard Frères & Co (46 page)

NINETEEN EIGHTY-ONE dawned with Lazard as the number-one adviser worldwide in M&A deals, having participated in some forty-five deals worth $12 billion. The firm also had a record year financially, earning $84.1 million in pretax income from its three houses. Michel was firmly ensconced, having--with the help of the Lazard partner Bruno Roger in Paris--convinced the new Socialist French president, Francois Mitterrand, not to nationalize the Lazard partnership in Paris as part of Mitterrand's plan to nationalize
all
the French banks. Even Lazard's rival Rothschild could not avoid nationalization. Although it was touch and go until the ultimate moment--when having less than 1 billion francs in deposits became the criterion used to decide the matter--Lazard was the only French bank anyone had ever heard of that avoided nationalization. This carefully orchestrated and heavily lobbied-for piece of good fortune put Lazard on a path, for much of the 1980s and 1990s, to ratcheting up its market share--and profits--in France to the stratosphere. There was simply nowhere else to turn in France for independent M&A advice in those days. "We explained to Jacques Attali and Michel Rocard [two key advisers to Mitterrand] that we were not a bank," Michel said, with perfect logic as always, "but rather we were a service company." This was a major victory for Lazard's longtime strategy of cozying up to politicians--by hiring them into the firm, by contributing financially to them, or merely by socializing with them, whatever it took--wherever it did business. In 1988, for instance, thanks to that fateful decision in 1981, Lazard's pretax profits in Paris reached their all-time peak of $109 million, up from $10 million in 1984. "They understood before anyone else that it was at the intersection of politics and business that the opportunities to make the most money were the greatest," Bernard Esambert, a longtime Rothschild partner and adviser to the French president Georges Pompidou, said of Lazard.

For his part, in 1981, Felix was back focused nearly exclusively on deals, although he remained chairman of MAC. The new partners were making meaningful contributions. Damon Mezzacappa had begun to build a small but profitable capital markets business. Overheads remained low. Lazard was poised for what proved to be a remarkable run of increasing profitability, just as the M&A market exploded in a rare confluence of large strategic mergers and the emergence of well-financed corporate raiders and buyout shops. Nineteen eighty-one was also the year that Felix and Lazard were able to--finally and quietly--put the ITT scandal behind them. ITT reached its $17.8 million tax settlement with the federal government in May, effectively ending a seven-year legal battle. (In 1981, Felix also turned over his ITT board seat to Michel.)

Ironically, just as the ITT matter was quietly wrapping up, Felix was perfecting his status as a national figure. There was no one catalyst for this, of course, as his reputation as a deal maker had been acknowledged for years. And his role as chairman of MAC allowed him to claim, with justification, a good measure of the credit for helping New York solve its fiscal problems and establish an institutional mechanism for preventing a recurrence.

The tipping point for Felix, though, was the election of Ronald Reagan, an unabashed conservative ideologue whose policies and rhetoric reintroduced the politics of polarization to the national debate, a schism that exists to this day. From the inauguration of 1981 on, and for the next eight years, Felix became something of an unguided political missile, a prominent card-carrying member of the political opposition--albeit without portfolio. His pronouncements as a quasi economist and political commentator were dark and foreboding and foretold of gloom and doom--the Dark Ages memo writ large--in almost stunningly perfect contrast to the Reagan rhetoric of optimism, hope, and "the shining city on the hill." The media loved Felix for it and rewarded him with prominence in the debate. In April 1981, the
New York Times
put Felix on the front page of the Metro section, in another one of its periodic kisses to him. There seemed to be no apparent news peg, other than a general desire to criticize Reagan economic policies that were not yet even three months old. He was interviewed, over breakfast--dry toast, orange juice, and coffee--both at his 770 Park Avenue duplex and in his Lazard office. "I believe in the free market," he said, "but I do not believe in laissez-faire. I do not believe that, at the end of the 20th century, in complicated, advanced industrial societies, an absolute free-market system exists or is desirable. If it does not exist, I do not think we should pretend we can cure the problems that we have with simply free-market solutions." His remarks were meant to be criticisms of how the Reagan administration was, in Felix's judgment, already mismanaging the economy. He referred to Reagan's "supply-side economics" as "an oversimplification" and "Keynes in drag."

According to William Serrin, the
Times
's labor reporter, Felix was "demanding a fundamental change in the relationships between capital, labor and government. A new social contract must be established, he believes, between these three institutions if the American economic system is to know the productivity and abundance that has characterized it in most periods since the Civil War." Once again, Felix called for the reestablishment of the Reconstruction Finance Corporation as a way to facilitate the bargaining among competing interests that he felt must occur to "bring new vigor to the American economy." And then, with the venue switched to his Lazard office, he unleashed his parade of horribles, a veritable catalog of the social ills that have plagued American society for decades and of which we still have no resolution: "We have an educational system where a high school education means nothing. A society where families don't provide ethics; an illiterate Army that is being provided the most sophisticated weapons at enormous costs--weapons they don't know how to use. We produce tens of thousands of lawyers, tens of thousands of business school graduates who are utterly of no use to society, instead of producing more chemists and people who know how to run factories. We cry about productivity, and the children of plant foremen want to be computer programmers. The contradictions--Karl Marx's contradictions--seem to have arrived." Wow. Felix's own contradictions and complexities were such that one was torn between thinking him prescient and astute and thinking him more akin to a broken clock, which is still accurate twice a day. For much of the Reagan era, Felix predicted the decline and fall of American society at the very moment American economic and political power was reaching its zenith worldwide.

Many of his prognostications appeared in the pages of the
New York Review of Books.
Robert Silvers and Elizabeth Hardwick, the co-editors of the
Review,
became his friends. But he often also voiced his concerns in the op-ed pages of the nation's foremost newspapers. He gave numerous speeches. In March 1982, in the thick of the Reagan recession, he blasted Reaganomics in a speech before the Conference Board, a New York-based business think tank, as placing the U.S. economy on the edge of "economic disaster." He urged Reagan to convene a "summit meeting" of administration and congressional leaders plus Paul Volcker (the chairman of the Federal Reserve) to "grapple with the national economic problems." His dire warning about the "growing misery and despair among millions who cannot find work and untold others who have given up trying" was that "violence is the handmaiden of despair. It does not take a soothsayer or an alarmist to predict that, if this process continues into the summer, it may be a very hot summer indeed." Felix impressed one Democratic U.S. senator--Thomas Eagleton, of Missouri--so thoroughly that he introduced legislation in 1982 for a constitutional amendment--the Rohatyn Amendment--that would have permitted naturalized, foreign-born citizens such as Felix to run for president or vice president. Eagleton had been moved by his "unbounded admiration for the intellect and skills of Felix Rohatyn."

In a tongue-in-cheek letter to Felix in November 1982, Eagleton wrote, "I am getting calls from all over the country about Felix Rohatyn for President. However, some of my callers raise some delicate points. 1. Your first name, i.e. Felix. Some callers think you are a 'cat.' Therefore 'Felix' has to go. 2. 'Rohatyn' is hard to spell and pronounce. It looks like shit on a bumper sticker. Therefore, based on 1 and 2, we are changing your name to: Sterling Patriot Jefferson." The letter continued in this vein. "In short, Felix," the senator concluded, "you are on the way to the White House if we can totally re-make you in almost every respect." Said Felix: "Eagleton liked me."

One of those old-fashioned, massively voluminous
The New Yorker
profiles about Felix appeared in January 1983, giving him another platform for his ongoing criticism of Reaganomics. As the economy began to recover throughout 1983, Felix remained skeptical. "It's a normal recovery after a recession," he told Charlotte Curtis, then the society columnist for the
New York Times
and later its opinion page editor. "But it looks like the validation of a program"--Reaganomics--"that's deeply flawed." Curtis reported about a speech Felix gave to Fordham University's graduating class the week before. "The war we are going to fight is not with the Soviets," he told the students. "It is here at home. It is a war with lack of education, racial discrimination, crumbling cities and dying industries, enormous disparities of wealth and privilege. This is a war we can lose. If we [do], the result could be a dangerous willingness to experiment with political extremism of the right or the left. Political extremism of any type is the enemy of freedom. It is a bridge to nowhere."

ATTEMPTING TO ARTICULATE and grapple with these massive problems would, one would assume, be an all-consuming task. But for Felix, in truth, it had the quality of an extracurricular activity. He remained very much in the thick of the fresh and growing wave of mergers and takeovers, many of them originating in an unfriendly way, then sweeping across the country. The media exacerbated the excitement level by covering these battles as if they were high dramas. And the middlemen--bankers and lawyers--were portrayed as rock stars, albeit with an intellectual bent. "For the handful of men who orchestrate such takeovers, the work is heady, frantic and exhilarating--a crucible in which careers are made or broken," the
Times
allowed in 1982. "The group is comprised mostly of confirmed workaholics, who see the corporate battles in personal terms. Indeed part of the game is to see who outsmarts whom and takes home the prize." The article quoted Felix: "'There are some fairly gigantic egos involved in all this.'" And the deals were big, too. There was DuPont's $7.5 billion acquisition of Conoco, after Conoco successfully eluded the hostile entreaties of Seagram (represented by Felix) and Mobil. Then Mobil and U.S. Steel battled for Marathon Oil, which U.S. Steel won for $6.2 billion. Then Mesa Petroleum attempted to take over Cities Services (known as Citgo). This prompted Citgo to turn the tables and attempt a takeover of Mesa. Ultimately, Gulf Oil emerged as a white knight and scooped up Citgo for $5.1 billion. This was just the tip of the merger iceberg. While there were more mergers in 1969 (6,107) than in 1981 (2,395), the dollar value of the mergers in the early 1980s had skyrocketed to $82.6 billion in 1981, from $23.7 billion in 1969.

Since the investment bankers advising these companies on these deals got paid on the absurd formula based on a percentage of the deal value, fees for bankers and lawyers exploded, too. On the DuPont-Conoco deal alone, the professional advisers walked off with more than $40 million in fees. First Boston, representing DuPont, and Morgan Stanley, representing Conoco, were paid $14 million each for their advice. First Boston received $18 million for representing Marathon in its sale to U.S. Steel. Not only did 1969 seem long ago in terms of the dollar value of M&A deals, but also with M&A fees it seemed an eon before. How quaint did Lazard's million-dollar fee for the McDonnell-Douglas merger--the first million-dollar fee--seem now?

Naturally, the increasingly large fees paid to M&A bankers caught the attention of critics. And just as naturally, bankers defended their excessive compensation, as they always do. A typical defense came from Stephen Friedman, then a leading M&A adviser at Goldman Sachs, who later led the prestigious firm with Robert Rubin before each entered national politics: "These fees don't come from widows and orphans. They come from people who are more than capable of strenuously negotiating over the amount of the fee. Fees are the purest form of competition. The companies have full knowledge of what other banks are getting for similar deals and the service provided, and they are not shy."

Felix, though, having perfected the art of cognitive dissonance, alone among his peers criticized the growing fees. "The level of fees is so different depending on what happens--and that's the unhealthy element," he told the
Times.
An apex of sorts was clearly reached during one of the most infamous takeover battles of all time--the 1982 fight for Bendix between Martin Marietta, Allied, and United Technologies. Bendix, led by its charismatic CEO, William Agee, took the offensive by launching a hostile offer for Martin Marietta, another aerospace company. Martin Marietta, now partnered with United Technologies (represented by Felix), countered with its own bid for Bendix. Ultimately, though, Allied won Bendix, but not before Bendix had acquired 70 percent of the public equity of Marietta and Marietta had acquired 50 percent of the public equity of Bendix. Allied ended up with Bendix and 38 percent of Martin Marietta. The two-month battle during the summer of 1982 played into the media's fascination with takeovers. There were the high-profile bankers of course, including an increasingly prominent M&A banker at First Boston named Bruce Wasserstein, but this mess had four huge corporations fighting a public war on multiple battlefields. There were more fronts than World War II. There was even the additional spice of the revealed affair between Agee and Mary Cunningham, one of his executives. Felix was outspoken in his criticism of his fellow bankers in this episode, too. "There's a general perception that investment banks' fees are too high, and that they don't earn them," he said. "That opinion is so widespread that the investment banking community had better pay attention to it, or someone will pay attention for us."