The last tycoons: the secret history of Lazard Frères & Co (61 page)

Despite the continuing pall cast on the financial markets by the collapse of the United Airlines buyout, Steve wasted little time in revving up his deal machine, which quickly erased any lingering concern on his part about what he had been hired to do at the firm. By the end of his first year at Lazard, aside from the Providence Media mandate, Rattner had advised the cable mogul Jack Kent Cooke on the $1.6 billion sale of his cable properties to a consortium of TCI and Intermedia. He sold KKR's Storer Communications cable business to TCI and Comcast (for a $10 million fee), and he represented his friend Craig McCaw on McCaw Cellular's $6.1 billion hostile acquisition of the TV broadcaster LIN Broadcasting (for a $14 million fee). These were major deals, and major accomplishments for any banker, especially given the rocky markets.

Felix, too, of course, had managed to maintain his usual whir of activity. He and his partner Jon O'Herron found themselves deeply immersed in the controversial and landmark $15 billion merger between Warner Communications and Time Inc., creating Time Warner Inc. The deal, which started out as more or less a merger of equals between Time and Warner, quickly dissolved into one of the most contentious and litigious deals of all time after Paramount Communications, another Lazard client, made a last-minute hostile offer for Time. In response, Time, advised by Bruce Wasserstein at his new firm, Wasserstein Perella, changed the structure of the deal with Warner by agreeing to acquire it in a highly leveraged transaction that would burden the combined company for years. The merger, which Rattner also helped out with as needed, marked the culmination of Felix's longtime association with the Warner CEO, Steve Ross. Felix claimed never to really like Ross because he felt his greedy behavior caused him to do some unsavory things. He remembered receiving a call at his house in Southampton years later from Ross, when he was near death, claiming to be in Dallas, picking out a horse for his daughter Nicole. Skeptical that Ross was well enough to travel, Felix called his friend Paul Marks, the president of Memorial Sloan-Kettering. "Paul, I just got a phone call from Steve Ross from Dallas," Felix reported. "I did not know he was able to travel. Paul said, 'He can't. He's at Sloan-Kettering right now.' Steve Ross stage-managed his life until the end."

By this time Felix had also met the Hollywood legends Lew Wasserman and Sid Sheinberg, the two men who ran MCA, the owner of Universal Studios, the powerful film and television studio. MCA had attempted a hostile offer for SeaWorld, a theme park operator, that Felix eventually sold to Anheuser-Busch for $1.1 billion. After the SeaWorld deal was over, Wasserman asked to come by and meet with Felix at his Lazard office. "Which was typical of Lew," Felix said. He expected to be lambasted for the outcome of SeaWorld. Instead, Wasserman asked him to join the MCA board. "If we can't beat you, we want you to join us," Wasserman told him. Flattered, Felix explained his long-standing relationship with Ross at Warner, a major MCA competitor. With Ross's consent, though, Felix joined MCA's board, which included his old friend Bob Strauss, the Washington lawyer.

The years after the 1987 crash were funny ones on Wall Street. LBO firms were having a bonanza taking private public companies whose share prices had fallen precipitously. CEOs of American companies were running scared, out of fear that if they didn't take steps to improve the productivity of their businesses the sharp-elbowed LBO financiers would target them for a takeover. The steep drop in share prices in the United States also attracted the attention of foreign buyers, especially the Japanese. The high-profile deal that started the Japanese buying spree here was the successful $2.6 billion acquisition of Firestone, the iconic American tire maker, by Bridgestone, the leading Japanese tire manufacturer. Lazard and Felix, representing Bridgestone, put the two companies together after the Italian tire maker Pirelli, backed by the French tire maker Michelin--a onetime Lazard client--made an unfriendly $2 billion offer for Firestone. The Lazard bankers were so angered by the fact that the Michelin-Pirelli team had made such an audacious move without Lazard that the firm quickly sought out Bridgestone to make a superior--and successful--bid. Bridgestone's acquisition of Firestone was the largest Japanese purchase of an American company at the time, but obviously was not the last such large purchase.

Felix was not a stranger to the Japanese. He had represented Sumitomo Bank when it had acquired 12.5 percent of Goldman Sachs, in 1986, for $500 million (which turned out to be a fabulous investment). But the Bridgestone-Firestone deal was far more iconic. Not only did corporate America seem particularly vulnerable post-crash, but there was likely no more quintessentially American company than the ninety-year-old Firestone Tire and Rubber Company of Akron, Ohio. There were a number of years, before the Japanese economy crashed, when American politicians became frightfully concerned that the Japanese were "buying up our country." This fear reached a symbolic peak, of sorts, in 1989, when the real estate subsidiary of Mitsubishi took control of Rockefeller Center. Around the same time, Sony purchased Columbia Pictures from Coca-Cola for $3.4 billion. Soon, Congress was holding hearings to assess the potential fallout from these acquisitions.

Felix testified at the hearings despite having played a meaningful role in bringing about the worry--however silly and nonsensical it was--in the first place. He focused on the coming economic dangers for the U.S. economy in the 1990s if the federal budget was not balanced and long-term interest rates reduced. He also criticized the many Lazard competitors that were using their own capital to make risky bridge loans to help their clients complete leveraged acquisitions. "Market conditions may occur under which a bridge loan cannot be refinanced," he correctly predicted. As to the concern about foreign acquisitions, Felix simply acknowledged that it "is becoming an area of increasing economic and political importance," and then sought clarification on the rules of engagement. Afterward, more than one of his partners remarked on the level of cognitive dissonance that Felix must be able to withstand after, on the one hand, actively participating in the acquisition of American companies by Japanese companies and, on the other hand, being able to testify before senators trying to come to terms with the phenomenon--and not even acknowledge before them his own role.

Maybe it was because he was not yet finished playing that role. In the fall of 1990, Felix's friend and literary agent, Mort Janklow, asked him to lunch at the Four Seasons restaurant to meet Michael Ovitz, the uber-Hollywood talent agent, who was then the head of the Creative Artists Agency. Ovitz had just represented Sony in its acquisition of Columbia Pictures, and Felix had never met him before. He was plenty controversial, even in those pre-Disney years, for it was rare for someone who was not an investment banker to play a central role in a high-profile corporate marriage. But such was Ovitz's standing at that time that he was uniquely able to pull it off, much to the envy of traditional bankers. Perhaps, Felix thought, Ovitz was cooking up some new corporate assignation, and that was why Janklow wanted Felix to meet him. "Lunch at the Four Seasons, and breakfast at the Regency, are at the heart of New York finance, the arts, publishing and high-level gossip," Felix once observed. "You do not go there if you want privacy. You go there if you are not averse to publicity." After Felix and Ovitz chatted a bit about their mutual experiences working with Japanese companies, Janklow left the two men alone.

Ovitz then told Felix he had been working for more than a year with a Japanese company, Matsushita, that was interested in buying MCA. Ovitz said Matsushita believed MCA's mix of business--movies, theme parks, and music (after Felix had just sold them Geffen Records)--would mesh well, in a Sony-Columbia Pictures way, with its consumer electronics business. Ovitz insisted on confidentiality and told Felix the Japanese would walk away if there was a leak. He asked Felix to speak to Lew Wasserman about the possibility of a deal. "By asking me to arrange a meeting with Wasserman to broach the possibility of an acquisition of MCA, he was making me an interested party to a possible transaction and at the same time, as an outside director, putting me at somewhat of a fiduciary obligation to try to give his transaction a fair hearing," Felix recalled.

Thus began the usual two months of intense deal making between the unlikely protagonists--the Jewish Hollywood royalty, on the one hand, and the conservative, secretive Japanese businessmen, on the other. Felix remembered one Sunday night dinner, in November 1990, between the two sides held at the Hotel Plaza Athenee, ironically the very site of Felix's lengthy affair a few years earlier with Helene Gaillet. It was "one of the oddest dinners I have ever attended," filled with awkward silences between the top brass of both companies, punctuated by equally awkward non sequiturs, duly translated. The first course was melon and prosciutto. "I hear you have very good melons in Japan," Sid Sheinberg observed. To which Masahiko Hirita, a Matsushita vice president, responded: "Yes, we have wonderful melons because we have very well electronically heated hothouses." This went on for three hours. "I thought I was in a Kafka novel where the central character never knows whether he is crazy or everyone around him is crazy," Felix commented later. But the deal progressed, despite concerns about the cultural fit--and the potential political fallout. To try to grapple with the latter, Matsushita agreed to spin off to MCA shareholders WOR-TV, MCA's independent television station, and to transfer MCA's concession in Yellowstone Park to a new, American operator. Wasserman and Sheinberg were to be left alone by the Japanese to continue to run MCA.

When the deal was announced just before Thanksgiving 1990, it was, at $6.6 billion, the largest nonindustrial deal to that time. "This deal might be another feather in my cap and in Lazard's cap," Felix remembered, "but I still had a bad feeling about the whole thing." His instinct was correct. The deal was a total bust. Less than seven years later, and without a word to Wasserman or Sheinberg, Ovitz advised Matsushita in the sale of MCA, for almost $6 billion, to Seagram. (That deal proved to be a disaster, too, and Seagram eventually unloaded Universal to what became Vivendi Universal, an overly ambitious former French utility then run by the former Lazard partner, Jean-Marie Messier. Once again, Universal proved poisonous. To avoid a possible bankruptcy, Vivendi ended up selling Universal to GE, which combined it with NBC.)

All of these deals--whether by Felix or Steve or many others--were large, high profile, and industry transforming, the completion of which meant big fees for Lazard. The MCA deal was particularly sweet not only because of the ongoing dearth of M&A deals but also because the financial advisers--Ovitz and Allen & Co. for the Japanese and Lazard for the Californians--were small boutiques, not the big Wall Street behemoths, a further validation of the Lazard business model. Generating these fees, of course, year in, year out, was essential to Lazard because it has always been, basically, a one-product firm: providing financial advice on M&A transactions. So while the larger, multiproduct Wall Street firms, such as Goldman Sachs, Merrill Lynch, Morgan Stanley, and Citigroup, have many ways to derive fees from their clients, especially from raising debt and equity capital for corporations, Lazard had, by design, precious little of that capability. The word around Lazard, repeated like a mantra every January, was, "Now we have to start again from scratch." Somehow, just as Frank Zarb had described, year in, year out, Lazard was able to do just that.

In the post-credit-crunch environment of the early 1990s, Steve's ability to generate high-margin M&A fees was, not surprisingly, getting him noticed in the corner offices of Lazard's thirty-second floor, where Felix and Michel held court. Not only did Steve generate large M&A fees; he did so with clients that were not traditional Lazard clients. This gave him increasing authority and power. He was, of course, being well paid--to the tune of millions of dollars per year--and before long he was also being recognized and rewarded with leadership positions. At the end of 1990, the introspective and cerebral Loomis, then forty-two, had managed to regain his balance as the firm's loosely acknowledged head of banking, as Lazard referred to its leader of investment banking. Loomis was to provide some leadership and direction--a task he did minimally, at best, given his natural reserve and the constraints placed on him by Felix and Michel--and, most important, once a year, conduct performance reviews and pay the nonpartners. Michel still set partner pay at that time, an increasingly deeply flawed system that led to acute paranoia among partners but kept everyone on edge and completely loyal to Michel. But Loomis still had time for his thoughtful, if somewhat inscrutable, observations about the state of the partnership.

He delivered one such tome in March 1991 to his banking partners. "After one year of some involvement on my part in the coordination of our banking business, it might be worthwhile to share observations," he wrote, with some modesty. One of his main points was to confirm that Lazard was doing quite well, especially when compared with the disarray being experienced by the bigger Wall Street firms after the credit crunch. That said, though, he enumerated eleven "observations, more or less obvious," that he believed had the ongoing potential to hinder the firm in the future. These ranged from the usual laments about proper use of scarce professional resources to how to continue to compete effectively against the firm's two largest perceived competitive threats. "Wall Street remains in disarray," he wrote. "Having said this, Morgan Stanley and Goldman Sachs are effective competition, not only because of their excellence but also because they have in common an enormous sense of drive currently and an almost imperial sense of an international approach."

Loomis's paper also acknowledged that Lazard was "not a place where anyone is going to direct activity and bestow efficiency on the rest of us. Some of the inefficiency is inseparable from the strength of the place and some is a lack of effort on our part as partners day to day in a host of little ways. It is our problem and thus the solution is a shared response." The treatise continued in much this vein before concluding existentially: