The last tycoons: the secret history of Lazard Frères & Co (89 page)

Steve was more than a little giddy with this turn of events and the possibility of transforming the firm. Seconds later, as everyone was leaving the stuffy conference room, Michel pulled Steve aside and into his sparse office. There was a couch, the priceless Vuillard painting of his grandfather, and his desk, with nothing on it. Michel spoke. Imitating a French accent, Steve recalled his exact words: "'Look, I have only two questions about this. One, what will you do with Mr. Verey?' Because there was nobody in Paris who could run it. Bruno [Roger] didn't want to run it; he was a little old, and the younger guys weren't quite ready. That was an advantage we had. Verey was the problem. So he said, 'You know, whatever you decide, you should think about Mr. Verey. He's a good guy. If you humiliate him, he will leave. You should find a place for him.' I said, 'I understand all that. What's the second thing?' And he said, 'Me! You know, I think I can be helpful,' and I said, 'Of course you can, and I want you to be helpful.'"

Despite the foreshadowing of this odd encounter with Michel, Steve was euphoric. He called Maureen and told her what had transpired and how it now looked like he might be finishing out his career at Lazard after all. With renewed vigor, he immediately set to drafting version six of the "Framework for Governance." "I said to myself, if I were starting from scratch and I wanted to do this right, what would I do?" He worked over the weekend, sending versions back and forth to Sally Wrennall-Montes, his assistant, indicating to her how the previous, unsatisfactory draft number five should be revamped and rewritten. In Steve's revolutionary blueprint, the old Lazard partnership agreement would be scrapped, along with Michel's absolute authority, and in its place would be established a more traditional corporate governance structure. This would be nothing less than the democratization of Lazard.

"I set it up so that the partners in effect elected a board and the board picked the CEO," Steve said. "The board could also fire the CEO, and the board was mostly working partners. I was always prepared to basically live or die by what the partners wanted. This proposal basically codified that commitment and said if the partners aren't happy, they can vote you off the island." Instead of a typical board of directors, though, the newly merged Lazard Group was to have a twelve-member supervisory board, to meet twice a year, consisting of three "capitalists" (the actual owners of Lazard's equity, for instance, Michel, his sister, and Pearson) and nine "working partners." Michel was to be the first chairman of the supervisory board for an initial five-year term. The board would enjoy a myriad of powers, among them the ability to hire and fire the CEO and to approve the sale, merger, or initial public offering of the firm. During the first five years of Michel's chairmanship, though, he would have the unilateral right to veto such an event.

Under Steve's construct, there was also to have been a nine-member management committee that would meet weekly and be chaired by the CEO. The management committee would make all compensation decisions as well as all decisions regarding promotion, hiring, and firing. The initial officers of the Lazard Group would be Michel, as chairman, Steve, as president and CEO, and Eig, Gullquist, Mezzacappa, Verey, and Braggiotti. Steve anticipated a formal announcement of the agreement to merge the three houses by Christmas 1998 and set the start of the new millennium as the "target date for full implementation." He circulated the revised term sheets to the relevant parties on Sunday.

To the existing New York management committee, he attached a cover memo with some of his thoughts about his new proposal. "The organization described in the attached term sheet is intended to address the present inadequacy of the Lazard Group to respond to the competitive threat that it faces," he wrote revealingly. The extent of the proposed dilution to Michel's historic authority was now abundantly clear.

THE BETRAYAL WAS
swift. So swift, in fact, that Steve never even saw it coming. On Monday morning, Michel had the Paris partner Bruno Roger call Steve in his New York office. Roger, whom Steve described as a "very talented banker who clearly saw Michel as his most important client," complained from the outset of the call about many aspects of the term sheet. Along with the call, Roger had faxed to Steve a list of objections. "Michel had read the proposal," Steve recalled, "and realized it marginalized him. He gave Bruno all these reasons why it was a bad idea and told Bruno to call me, kind of 'as Paris,' to tell me why it was a bad idea." Of course, Roger played it straight during the phone call with Steve. It was only later that Steve learned the truth of what had happened from Braggiotti, who told him that Michel had "torpedoed it" and enlisted Roger as his messenger.

Steve knew at that precise moment
les jeux sont faits
for him at Lazard as well. Both his clarity and his disappointment were total. "I think Michel was balancing two things," Steve said later. "What was right for the firm and what was right for him. The problem was that what was right for him consistently won out. While I think he knew that we had to do something like this, he was never willing. This moment finally exposed that, because until then he had been saying, 'I would appreciate this,' or 'This is fine with me, but the French will never live with it and the British will never live with it.' So we went into this meeting, and everybody with the possible exception of Verey, who was very quiet in the meeting, said, 'Great.' Now Michel had to come out of the closet in effect and say, 'Okay, it's about me. It's not about the English. It's not about the French. It's about me.'" A senior partner added that he believed Michel did not want Steve to have one more bit of authority. "That's why he had Bruno call," he said.

Another partner remembered, incredulously, "Michel dictated the fax to Bruno, and Bruno sent it. He doesn't even deny it. And that fundamentally killed that deal." Damon Mezzacappa, Steve's close ally, remembered how excited he and Steve were after the Paris meeting. Mezzacappa, who had informed a few people he was thinking of leaving the firm, told Steve he would reverse course and stay on under Steve's leadership. "We were excited because I think we could have put the firms together and run them very effectively," he said. "The potential was just enormous." But after he heard about the call from Roger, "the whole thing came apart and that was the end."

For his part, Verey was none too happy about the turn of events that Friday morning in Paris. He was every bit as ambitious as Steve. He had been head of Lazard Brothers for almost ten years and had helped resurrect the franchise by hiring a number of talented bankers and spurring them on to great achievements. He was not paid as well as Steve--due in part to the fact that London, in 1996, made half of what New York made, Verey got $3.5 million, whereas Steve was closer to $9 million--but he loved advising CEOs. He still proudly remembered the day, in October 1997, when the
New York Times
reported that Lazard Brothers was involved in five of the six large mergers announced in Europe that day. Verey and Steve were, according to Steve, "friendly rivals." Quite frankly, Verey wanted the job as Lazard CEO, too, even though he had no interest in moving to New York, the firm's locus of power since World War II. He held out some slight hope that Michel would consider allowing him to run the firm from London. Verey had a certain disdain for Steve's American-centric thinking, his apparent lack of appreciation of the firm's history, and his lack of understanding of the outside forces swirling around the two European houses.

In London, Pearson, the U.K. publishing conglomerate, had been considering selling its stake in Lazard at least since the Texan Marjorie Scardino became CEO in January 1997. The rumors heated up again in May 1998 after Pearson purchased Simon & Schuster's educational publishing business for $4.6 billion. Conversations between Michel and Scardino about the sale were well under way by the November 1998 Paris meeting. Verey, who was on the Pearson board, felt Steve had failed to factor in how Scardino would react to his merger proposal. Then there were the series of interlocking French holding companies--some public, some private--all with funny-sounding names, that held a portion of Michel's (and others') stake in Lazard. Verey believed Steve had no appreciation for how these holding companies had to be integrated into the mix as well. The Paris meeting and the consensus that formed around Steve that morning, though, dashed Verey's aspirations. But even before Verey himself could begin to try to rectify the "Rattner putsch," as he called it, Michel had already counterpunched.

Looking back on this unexpected turn of events, Steve fully comprehends Michel's convoluted, if crystalline, logic. "At that point, he wanted me gone," Steve said, "because that meeting--not to be immodest--but that meeting in that room in Paris was like the French Revolution.

Michel saw me for the first time as someone who could rally the troops, not only in New York, which he had seen, but globally, in a way that was dangerous to him. At that point, it didn't matter how much revenue I produced. Michel's control of the firm was more important than the firm's success. He didn't fire me, but he was terrified about what might happen with me still rattling around." With Felix gone, Michel was the only person at the firm who could have stopped Steve. And he did.

Steve didn't resign at that moment, or even step down as deputy CEO, because both he and Michel were concerned about how the professionals in New York would react. "He didn't want me to leave, because he knew I had a lot of support in New York," Steve said. "He was afraid that New York would unravel if I left." Also, while he knew his "democratic" proposal to merge the firms was dead, the need for the merger hadn't diminished one iota, and he thought he could have some impact, on the margins, on the eventual--and inevitable--merger by staying in his seat a while longer. "I felt that it was important for all concerned that I give it my best shot to effect a happy resolution," he said. But in truth, there was also a certain lame-duck quality to Steve's leadership during the next six or so months.

For instance, in March 1999, he organized one of the first dinners for the New York partners at the Four Seasons. The ostensible reason for the dinner was to honor the handful of new partners. But when Steve got up to speak "very much from the heart," his words, while inspirational, sounded like a swan song. "Nearly two years ago we set forth on a great adventure together to see if we could successfully navigate some pretty fundamental changes in our Firm," he said. The changes, he said, were not related to business strategy, to corporate structure, or to Michel ("to whom I am indebted for the willingness he has shown to allow this experiment to go forward, even though at times I'm sure he had doubts"). Rather, he told his partners, what he set out to do was to overhaul how partners related to one another and to the firm. "Our great adventure has been to begin to forge a true partnership among the people in this room," he said. "Having a true partnership does mean treating each other with collegiality and with respect. Having a true partnership does mean working closely together in the recognition that coordination and combination of effort, where appropriate, can make the whole greater than the sum of the parts."

He went on in this vein a bit longer, taking no credit personally for the firm's successes in the previous two years, giving special thanks to the members of the management committee, and lavishing compliments on the talented rank and file. "I am grateful to all of you," he said in conclusion, "and I know the many talented colleagues who are not part of this group but who will in turn inherit this Firm from us in the future should also be very grateful to you. Working together, all of us--the more than 1,000 men and women of Lazard Freres NY--can bring this Firm to even greater heights in the future." This was Steve at his best.

Throughout the early and late spring of 1999, Steve continued to contribute to the ongoing discussions about how to merge the firms. There was a spurt of inconclusive activity in April. And in the second week of May, a meeting was scheduled at the luxurious Bristol Hotel in Paris, near the American ambassador's residence. "My last shot to get something sensible done," Steve said. But "draft #9.2" was not all that different from what Steve had proposed the previous November, with the major exception that Michel, not Steve or Verey, would be the combined firm's chairman and CEO, for an initial period of six years.

But Michel would not endorse even this proposal, making it impossible for Steve to win support for it from either Verey or Roger during the meeting at the Bristol. "Michel had a plan to merge the firms as a headless monster," Steve said. "He wanted to do a lot of things that I thought were wrong. I said, 'Look, if you want to do that, that's fine, but I don't want to be part of it. I think I've done a reasonably good job in New York, and I think I can do this. I am happy to be part of something that makes sense, but this doesn't make any sense.' I was exhausted after two years of beating my head against the wall."