The last tycoons: the secret history of Lazard Frères & Co

by William D. Cohan

  Felix, much more risk averse than Andre, perceived great honor and prestige in being the middleman, the enabler. He was also able to convince corporate chieftains to pay him millions in fees for his advice, without the firm putting up a dime. "Firms used to do M&A for nothing," Felix explained. "Rohatyn is in total contrast to Meyer," Anthony Sampson wrote in the early 1970s, "with none of the traditional bankers' smoothness and deep camouflage, and a stimulating openness of manner. He has crew-cut hair, a piercing expression, talks fast in a high voice, drives a small Toyota, wears an old raincoat, seems oblivious to surroundings." Felix had "total mastery of figures" and "enormous drive." And like Meyer, he hated to lose and was a fierce negotiator, "like a terrier with a rat," one observer noted to Sampson.

  IN MANY WAYS, Felix was the perfect man at the perfect time. Corporate America was on the precipice of creating conglomerate America, and Felix had the wisdom, experience, and gravitas to become the era's midwife--and to get paid handsomely for his services. The world got a peek at this revolutionary alchemy as early as 1962, one year after Felix became a partner of Lazard in New York, when Lazard advised Pechiney, a large French aluminum producer, to buy 40 percent of Howmet, an American manufacturer of aluminum castings for aircraft, for $18 million, some 36 percent above Howmet's then trading price in the market. The deal was a huge financial success for Pechiney--and for Lazard, which won most of Pechiney's follow-on M&A and financing business for years to come.

  Felix and Lazard came to dominate the M&A business. While Lazard continues to be among the leaders globally in providing clients M&A advice, there has been a virtual explosion of purveyors during the past twenty-five years. It is hard to conceive in 2006 how inchoate--even quaint--the specialized and clubby world of M&A advisers was forty years ago when Felix pioneered it.

  The key to Felix and Lazard's early success in the world of mergers was ITT--the International Telephone and Telegraph Corporation. Felix counseled the infamous Harold Geneen in the 1960s and 1970s as Geneen transformed ITT away from its roots in international telecommunications to become the symbol of corporate conglomeration--a journey that ensnared Felix in a political and legal maelstrom in the early 1970s and almost ended his career.

  CHAPTER 5

  FELIX THE FIXER

  Historically, Geneen's banker of choice had been Kuhn, Loeb, another prestigious Jewish partnership. Over time, though, Lazard, Andre, and Felix made small inroads. But the baby steps became a giant leap in 1965, thanks to a then-second-rate rental car company, Avis. It turned out to be a fateful moment.

  Meyer and Lazard first came across Avis in the summer of 1961. At that time, Hertz and Avis were battling for supremacy in the relatively insignificant business of renting cars, but the competition between them really wasn't even close: Hertz had revenues of $138 million, and Avis, with $24 million in revenue, was continuously unprofitable and struggling for its life. At the same time, Edward Rosenthal, the head of Kinney System Inc., was looking to expand his own tiny New York rental car business to complement his growing parking lot and funeral home businesses. Rosenthal and his son-in-law Steve Ross--who would later turn Kinney into what is now Time Warner--approached Hertz about buying the company, but Hertz had no interest. When they approached the struggling Avis, though, they were encouraged in their quest. As Kinney had never bought a business of the size or type of Avis before, the two partners sought the advice of David Sarnoff, then head of RCA. Sarnoff's nephew worked for Kinney. "Get in the car," Sarnoff told the Kinney executives. "I will take you down to see Andre Meyer." Andre and his "flunky," as Felix was then thought of--whom Andre brought along to meetings because "he knows how to use a slide rule"--together tried to broker a deal for Kinney to acquire the struggling Avis. But Ross ultimately declined, believing the risks too great.

  Sensing a financial opportunity, Andre and Felix pursued the deal on their own, after their client passed, and won a ninety-day exclusive period from the company, then publicly traded, to see if it could pull the opportunity together. Somewhat out of character for the fiscally conservative Felix, he became the deal's champion. The two Lazard partners quickly ran into the problem perennially faced by financial buyers: to wit, who will run the company? They had nobody, could barely understand the nuances of the business themselves, and realized the current management was doing a lousy job. They needed to find someone who understood the car rental business and who could give them an honest and quick assessment of the Avis deal.

  So challenged, Felix came up with the idea of asking a man named Donald Petrie to help. The imposing Petrie, with a face not dissimilar to a gargoyle on the facade of the Notre Dame Cathedral, was the former president of an international car rental joint venture between Hertz and American Express. In early 1962, he had just left the Hertz venture to return to practicing law, at a small firm on Long Island. "I get a call one day," Petrie recalled. "It was from Felix Rohatyn. I had never heard of Felix Rohatyn. The firm is Lazard Freres. I never heard of Lazard Freres. He says, 'Mr. Andre Meyer would like to meet you.' Well, I never heard of Andre Meyer, either. So I said fine, how do I do that? 'You come to the Carlyle,' Felix says.

  "So I go to the Carlyle," Petrie continued. "And since I'd never heard of him and I'd never heard of Lazard, I thought he was a guest, and I went and asked for his room number. And they said, 'No, no, no, you go up to the thirty-third floor.' So I went up and a man in a white coat took me into one room, sat me down, and I waited there for a while. And I looked on the wall, and there was a Manet and a Monet and a Corot and a Seurat. And I thought, 'Gee, this guy's a print nut. He's got beautiful prints.' Then they took me out and put me in another room, and there was a Picasso and a Renoir. And so I went up and I felt one of them. I remember saying, 'Holy Christ, these things are real. Whoever this guy is, he's not kidding.'"

  Petrie signed on for the due diligence phase of the exercise but declined Andre's offer to run Avis. Instead, he suggested for the job Robert Townsend, another executive at American Express, who was a year older than Petrie. Townsend was interested, primarily for the opportunity to run his own company and to be a significant shareholder. As for his salary, Meyer offered him $50,000 a year. Townsend turned him down. He wanted only $36,000. "That is the top salary for a company that has never earned a nickel for its shareholders," Townsend told Andre, who consented immediately and knew he had found the right man for the job. With Townsend on board, Lazard did the deal, as both Andre and Felix were convinced of its wisdom.

  In March 1962, Lazard, acting through a newly created affiliate, the Silver Gate Corporation, purchased for $5.5 million a controlling stake in Avis. The Avis deal was purely a venture capital transaction for Lazard, the idea being to fix the company and sell it as quickly as possible. Under the stewardship of Felix, Townsend, and Petrie, Avis became a fabulous success story. In three years, these three men turned a company that had an operating loss of $600,000 in 1962 into one gushing profits of $5 million by the end of 1965. The first step for Townsend was to eschew unnecessary overhead by slashing bureaucracy, cutting memos, and eliminating corporate secretaries. Andre also moved Avis's "world headquarters" to the Roosevelt Field Mall, on Long Island, from Boston. Andre had developed Roosevelt Field, a former airstrip, with Zeckendorf in 1953. "These people felt they were losers," Petrie later recalled. "They were people who were consistently beaten every time they tried to get their heads above water. They were beaten by Hertz, and they needed a lot of attention." Under Townsend and Petrie, whom Andre convinced to spend more and more time at Avis, the company's morale blossomed in part because they had the prescience to pursue the famous "We're Number Two. We Try Harder" ad campaign. Soon, "We Try Harder" buttons and red jackets were everywhere, making Avis, almost overnight, one of the most easily recognizable names in American business. The improved marketing turned into higher revenues, and the lower cost base turned the revenues into profits.

  With the turnaround firmly in place and proposed budgets easily surpassed, Townsend bega
n to lose interest in Avis, spending more and more time away from the office, infuriating Meyer, who preferred to be kept informed on a daily basis about the most minute details of the business and wanted his partners to work hard. "Townsend would torture Meyer," one partner remembered. "Andre would carry on about something and Bob would say, 'OK, Andre, have it your way. I'll be out on Monday. You send someone over to run the company.' And Andre would just go through the roof."

  Townsend explained his thinking to Petrie: "I'm ahead of your plan, Donald. I'm ahead of my plan. I'm ahead of any plan Andre could possibly have had. I'm not only on budget, I am ahead of budget. I'm ahead of our objectives on revenue, growth, return on assets, return on equity, and return on revenue. So what the hell do I need to be in the office for?" The relationship would soon become irreparable when Townsend and Petrie insisted on promoting a man Andre disdained to be the company's president. "You insist on this?" Andre asked Petrie. When Petrie responded affirmatively, Andre shot back, "All right, now I sell the company." And that is precisely what Meyer set out to do. First he tried to sell Avis to the Mobil Corporation, but Townsend's meddling caused the oil company to lose interest.

  Then Andre turned to ITT, this time without the involvement of either Townsend or Petrie. The negotiations between ITT and Avis began in December 1964 and proceeded quickly: the deal was completed less than a month later.

  For Lazard, the ITT-Avis deal was momentous. Not only did Felix and Andre turn a $5.5 million investment in three years into a $20.3 million bonanza for Lazard and its well-heeled investors, who all became large shareholders of ITT, but the deal was also an incredible windfall for Avis's long-suffering public shareholders, who owned the remaining 60 percent of the company (for which they received almost $32 million of ITT stock) when it had been on the verge of bankruptcy--which surely would have occurred had Andre and Felix not come to the rescue. And of course, Lazard was now the acknowledged "expert" in the car rental business, and so it was no surprise that the firm advised David Sarnoff when RCA bought Hertz, Avis's longtime rival, in 1966. Lazard received a fee of $750,000 for its advice to RCA, one of the largest M&A fees at that time. After the Avis deal closed, Andre pocketed about one-third of the Lazard windfall, about $7 million, and turned around and donated the astounding sum, at the time, of $2.5 million to New York University. He had hoped to make the donation anonymously, and at first did, but then the university beseeched him to allow for a public announcement. He yielded, and soon followed a "Man in the News" profile of Andre, a first, in the New York Times. "I'm terribly allergic to any kind of article about me," he said. "Maybe it's an excess of humility."

  For Felix, the Avis payoff was far more modest, stunningly so. After the deal closed on July 22, 1965, and all the outstanding Avis shares were converted into ITT shares, Felix received 454.1375 shares of ITT common stock and 330.1 shares of ITT preferred stock. Felix's first wife, Jeannette Streit, was also an investor in Avis, and she received 648.725 shares of ITT common stock and 471.8 shares of ITT preferred stock. Together, the Rohatyns' stock that day was worth all of $135,571.47.

  Not everyone was thrilled by the Avis deal. Petrie told Andre, "You have been screwed" by ITT on the price, because he figured the company's best growth was ahead of it still. But since one of Andre's mantras was "Nobody ever got poor taking a profit," it was difficult for him to see Petrie's point. Then there was Robert Townsend, the true architect of Avis's turnaround. It is likely he never forgave Andre for selling the company, and to a conglomerate no less. His experience at Avis led him to write Up the Organization, a New York Times best seller for seven months, where he laid bare many of his experiences. In the chapter "Mergers, Conglobulations, and Joint Failures," he wrote presciently about a coming era, with some passion: "If you have a good company don't sell out to a conglomerate. I sold out once but resigned. Conglomerates will promise anything for your people (if your stock sells for a lower multiple of earnings and has a faster earnings growth than theirs), but once in the fold your company goes through the homogenizer along with their other acquisitions of the week, and all the zeal and most of the good people leave."

  For ITT, the $53.1 million deal for Avis was its first successful diversification. In 1965, some 54 percent of ITT's revenue and 60 percent of its consolidated net income derived from overseas, with the bulk of its European sales being telecommunications equipment. With Avis, ITT had taken the important first step toward becoming the more U.S.-focused conglomerate Geneen envisioned. He was the Jack Welch of his day. "Even those who hate the man admit he's a genius," Forbes explained in 1968. And there were plenty who hated him. Who could love a man that told his senior executives one day, "Gentlemen, I have been thinking. Bull times zero is zero bull. Bull divided by zero is infinity bull. And I'm sick and tired of the bull you've been feeding me." He was a sponge for executive talent, though, paid top dollar for it, and was unabashed about pilfering.

  He also was an extremely aggressive--and successful--acquirer of businesses. From 1960 through 1968, ITT acquired 110 companies, about evenly split between foreign and domestic. In the first ten months of 1969, it completed an additional forty-eight mergers and had thirteen pending. In 1968, thanks to Geneen, ITT ranked eleventh on the Fortune 500 list, up from fifty-first in 1960, and its revenues increased 400 percent during that time period to just above $4 billion.

  ITT was the first corporate deal machine, and soon after the Avis deal closed, Felix became the grease. The Avis deal brought Lazard and Felix infinitely closer to the most aggressive corporate deal maker of his era, Harold Geneen, and led directly to the creation of the M&A advisory business and Lazard's domination of it. This was the real payoff for Felix from the Avis deal, not the $100,000 or so he pocketed. If Felix was not the architect of Geneen's acquisition strategies, he certainly was cognizant of them. He was able to charm Geneen when Meyer, Lazard's famous senior partner, could not, and became "practically an employee" of ITT by meeting the CEO at his office nearly every night at six o'clock.

  After the Avis deal closed, Andre all but insisted that he be given a seat on the ITT board of directors, a demand to which the strong-willed Geneen, a Brit, objected mightily. (Andre never had much respect for the British.) Felix's solicitous approach with Geneen proved far more felicitous. That Felix was "the best man always to placate" Geneen was the view of Stanley Luke, an ITT senior vice president. The return on Felix's investment of time began in 1966, when ITT hired Lazard to advise ITT Consumer Services Corporation (the new division created with the Avis deal) on its acquisition of Airport Parking Company of America. ITT paid Lazard a fee of $150,000 for that assignment. In 1967, ITT hired Lazard again to advise it on the acquisition of Claude Paz & Visseaux, a French audio equipment manufacturer, and paid a fee of $125,000. "Geneen is a very difficult person," Felix said in the early 1980s. "A very difficult person. But I always knew where he was going." The two of them together started a revolution in corporate deal making that continues, with the occasional bump along the way, to this day.

  Also in 1967, Lazard advised the Douglas Aircraft Company on its sale of the McDonnell Company, creating McDonnell Douglas (now part of Boeing). Douglas hired Lazard in late 1966, when the company was near bankruptcy, and Lazard put together a SWAT team of six partners to work diligently between Thanksgiving and New Year's to find a buyer for the company. Six bids for Douglas were solicited, and McDonnell was chosen the winner. Lazard asked for, and received, the first $1 million merger advisory fee for the McDonnell Douglas deal. "Actually," recalled Stanley de Jongh Osborne, the Lazard partner in charge of the deal, "we were entitled to twice that, under the terms of the contract. But we thought a million dollars was enough. Even so, Mr. McDonnell wasn't particularly pleased." (As a practical matter, buyers end up paying M&A fees.)