On at least one occasion--in advising Levitt and Sons, the Long Island-based tract-home builder and suburban scourge--Felix found himself on the other side of ITT. Lazard's part in the sale of Levitt to ITT, which began in 1966 and closed in 1968, illustrates the nuanced role an M&A adviser often plays in a CEO's most important decisions. It was then especially true, and remains so, a world of social salons and clubby relationships where the best bankers are as much armchair psychiatrists as financial engineers. No one was better at mixing and serving as fine a cocktail of these subtleties than Felix Rohatyn.
Equally fascinating, though, was how little Felix appeared to know about what Levitt actually did before going into the assignment's kickoff meeting with Joel Carr, the general counsel of Levitt, even though, because it was a public company, any number of financial reports would have been available to him. "Apparently Levitt's forte is his ability to undertake the construction of large agglomerations of single family dwellings and shopping centers at low cost," Felix later wrote Andre. "What the company needs for future expansion is the ability to bank sizable amounts of land for future operations." That lack of detailed knowledge of Levitt's business was entirely consistent with an era where M&A bankers were generalists and tacticians; Lazard, more than any other firm, worshipped at that particular altar. And Felix was its high priest. The thinking was that management knew its industries; the Lazard bankers were specialists in the art of M&A regardless of industry. (Now, of course, bankers, even at Lazard, must be both industry and product experts.)
Felix was very enthusiastic about the Levitt assignment, even though at $40 million it was a small deal, made even smaller because Felix agreed to split the fee with Wertheim & Company, Levitt's longtime banker. Then there was the matter of Levitt's personality, which Carr must have given Felix enough of a sense of for Felix to warn Andre. "Mr. Levitt is apparently a rather mercurial individual with a highly developed sense of his own importance and requiring a somewhat highly personalized approach. He knows you by reputation and Carr believes that at the appropriate point a meeting between you and Levitt should be arranged." Felix went on in the memo to muse about potential acquirers of Levitt, including large oil companies, because "they are already active in the real estate business...plus the fact that they have the cash resources required in any kind of a land banking operation," or "companies like Alcoa, Kaiser, or eventually, Georgia Pacific." Felix concluded, "In any case, I believe that, from everything I have been told, in its field Levitt & Sons is the number one company; its current business seems to be profitable and growing and if proper safeguards can be taken for retention of management it should be a saleable property. The problem will undoubtedly be Mr. Levitt's personal ambitions and requirements for continued unquestioned control over the operation once the company is owned by somebody else, and possibly an overly inflated idea of value. This, however, seems to be a proposition worth pursuing." There is no recorded response from Andre, which was his style. The best one could hope for in that regard was that he would return the memo, whether read or not, to its writer with a big A scrawled on it, indicating not a praiseworthy analysis but rather that he had seen it.
In any event, less than a week later, Levitt had signed an engagement letter with both Lazard and Wertheim agreeing to pay them together the lower of $500,000 ($250,000 each) or 1 percent of the total consideration received to advise on the sale of the company. (This agreement ended up giving Levitt a 45 percent discount on the fee.) This was at a time when one of Levitt's homes cost less than $20,000. Within a month of the signed engagement letter, Lazard had created one of the first "selling memoranda" used to solicit bids for a public company. The twenty-seven page document was unremarkable in every way, except for the fact that it was done at all--becoming most likely the first such document ever produced.
When the selling memorandum was complete, Lazard began calling potential buyers of Levitt. Felix quickly focused on his wonderful client ITT. But the initial response from Geneen was negative, in large part, Felix believed, because ITT was preoccupied with shepherding its bold attempted acquisition of the ABC television network through the increasingly sticky thicket of Washington regulators, who were starting to worry about ITT's M&A campaign.
On April 11, 1966, Peter Lewis, a Lazard associate working on the Levitt deal, wrote Felix a memo about other potential buyers of Levitt; it is highly unlikely Lewis would have written the memo voluntarily and showed one indication of what working for Felix was like. This analysis led Lewis to suggest to Felix that Lazard consider both electric utilities and, rather improbably, aircraft frame manufacturers, such as Lockheed, Boeing, and Douglas. When asked about Lewis's memo during his later congressional testimony, Felix disavowed its relevance: "This is an internal memorandum setting forth some ideas and views. They are just that. They are one man's ideas and views. We were having discussions with I.T. & T. at that point, and from that point on we didn't have any discussions with anybody else."
Felix's willingness to undercut his subordinates, as evidenced by his decision to distance himself from Lewis's memorandum, would become an unfortunate trademark and create much resentment toward him from other Lazard professionals. Felix had a nasty habit of cozying up to younger partners and senior vice presidents and seducing them into working for him on his deals. These unsuspecting men, and the occasional woman, would slave away for Felix, and bask in his enormous spotlight, before being summarily dismissed or undermined. Then some other poor soul would suffer the same fate. Despite his deal-making prowess, many partners over time came to view Felix as more of a liability to the firm than an asset. "The thing that strikes me about working for Felix is that he always wanted to be in control of the plane," one partner recalled, disapprovingly. The irony, of course, was that since Felix was so good at what he did, he always found himself in the midst of the most important or interesting deals. So, naturally, young ambitious bankers wanted to work for him and be part of that excitement. Unfortunately, he was well aware of that attraction and took advantage. He became the third rail of investment banking. "Working for Felix was very difficult because it was so unrewarding," said one longtime partner. "He never wanted you to get any credit with the client or, for that matter, within the firm." Lamented one banker, "Working for Felix was a death sentence." Partners often complained that Felix had no loyalty to them. Once, David Supino was discussing this aspect of Felix's personality with Percie du Sert, the CFO of Renault, a longtime Lazard client. "No, David," du Sert said, "you are wrong. Felix is loyal, but his loyalties are successive loyalties."
Lewis's thoughts on other buyers for Levitt aside, Lazard continued to push for a deal with ITT, which, in May 1966, was suddenly smitten with the prospect of owning Levitt. ITT made an offer of $16.50 per Levitt share, all in ITT stock. The offer valued Levitt at about $51 million, about 50 percent premium to the then trading price of $11 for each Levitt share. Lazard recommended that Levitt pursue a deal with ITT. The two sides continued to negotiate, though, and conducted due diligence sessions at Levitt's Lake Success headquarters. Soon, ITT revised its offer for Levitt to $17.50 per share, or $54 million, a 59 percent premium. Levitt continued to hold out, and on August 8, 1966, Felix sent Geneen a letter with "a small list of questions" that Levitt still had along with Felix's answers to the questions "based on my prior knowledge of ITT and the way it operates." He suggested to Geneen that he, Levitt, and Felix "have lunch" in the middle of September to "clarify these points." The two sides did meet on September 15, 1966, and Geneen's notes from the meeting are on a slip of paper with the headline "Important Concepts," in his own hand. Geneen noted, "L. is unique. When housing was declining, they're 30% above budget." The deal trudged on. It was still not done by early 1967, and Levitt's stock price kept going up based, in part, on a series of marketing meetings Bill Levitt had arranged with Wall Street research analysts.
Apparently, Levitt's "educational campaign" with Wall Street had begun to pay off as the Levitt stock was then at $19 p
er share, a big move up. On February 28, 1967, in response to a request from Andre for an update, Felix produced a three-page memo. Because no deal had been achieved with ITT, Levitt returned to the idea of doing a secondary stock offering and wanted his bankers' view of that option, given that the stock had risen materially. "The Levitt stock is undoubtedly not cheap at this price," Felix wrote to Andre. "A considerable amount of glamour has been generated over the last few months because of the potential recovery of the housing market, the Company's 'New Cities' program, and the Company's unique record in the industry." Felix further explained that he had had a conversation that day with the Wertheim banker Al Kleinbaum, who also thought the Levitt stock "too high," and described how Kleinbaum thought a public stock offering at this price "would be undesirable until such time as the earning power foreseen for the coming year actually becomes apparent." But since Levitt wanted to sell an additional 450,000 shares, which together with the existing 550,000 shares already public would give the company 1 million shares traded publicly and qualify for a coveted New York Stock Exchange listing, Lazard and Wertheim were faced with having to give their professional opinion to the CEO.
Felix sought cover. First, he spoke with his old classmate Joel Carr, the general counsel at Levitt, and discovered that Levitt had agreed not to receive dividends on his stock until the end of 1967, an agreement that could not be changed. Selling the Levitt shares without the capability of receiving the same dividend paid to the other public shareholders was a nonstarter. Therefore, given this restriction, a secondary was not practical at least until the end of 1967. "This is probably just as well," Felix wrote, "since, in my judgment, telling Bill Levitt at this point that his stock is overpriced for purposes of making a public offering would be psychologically most undesirable and I would hope that this question could be avoided altogether or," and here Felix conceived of a classic investment banker ploy, "if Wertheim is somewhat cautious on the current level of Bill Levitt's stock that, since it will not cost us anything we can be somewhat more bullish." Felix went on to recommend that as an alternative to the ITT deal, a secondary stock offering be considered for early 1968 plus an acquisition program of other troubled builders, suppliers, or companies "whose activities could be brought to bear, such as insurance, mortgage servicing, title guarantee, etc." All of these options would, of course, be moneymakers for Lazard.
Still, Felix preferred the ITT deal. "It may be that alternatives to ITT should be discussed, although I believe that we should make a strong pitch that ITT is probably the best ultimate answer to Bill's problems and that during the next few months everything should be done to try to consummate that transaction on the most favorable terms possible," he wrote.
Finally, on July 11, 1967, there was a little movement from ITT. In the face of an unanticipated antitrust challenge from the Justice Department on its ABC deal, ITT decided to abandon that increasingly controversial merger and turned its attention back to the long-simmering Levitt deal. On July 22, ITT and Levitt announced the two companies had agreed to acquisition terms, valuing Levitt at about $91.3 million, more than double the value of the company when Felix attended the first meeting with Carr in January 1966. The Levitt stock had been soaring throughout the first half of 1967 and closed at $28.75 the day the merger was announced, just below the $29.07 per share the ITT deal was worth to Levitt shareholders. While the process of the Levitt deal for Lazard must have been extremely cumbersome and required much hand-holding, especially as ITT delayed repeatedly and there were clearly no other buyers around, the outcome for Levitt shareholders was better than could possibly have been anticipated.
Ironically, the loser in the deal was Lazard, which benefited not at all from the stupendous increase in Levitt's market value. The terms of Lazard's fee agreement called for the fee to be the lower of $500,000 or 1 percent of the total consideration received by Levitt. At $91.3 million, 1 percent was $913,000. Unfortunately, with $500,000 being lower than $913,000, $500,000 became the operative fee, which, when split with Wertheim, amounted to $250,000 for Lazard for almost two years of work. After "advertising" expenses of $24,310.76 (half of which Wertheim absorbed), Lazard pocketed $237,844.62 when the deal closed in February 1968.
Once again, though, as with his relatively inconsequential take on the Avis deal, Felix turned Lazard's small payday on the Levitt deal into something far more meaningful: a December 13, 1967, appointment to a coveted seat on ITT's board of directors and on its executive committee. The so-called Lazard ITT board seat, which Andre had demanded of Geneen two years earlier, would be occupied by Felix until 1981, and after that by Michel, until he relinquished it in May 2001. In the decades before the passage of the Sarbanes-Oxley Act, in 2002, made it untenable for an investment banker to sit on his client's board, such board seats were much sought after by bankers as a way to garner the most insight into their client's strategic thinking and, of course, to make sure the banker's firm walked away with the lion's share of the investment banking business.
With the Levitt deal finally concluded and Felix on the board, Lazard resumed its representation of ITT on the company's increasingly aggressive acquisition campaign. In 1968 alone, Lazard represented ITT in its $293 million acquisition of Rayonier, the nation's largest cellulose manufacturer and a large owner of tracts of timber (a $600,000 fee); its $280 million acquisition of Continental Baking, the nation's largest baker (a $400,000 fee); and its acquisition of Pennsylvania Glass Sand Corporation, then the country's biggest producer of silica and clay for glass and ceramics (a $250,000 fee). In 1969, Lazard represented ITT on the acquisition of Canteen Corporation (a $250,000 fee) and United Homes (a $50,000 fee). In 1968, Canteen had been a client of Lazard when Lazard sold Canteen's Rowe Division for a $75,000 fee. The only large deal during these years that Lazard seems to have missed out on was ITT's $193 million acquisition of the Sheraton hotel chain. Still, Lazard had nearly a monopoly on ITT's advisory business. This fact, while well hidden from the general public, was most likely of no interest to the greater populace, either.
IT IS TEMPTING today to shrug with indifference at these relatively small deals and smaller fees. But in the late 1960s, these deals and fees were considered enormous, and portentous of significant change, so much so that Congress began an unprecedented--if utterly unheralded and all but ignored--investigation into what were then known as "conglomerate corporations," companies such as ITT and Gulf & Western that, with wild abandon, seemed to be acquiring companies far beyond their traditional lines of business. Under the auspices of the then-long-tenured Jewish Brooklyn congressman Emanuel Celler, the House Judiciary Committee began, in October 1968, a "comprehensive" study into the economic and political significance of the merger activity of conglomerates.
Celler's subcommittee decided the best way to get a handle on the wave of merger activity would be to select six conglomerates, study their acquisition strategies, and interview their CEOs. These companies--ITT among them--were abetted in their acquisition activities by "the assistance of a few advisers," who also came under congressional scrutiny. Lazard was singled out by the subcommittee for close examination because of its role advising ITT, which quickly took center stage in the hearings.
On December 3, 1969, Felix testified for two hours and twenty minutes before the subcommittee, with partner Ray Troubh and associate Mel Heineman at his side. Neither of these men uttered a word. Felix later claimed he couldn't even recall making the appearance before the Celler commission. For the intensely secretive house of Lazard, these hearings were an unprecedented public bloodletting. Not only did Felix's testimony lay bare for all to see for the first time the inner workings of the firm, but Congress forced Lazard to turn over thousands of pages of documents to the subcommittee about everything from who worked for the firm, by name, to the intricacies of the Avis sale to ITT. The documents revealed that Lazard earned more than $16 million in fees advising on seventy-two transactions during this time period. More important, though, these pages provided
a prism through which to peer into Lazard's DNA.
Felix's testimony offered listeners a remarkable blueprint for understanding the nascent world of advising corporations on mergers, acquisitions, and divestitures. It was really quite a simple insight, Felix explained. "Our corporate clients should get advice on acquisitions in the same manner that they get advice raising money," he said. "A company, or the owner of a company, wishing to sell should seek professional representation of the same caliber as when he wishes to refinance a loan or go public." Simple, but before Andre and Felix came up with the idea, the business of advising corporations on their M&A activity did not exist. Felix then codified for the committee in layman's terms the four distinct roles an M&A adviser plays: initiation, analysis, negotiation, and coordination. These are the same roles played by advisers today. In the first phase, "Lazard will, from time to time, initiate or originate an idea for an acquisition at the request of a company wishing to expand or to diversify into a given area of activity," he said. "Conversely, it may be retained as an exclusive agent of a corporation if we can recommend an association which is both feasible and economically sound. Lazard's assistance has also been requested in past instances to assist a corporate client desirous of disposing of a segment of its business, such as a particular division or subsidiary." During the analytical phase, the Lazard bankers "would look into businesses and prospects of potential acquisition candidates, as well as of a company or companies which might consummate the acquisition. Such analysis may encompass the background of the industry involved, particularly with a view toward trends and industry direction and a detailed picture of the companies under study. Upon the conclusion of this phase, we are in a position to make a judgment whether a given combination will be in the best economic interests of the participants."
The last tycoons: the secret history of Lazard Frères & Co Page 12
