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

by William D. Cohan

  With the pace of activity on the Necchi deal having slowed considerably during the early spring of 1969, Andre and Cuccia turned their attention to another matter. Thinking that Lehman had been operating outside the parameters of their agreement, the two blood brothers decided to jettison Lehman Brothers from the five-year-old working arrangement. On March 19, 1969, Andre wrote a letter to a Mr. Joseph Thomas--and in a quaint touch addressed it "c/o Messrs. Lehman Brothers"--summarizing the meeting the two of them had had the day before. "I refer to our meeting of yesterday relating to the Memorandum of Understanding of December 18, 1963 among Mediobanca and our respective firms," Andre wrote. "I advised Mediobanca of our discussion, and they have concurred with our conclusions. Accordingly, on behalf of Mediobanca and ourselves, this is to confirm that the Memorandum of Understanding is terminated as of this date." Thomas signed on behalf of Lehman and returned the letter to Andre. Apparently, Andre would later explain, "behind the back of Mediobanca," a Lehman Brothers partner went to see an Italian company to suggest a deal, "which was absolutely contrary to the spirit of the agreement, and it is on that basis that the agreement was cancelled." For Lazard, with Lehman out of the picture, there was now a new arrangement with Mediobanca, where any and all applicable fees were split fifty-fifty. The timing was propitious. For his part, though, Felix would testify in 1973, he never saw the document at the time Andre negotiated it but was aware that Lazard "did have and do have a continuing relationship with Mediobanca."

  MEANWHILE, BACK ON November 2, 1968, ITT's management had completed a report about the opportunities that might derive from an ITT-Hartford combination. The code name for the Hartford was "Tobacco," and the so-called Tobacco Memorandum referenced "several opportunities" for the marketing of insurance to, for instance, Sheraton's 1.2 million credit card holders, Avis's 1.5 million credit card holders, Levitt's home owners, and ITT's more than 200,000 shareholders. Then, six days later and with Lazard's help, ITT bought a 6 percent "toehold" in the Hartford for $64.7 million (1,282,948 shares at $50 per share) from Insurance Securities Inc. (ISI), a San Francisco-based investment fund focused on the insurance industry. At the time, Geneen said publicly that the purchase of the shares, which made ITT the largest shareholder in the Hartford, was "an excellent investment in a leading company in the fire and casualty field." ITT had paid a premium to market of around 20 percent to obtain the big block of the Hartford stock. Geneen also said that the managements of the two companies had spoken about "areas of mutual interest." But the main reason for the purchase of the shares, according to Howard Aibel, ITT's general counsel, was "the long-range possibility that in the future we would be able to merge or make some other affiliation with Hartford Fire."

  The "long-range possibility" came precisely forty-four days later, on December 23, 1968, when, with Lazard at its side, ITT made the largest hostile takeover offer in corporate history when it unilaterally announced publicly its $1.452 billion "bear hug" offer to the board of directors of the Hartford Fire Insurance Company. The Hartford, founded in 1810, once had insured both Abraham Lincoln and Robert E. Lee. At the time of ITT's hostile offer, the Hartford was the fifth-largest property and casualty insurer in the country. Bradford Cook, a former SEC chairman, said of the two corporate adversaries: "Hartford--she's a blue-blooded lady, ITT--she's a lady of the night." In typical ITT fashion, the initial offer was about 40 percent more than the Hartford's publicly traded value.

  Felix had orchestrated much of ITT's machinations regarding the Hartford: he convinced Geneen of the deal's wisdom, advised him about how to go about stalking the prey, and had been in a position to know that the 6 percent block of stock was available. Lazard was one of ISI's important brokers, and Felix's partner Disque Deane had arranged for the sale of ISI's Hartford shares to ITT, for a fee of more than $500,000.

  From a regulatory point of view, ITT's decision to pounce on the Hartford could not have come at a more inopportune time, literally two months after the Celler commission had started looking into the perceived runaway power of corporate conglomerates. More disquieting, though, from ITT's perspective, was that there was also a new sheriff in town in the Justice Department in charge of antitrust matters. His name was Richard W. McLaren, and in contrast to his immediate predecessors, he held the somewhat novel view that conglomerate mergers should be challenged by the federal government based on section 7 of the Clayton Act, enacted by Congress in 1914 to strengthen the Sherman Antitrust Act of 1890. Section 7 prohibits mergers and acquisitions where the effect "may be substantially to lessen competition, or to tend to create a monopoly."

  McLaren explained his views to John Mitchell, Nixon's attorney general designate, and to Richard Kleindienst, his deputy, at an interview at New York's Pierre hotel, Nixon's transition headquarters, in December 1968. "I had an understanding with them when they offered me the job," McLaren later explained. "I made three conditions: that we would have a vigorous antitrust program; that we would follow my beliefs with regard to what the Supreme Court cases said on conglomerate mergers, and the restructuring of the industry that I thought was coming about in an almost idiotic way; and, third, that we would decide all matters on the merits, there would be no political decision."

  On January 16, 1969, just three weeks after ITT made its hostile offer for the Hartford, the Justice Department sent Harold Williams, the CEO of the Hartford, a letter asking for all the information in his files about the potential deal. The Justice Department had put ITT and the Hartford on notice that the Nixon administration would likely oppose the merger on antitrust grounds.

  Remarkably, McLaren was a Republican and was serving in a Republican administration, which most observers assumed would take a pro-business stance on antitrust matters. Soon, though, Mitchell was espousing McLaren's views. The attorney general said in a speech in June 1969 to the Georgia Bar Association that "the future vitality of our free economy may be in danger because of the increasing threat of economic concentration." He noted that mergers involving conglomerates had increased to 91 percent of all mergers in 1968, from 38 percent in the years 1948 to 1951. "These facts require us to move aggressively to counteract this trend," he said. None of this commentary could have pleased Geneen, CEO of the nation's largest pure conglomerate and a significant contributor to Nixon's presidential campaign. Indeed, from 1961 to 1969, ITT had acquired fifty-two domestic and fifty-five foreign corporations--thirty-three of the acquisitions coming in 1969 alone. ITT was in the Justice Department's crosshairs. When McLaren decided to seek a preliminary injunction against ITT's $148 million acquisition of Canteen Corporation, which was set to close on February 18, 1969, Geneen felt he had been provoked. And an unhappy Geneen would soon become a major White House concern.

  Today, in an era when cost savings are the sine qua non of most mergers, McLaren's objections to the ITT-Canteen merger on antitrust grounds seem stunningly antiquated. Yet for much of the first Nixon administration, his views ruled and had to be accommodated. Indeed, on April 29, the same day of the Canteen suit, Geneen wrote Felix of his worry--presciently as it turned out--that antitrust storm clouds were gathering in a far more substantial way than even when the Justice Department had blocked ITT's acquisition of ABC, almost a year earlier.

  McLaren's increasing aggressiveness aside, ITT pushed ahead with its pursuit of the Hartford in the spring of 1969, even though it fully expected the Justice Department to oppose the merger. In that vein, for $24.4 million, ITT acquired, with Lazard's help, another 458,000 Hartford shares at an average price of $54 per share. Now ITT owned 1,741,348 shares at a total investment of $89.1 million--a considerable sum at the time. To protect its investment, ITT, with Lazard's help, had to make sure the Hartford merger passed muster with both the Justice Department--a mighty big obstacle considering McLaren's ongoing opposition--and the IRS, which still needed to rule that the proposed stock merger would be declared tax free to the Hartford shareholders. Geneen exhorted his team to use its "full panoply" of resources to put "inex
orable pressure" on the insurer. And the feisty Brit pursued a parallel path in Washington. "I think that during the ensuing delicate period our posture should be one of extreme alertness and in your own apt phrase from an earlier conversation, one of 'inexorable pressure'--right up to and through the moment the deed is officially consummated," one ITT board member wrote Geneen early in 1969. As it turned out, through a series of extraordinary and unprecedented meetings with McLaren's bosses, Felix was the man who, in large part, orchestrated the application of the required pressure. That "inexorable pressure" would eventually lead to the humiliating resignation of an attorney general--Richard Kleindienst--and would sully Felix's golden reputation for years.

  On April 9, the Hartford board capitulated to ITT's takeover tactics, and the two companies signed a merger agreement. Felix had just returned from a two-week vacation in Vail. On his first day back in the office, he attended the firm's operating committee meeting, had lunch with Andre and Pierre and Michel David-Weill, the three of whom together owned the majority of the Lazard firms in Paris and New York, and headed over at 6:00 p.m. to meet with Geneen.

  He was present two days later for the ITT board meeting, on April 9, when the merger agreement with the Hartford was approved. But the specter of McLaren loomed over the deal. On June 23, the Justice Department announced it planned to oppose the Hartford merger--as well as ITT's proposed acquisition of the Grinnell Corporation, yet another Lazard assignment--on antitrust grounds.

  The consummation of the Hartford merger, as mentioned, was also contingent on the Internal Revenue Service ruling that the ITT stock being offered to the Hartford shareholders would be tax free. In other words, it was essential that when the Hartford shareholders exchanged their shares for new ITT shares, this exchange be free from capital gains tax at the time of the exchange. This is a fairly standard provision in most stock-for-stock merger agreements--just as it had been essential for Lazard in the ITT-Avis deal--and the IRS usually grants the request since, when a shareholder later sells the new shares, a capital gains tax is levied, so taxes are not avoided, only deferred. But of course, there were any number of important rules that came into play for the IRS to agree to the tax-free request; an extremely important one required ITT not to own any Hartford shares at the time the Hartford shareholders voted whether to approve the ITT deal. That vote was scheduled for November 1969--and of course, ITT had become Hartford's largest shareholder.

  Obtaining the IRS's tax-free ruling involved intense political pressure as well, but first Andre had to execute an arcane cross-border deal with the help of his old crony Enrico Cuccia, who was, to say the least, Andre's equal at subtle manipulation. That immensely complex deal, which amounted to illegal stock parking, would add immeasurably to Felix's mounting woes and almost lead to his professional undoing, and, many believed, led to Andre Meyer's death.

  While ITT had its merger agreement with the Hartford, the IRS required that the company, in order to receive its tax-free ruling, dispose of its newly acquired 1.74 million Hartford shares, some 8 percent of the then-outstanding Hartford shares. The ITT management focused immediately on this conundrum. (Geneen did take time out to invite Felix, in writing, to become an honorary member of the International golf club in Bolton, Massachusetts. "The course is scenic and exacting," Geneen wrote. "It has a few water holes and many natural hazards that call for accurate shooting." But alas, Felix didn't play golf.) It was not as easy as just selling the shares in the market. First, selling this large a block of stock, despite the merger agreement, would most certainly depress the Hartford stock price. Second, that price had already fallen well below ITT's average cost of about $51 per share and was trading around $37, giving ITT a paper loss of almost $24.5 million. ITT had no interest in perfecting that large a loss by selling the shares outright in the market.

  The Hartford shares had fallen mainly because of the general uncertainty about whether the deal would close. The Justice Department's opposition to the merger--indeed to ITT's entire merger program--merely compounded the problem of unloading the Hartford shares. Geneen decided that Felix was the only man who could help. On June 20, 1969, Howard Aibel, the ITT general counsel, wrote Felix: "Now that it looks like we will have a meeting of the Hartford shareholders, we must get busy on the job of disposing of the Hartford shares which ITT owns."

  By the beginning of August, having failed to find a solution on his own, Felix turned to Andre, who was at his house in Crans-sur-Sierre, to see if he had any clever ideas. That was when Andre hit upon the idea of having ITT sell the stock to Mediobanca. He knew Cuccia could make a decision quickly, and Felix had also taken Cuccia to meet with Geneen a month earlier in New York. Felix later testified to the SEC that Andre chose Mediobanca because "he thought they had the size, to my recollection, and that Dr. Cuccia was intelligent and aggressive and wanted to build up a relationship with ITT." Left unsaid by all was the belief--alas, unprovable--of some Lazard partners that Andre and his friends together owned a controlling chunk of Mediobanca beyond the 10 percent stake owned by Lazard in New York, making Mediobanca's help in this matter inevitable and personally profitable.

  Throughout August, Felix sent Andre a number of telexes, some typographically very difficult to read, that outlined the proposed deal. Andre suggested that three representatives of ITT meet with Cuccia in the Paris office of Lazard on August 28, 1969. Andre attended this meeting. His recollections about what happened in Paris in August 1969 came years later, in 1974 and 1975, as a result of any number of lawsuits that ended up being filed against Lazard for its role in the ITT-Hartford merger. By the time of his testimony, he wanted to distance himself from the deal. He said he provided no advice to Cuccia about how to conduct himself with the ITT executives because "Dr. Cuccia is a very cold blooded man and very clear and very realistic."

  The day after the Paris meeting, Felix sent a telex (through ITT World Communications) to Andre in Paris. "Have talked to both Geneen and Howard Aibel and believe that the economic features of transaction are okay but that the lawyers cannot sign until draft agreement has been cleared with Internal Revenue," he conveyed. "Believe it would be unwise and probably impossible to close transaction with Cuccia subject to reversal in November if subsequent problems with Internal Revenue Service but believe we should have IRS ruling as well as clearance of this transaction within framework of IRS ruling by September 15. ITT lawyers are therefore being instructed to get text that is acceptable to Cuccia and which in their best judgment would be consistent with IRS and bring it back here for clearance with IRS. Geneen most grateful for your efforts. Warm regards, Felix." Despite his obvious involvement in the deal, Felix would later seek to distance himself from it as well, giving life to the old Wall Street adage that success has many fathers and failure is an orphan.

  Finally, on October 13, 1969, the IRS ruled that the ITT-Hartford merger would be treated as a tax-free combination as long as ITT "unconditionally" disposed of all of its Hartford shares. On October 14, John Seath, ITT's vice president and director of taxes, wrote to the IRS and asked if it would find ITT's selling the shares to Mediobanca a satisfactory fulfillment of its requirement. Seath insisted that the proposed sale would be "unconditional," "as required by your ruling," and further elaborated: "There are no conditions on Mediobanca's ownership of the Hartford shares. It can hold the Hartford shares; it can give them away; it can sell them to ITT's competitors; it can vote as it wishes on any matter on which shareholders vote." Seath's characterization of the arrangement would later be determined to be misleading at best, when the whole transaction came under intense legal scrutiny for duping the IRS into providing the tax-free treatment. Seath also conveniently left unsaid whether Mediobanca intended to take any actual economic risk by purchasing the shares. Felix would later testify that he believed "Mediobanca had the option to make it riskless." Whereas the IRS took six months to issue its first ruling, with the heat ratcheted up and the clock ticking, it ruled one week later, on October 21, that the
proposed deal with Mediobanca would "constitute an unconditional disposition of stock for purposes" of satisfying its October 13 ruling.

  On October 28, 1969, Tom Mullarkey, Lazard's in-house counsel, called the ITT legal department to say that he had just returned from Milan with word that Cuccia had finally signed off on the October 7, 1969, version of the ITT deal--the very version that the IRS had signed off on a week earlier. He also said that Mediobanca was now awaiting payment of a commitment fee equal to .765 cents per Hartford share, or a total of $1,332,131.22. The payment to Mediobanca was approved and money wired the next day to Les Fils Dreyfus, in Basel, to pay such funds to "Lazard Freres & Co. for the account of Mediobanca."

  The soon-to-be-infamous October 7 seven-page document memorializing the agreement between ITT and Mediobanca raised circularity and obfuscation to an art form. There was a technical requirement that Mediobanca sell any shares through Lazard after first notifying Lazard in writing of its desire to do so. Lazard had also been authorized, if asked, to provide a minimum price at which Mediobanca could sell the shares to a third party, which was a mechanism designed to prevent Mediobanca from simply dumping the shares on the market to get rid of them at any price. Lazard sought, and received, an indemnification from ITT for the work it was to perform under the ITT-Mediobanca contract.

  In his "Memorandum to the File" regarding the closing, Samuel Simmons, ITT's European general counsel, acknowledged being told by Cuccia that Mediobanca had selected a third-party resale option in the contract; this meant that Mediobanca, with Lazard's help, would hold on to the shares until it found third-party buyers willing to pay more for them than ITT had. Mediobanca never intended to take any risk itself with regard to the shares and would simply pay over to ITT whatever price it got for them, less any fees and sales commission it was entitled to. Per the agreement, any profit or loss on the shares would be remitted to ITT. But this is hardly the same as an actual sale. The contract's convoluted and murky language--and its implications--would subsequently subject ITT, Mediobanca, and Lazard to a massive, decade-long legal battle and the attendant fiasco of negative publicity. Critics charged that ITT, with Lazard's help, was simply placing the stock with Mediobanca--to comply with the IRS requirement--and in the process, while receiving large, no-risk fees for themselves, buying more time for the Hartford stock price to recover sufficiently to avoid a loss on the original purchase, which is exactly what happened.