How familiar were you with Lazard's history and its problems when you joined the firm at the start of 2002?
I knew Lazard very well over a long period of time. I knew a lot of the people. But I also spent a lot of time thinking about the history of Lazard and also a lot about the history of investment banking, the structure of investment banking.
Because of difficulties as to the structure of succession…a dozen senior people had left, and the younger people who were really excellent and who stayed weren't yet fully developed. I had to remedy that as the first problem. The second problem is just that the world had changed and the cell theory of investment banking didn't work anymore.
What's the cell theory?
The cell theory is that you get a partner, he gets a couple of assistants, and he works on his own. You get a series of cells. If one of them doesn't work, you lop it off.
What we've moved toward, and what I believe in, is an integrated team approach. The thing that has changed is that problems have become more complex. You need industry specialists, geographic specialists—all of that… It's not the situation any more of having the wise man—one guy—who can say, "Ah, that's reasonable." You still have to have those people, but you also need industry expertise and you need local knowledge.
The old Lazard was famous for its infighting. How did you begin to address the problem of getting partners in New York, Paris, and London to cooperate?
You have a strategic plan and a tactical plan. The tactical plan was to change the compensation system. If you were in Paris, you got paid more if you didn't share information with someone in New York, because if you did, the fees had to be split and therefore your share got less. It's not that people were venal or behaving otherwise than the way they were structured to behave. It was strange.
So how did the compensation system change?
Oh, I just ended all that. It's not split. What you end up doing is using a system I had at First Boston, where you say, "O.K., everybody's getting credit and we'll judge you as an individual, including on teamwork and leadership and all these other things."
Remember, the thing about Lazard is that it's not a normal hierarchical organization. It really is a merit partnership. I have an unusual function because I'm the presiding partner, and obviously that's about leadership. But I assist people on deals only if they want my help. The fact is, you don't say to Bruno Roger [a top partner in Paris], "Hop three steps and do a turn."
So Roger can't dance?
No, I wouldn't say that. That's your comment. It's that our foreign partners are people of substance in their own communities. I'm fortunate enough to have an international background, which most people don't quite realize about me. I lived in England. I went to school there. I have a lot of international exposure just from the old Credit Suisse days. When I started at Lazard, I spent most of my time in Europe. I knew the Americans already. I knew what to do there.
Yet the impression created by news coverage at the time was that the resistance to the IPO and other changes was most intense in Paris.
I would say that was never the case. At the time I came in, everybody—every single person—at this place had job offers from some place. I said, "Here's our message, here's where were going. If you believe in the place, great. If you don't, get out of here."
You were really that blunt about it?
Oh, yeah, because I knew I could recruit. I wasn't worried about that.
In fact, you hired away so many top bankers from other houses that it caused friction between you and Michel David-Weill (Lazard's longtime principal owner and Wasserstein's predecessor as managing partner).
Yes, but despite all the crazy stories, we didn't have to pay people more than they were getting paid because they wanted to come.
David-Weill brought you in to revive Lazard. How did he think you were going to do that without hiring from the outside to replace all the bankers who had left?
He understood I was going to bring some people in, but he didn't realize the scope of the change.
Did you resent David-Weill for opposing your proposal to taking Lazard public?
Michel was being pressured by different groups, including people who were for the IPO and a bunch of other people [who urged him] not to do the IPO. There were all sorts of confusing, contradictory things. Look, if a business has been in your family for a long period of time, it's all understandable. I'm not unsympathetic, except that in a fundamental business sense there's some elementary laws. You have to invest to have a future.
Unlike most of your larger competitors, Lazard doesn't lend money to corporate clients or invest alongside them to make acquisitions. How can you compete for M&A assignments just by offering advice?
If you think of buy-side advice as a barbell, there's the idea, there's a middle process, and then there's the execution of a transaction. We're quite strong at both ends of the barbell. Some of our good competitors are fine at execution, but they don't spend a lot of time at the conceptualization. Why? Because, one, they don't have to, and two, they have too many conflicts. They can't go recommend that you think about buying their client. They keep tripping over themselves on these things.
Good advice has always been in style. The only thing is that the bar has been set higher. The standard for excellence is higher. You can't just do commoditized business. You can if you're giving out capital. But if you're giving out advice, it has to make a difference.
Does good M&A advice command a premium price?
Yes, you can see it in the fact that our fees have risen disproportionately to our volume of transactions. What I would say is that there's a growing demand for sophisticated advice or extra advice and that clients are willing to pay for it.
I'm not extolling our model for other people. If I were running Big Bank, I wouldn't be rushing off to try to do what we do. It works for us. My view is, there's room in this business for a lot of different styles, and ours happens to be one place that works.
Are you still acting as senior banker on certain deals?
Sure. But that's not my objective. Actually I would rather be the junior banker on the deal, assisting people on particular things. It's fun for me, and I like the people side of the business. And I like dealing with people's problems.
What's nice about the M&A business is you get people at the inflection point of crisis, so you really get to know them. There's always a particular week or a day that's particularly difficult. For example, a board gets two offers: one's with a condition, one's without. What do you do? How do you compare a bunch of grapes with a crate of oranges? That sort of stuff, and thinking strategically what are the consequences of all that. I like doing that.
This year clearly has been a good one for Lazard, but how satisfied are you overall with the company's performance since the IPO in May, 2005?
Oh, I'm always looking far ahead. I'm three years out. I think companies will continue to simplify because that's what money managers want, for focus. But they also will globalize and consolidate, and that vortex of change—the reindustrialization age—will be with us for quite a time. That doesn't mean there won't be peaks and crashes, that we'll fall out of the [M&A] cycle. They will be there, but the general environment, I think, will be good for a sustained period of time.