Felix Rohatyn, a storied deal-maker who once was the preeminent investment banker on Wall Street is dead. I owe him a personal debt even though I spent only a little time in his presence.
Royatyn’s and Paul Volcker’s deaths this week symbolize the end of an era, of a time in the business world and in finance where it was widely understood among influential men (then the people with clout were all men) that it behooved everyone, including those at the top, to enforce rules and standards of conduct. That isn’t to say that there wasn’t corruption or plenty of self-interest, but that there were generally accepted norms that they had to be kept within bounds.
The press has given ample coverage to Royhatyn’s history: a Jew born in Vienna whose family twice fled the Nazis, landing them in Rio de Janeiro before they eventually came to the US, then a young ski buff and middling student at Middlebury College who eventually obtained a degree in physics and then served in the Korean War. Rohatyn’s early work waystops included briefly touting Edith Piaf in English and working in a brewery before his father landed him a job at Lazard Freres in New York.
Rohatyn’s next chapters are better known. As one of the few French speakers in the office, Rohatyn managed to endear himself to the powerful and very connected Andre Meyer, in many respects the top private banker of his era. As Meyer’s protege, Rohatyn became an important player in the emerging mergers & acquisitions business, with the increasingly infamous Harold Geneen of IT&T as a core client. Geneen was a leading practitioner of go-go era conglomeratization, using his high-flying stock to buy up sleepy, low valued companies….who earnings, when added into the IT&T empire, would be valued at the vastly higher IT&T multiple.
This 1960s mergers boom, and in particular, the creation of sprawling companies in unrelated businesses, set the foundation for the explosion of the leveraged buyout business in the 1980s. These once richly priced companies later traded at a conglomerate discount. Getting control of them was the hard part; breaking them up and selling the parts for more than the former whole was close to shooting fish in a barrel.
Rohatyn became known as “Felix the Fixer” thanks to his deep involvement in the 1960s deal frenzy. His at-times controversial but effective job in keeping New York City out of bankruptcy and restructuring its finances put him on a completely new level; for instance, the headline of his ABC obituary reads Banker, New York City savior Felix Rohatyn dies at 91. Royhatyn had been appointed the chairman of Municipal Assistance Corporation which had control over the city’s funding and expenditures. In a testament to his negotiating skills, Rohatyn secured concessions from the city’s unions….yet became a good personal friend of their lead representative, Victor Gotbaum.
Rohatyn’s success in mergers and acquisitions came from the fact that he came to be prized as a trusted advisor to often-isolated CEOs. The M&A bankers I knew at Lazard back in its heyday joked that they specialized in abnormal psychology. But Rohatyn’s reputation included being willing to discourage corporate leaders from doing dodgy-looking deals. In reality, I have no idea how often that this actually happened. But that it happened at all in that high-testosterone, mercenary business was a departure.
I had my brief experience with Rohatyn in action in 1986. At McKinsey, I was a manager (meaning a mid level working oar) on a global capital markets study for Sumitomo Bank, then the second-largest bank in the world and the pre-eminent financial institution in Japan. Sumitomo had ambitions that were unrealistic for a Japanese institution to achieve on its own. Rather than just saying no, or talking them into something modest, we came up with the idea of a minority investment in Goldman Sachs, with substantial business cooperation in Japan and Goldman assistance on Sumitomo’s foreign efforts.
The choice of Goldman fell out analytically: the firm was at risk of losing its vaunted leadership position by still being private at a time when the size of a firm’s capital base was a critical factor in staying competitive. Goldman also stood to net gain the most from an association with Sumitomo in the then-key Japanese market. And better to invest in a highly-successful, highly profitable firm with a strong culture.
We analyzed the regulatory issues, structured the deal and even valued Goldman. But we were concerned that we had all gotten high on our clever idea. Goldman was the virgin queen of Wall Street. Despite their obvious need for private capital, would they entertain an approach from a Japanese bank? Sumitomo needed someone credible to make the pitch to Goldman.
We identified three possible intermediaries. Tt was critical that they not be perceived as competitive threats, hence boutiques. Lazard and the Blackstone Group were the first two picks. We had a third we didn’t wind up contacting.
McKinsey wound up getting the meeting with Pete Peterson and Steve Schwarzman first. We explained why we came to see them. We got 40 minutes (I kid you not, I checked my watch) of name-dropping by Peterson, of all the senior folks he knew in Japa. But that wasn’t why Sumitoma came to see him; had he bothered to listen, the matter at hand was in the US.
Then he and Schwarzman spent the next 20 minutes talking about Blackstone, and they make it abundantly clear how jealous they were of leveraged buyout king Henry Kravis (at the time, Peterson and Schwarzman were mere advisor types, their
looting wealth creating opportunities were far more limited than if they had oddles of investor and bank money to play with).
So in effect, they spent an hour telling us that they really wanted to be doing LBOs, that was SO much better paid than M&A, they wanted to grow up to be Henry Kravis, but since they hadn’t raised the money to do that yet, then yeah, our client’s deal might be worth their while in the interim.
I have never seen a pitch meeting (and this had been arranged at the senior levels of the firm) devolve into such a naked display of personal greed. The two partners who were there with me, neither one of them naifs, were as appalled as I was. As much as I have seen a lot of unprofessional conduct in my life, this still ranks as one of real doozies.
The contrast with Lazard could not have been more stark.
Rohatyn came to the meeting with the firm’s #2 partner and two addition partners. The most junior one got coffee.
The Sumitomo client team leader did the talking, outlined the proposed deal crisply and then asked Rohatyn, “What do you think?”
Rohatyn said, “I think it’s a terrific concept.”
That was the right answer if you want the business. That reaction gave us all at McKinsey great relief. Even if Rohatyn actually wasn’t 100% on board, it meant he thought there was enough there to make it worth the firm’s time.
Rohatyn did work on the deal personally. McKinsey also participated in some of the early meetings, and I wound up sitting next to Rohatyn because he had not worked out Japanese protocol (senior people in the middle of the table, juniors at the end).
Not surprisingly, Lazard eased McKinsey out. Dealmakers don’t want pesky consultants looking over their shoulders. And I learned much later (ironically from Covington’s Gene Ludwig, who I engaged as my lawyer later, before he became head of the Office of the Comptroller of the Currency) that Goldman had conspired against Sumitomo by offering to handle the Fed, then raising the specter of Japanese creeping control. In reality, Sumitomo didn’t begin to have enough people with remotely adequate English skills to attempt that even if it wanted to and the bank knew that well, plus its position as limited partner prohibited it from having any managerial say in Goldman. So the Fed nixed the business cooperation elements that McKinsey and Sumitomo had regarded as important, and gave the bank only 24 hours to make up its mind. Sumitomo reluctantly went ahead. In the 13 years of its investment, it made a 24% compounded annual return in dollars. It never computed the return in yen, which would have been higher.
Without going on overmuch, Rohatyn making the Sumitomo investment in Goldman gave me a career boost.
Rohatyn still suffered later disappointments. Clinton had wanted him to be Fed vice chairman. Others had suggested he be Treasury Secretary. Neither came to pass due to Administration fear of Senate opposition. Instead he wound up with the consolation prize of being ambassador to France, a post he reportedly enjoyed.
It’s a shame because Rohatyn despite imposing austerity on New York City, had New Deal sensibilities, unlike Alan Greenspan or Robert Rubin. Rohatyn’s first book was Bold Endeavors: How Our Government Built America, and Why It Must Rebuild Now, and it was a series of case studies on US infrastructure successes, and pitch for a revival of large-scale, public funded projects.
Rohatyn was later turfed out of Lazard in a power struggle that led to the installation of the stylistic antithesis to Rohatyn, “Bid ’em Up Bruce” Wasserstein, for his famed ability to talk CEOs into crappy deals. He became chairman of Lazard just before its public offering in 2005. Rohatyn founded his own firm.
I wish I could again find an interview with Rohatyn from the 2000s. His bushy eyebrows made him look a tad amused and one could read that into this talk. He said without naming names that he was sought out for deal advice on a regular basis and wondered why, since many clients seemed set on sticking to their originally-planned course. I can’t recall the particulars of what he said, but he made it clear that his sensibility was at odds with a lot of current practices. He didn’t inveigh against greed or short-termism even though those were the big sources of divergence between him and those who wanted his views. And he didn’t seem resentful that his advice was often ignored. The world had gone in a puzzling and unwise direction. He wished it were otherwise but accepted his inability to do much about it.