Last spring, Bruce Wasserstein received Harvard Law School’s 2007 Great Negotiator Award, joining a select group that includes Sadako Ogata, a former United Nations high commissioner for refugees, and George Mitchell, the former U.S. senator who led the peace talks in Northern Ireland. In presenting the award, Harvard Business School professor James Sebenius cited in particular the masterful deal making that went into Wasserstein’s 2005 coup at Lazard, in which he famously disassembled a century and a half of family ownership and took the fractious M&A and financial advisory firm public. By many accounts, Lazard’s IPO is among the most complex transactions Wasserstein has navigated—and indeed he keeps the nine bound volumes detailing the deal prominently displayed in his spacious New York office.
But Lazard’s IPO is just one of a multitude of big deals that Wasserstein has crafted over the decades. A graduate of Harvard’s business and law schools and Cambridge University, he’s been a major figure in negotiation and mergers and acquisitions for over 30 years. He has helped broker more than a thousand deals, worth hundreds of billions of dollars, as an attorney at Cravath, Swaine & Moore; as cohead of First Boston’s M&A practice in the late 1970s and most of the 1980s; as CEO of the investment-banking firm Wasserstein Perella Group in the late 1980s and the 1990s; and currently as chairman and CEO of Lazard. In 2006, the most recent calendar year for which complete data are available, Lazard’s closed deals had a total value of more than $300 billion.
That’s a lot of money. But, more to the point, it represents a lot of value. HBR’s editor, Thomas A. Stewart, and senior editor Gardiner Morse spent many hours at Lazard and interviewed Wasserstein, setting out to understand how he creates value as a manager, as a deal maker, and as a counselor to CEOs. How does he attract and manage talent, build and sustain knowledge businesses, size up companies and industries, and craft advice? Partly, the answers lie in his sheer and subtle brainpower; those who’ve worked closely with him will tell you that he’s among the smartest people—or perhaps the smartest person—they know. But it’s also how he combines intellect with an idiosyncratic creativity and doggedness (Wasserstein once said to a colleague, “I thought about this last night while I was sleeping”) that allows him to disassemble the most complex problems and devise novel solutions. With characteristic economy, Wasserstein describes his approach as discovering whether a deal or strategy “makes sense.” Such sensemaking seems to underlie every move he makes, and it has paid off handsomely. Following is an edited presentation of HBR’s conversations with Wasserstein.
You’ve always seen deal making as a kind of problem-solving game. Where did this approach come from, and how did it influence your early thinking about structuring an M&A advice business?
After I finished at Harvard, I studied at Cambridge University and wrote a thesis on British merger policy. When I joined Cravath, a New York law firm, I was therefore asked to focus on merger law. I worked on a lot of Wall Street deals, mostly asset acquisitions. These deals were very complicated and paper intensive. Not many people wanted to do them, because at the time public-offering work was more glamorous. But I liked doing them. I found them much more intellectually and creatively challenging.
One of my clients was First Boston, which didn’t have much of a merger business then—only a small group of generalists (who gave overall investment-banking advice to their corporate clients) that was supported by four young professionals. First Boston hired me to bring some technical depth and practical experience to the group. Its M&A business was generally slow, the deals were small, and the technology was primitive. The firm did only one or two deals a year at that time. So the questions were “How do we market the business?” and “What are we marketing?” and “How can we possibly compete with larger M&A businesses?” We decided first to execute deals really well and then to market that track record. Our competitors often delegated deal implementation to lawyers, which we felt was a mistake. We realized that understanding the nuances of deal terms and structure could have a tremendous financial impact.
Things were pretty dry for a while, but soon we had some breakthroughs, including a successful hostile offer. Since we had a small team, we gang-tackled problems. It was exhilarating. We gradually expanded the team and prioritized marketing targets. At first we simply approached the clients of other firms and said, “What you need is more attention and superior execution skills.”
That was a good start, because the odds were that a percentage of those people were unhappy with the advice they’d been getting. But we had to think about the long-term strategy for our business. We decided to separate the M&A advice, which was a CEO business, from the financing advice, which was a treasurer or CFO business, and appeal directly to the CEOs in our marketing. That was a very different approach at the time.
We had to have some distinctive expertise to market, so we built up industry areas within M&A and set up local offices around the country. We also developed a “creative department.” Its job was to think about the dynamics of industries and what changes within them would take place over the next five years. So when companies looked at their future, it was in the context of positioning themselves within a changing landscape rather than buying or selling a company by tomorrow. We also helped companies identify and focus on their hidden core strengths. For example, an international oil company might have potential in financial services because of its expertise in currencies and hedging.
Imitation is a form of both flattery and competition. Over the past decade, many investment-banking leaders have come out of that First Boston group, including my former partner, Joe Perella—and the diaspora of people who’d experienced this structure brought what they’d learned to wherever they landed.
Have you replicated or adapted this tripartite structure of industry expertise, creative capacity, and technical skills at Lazard?
The trend in investment banking now is toward industry specialization. There are very few people who divide their time between different industries and are generalists. What’s good about specialization is that the advisers know their industries well. What’s not so good is that in many firms the creative side has suffered, and it’s harder for them to have a broad perspective and make conceptual connections between the dynamics in one industry and those in another. Also, implementation skills often apply across industries, but the specialists lack the breadth of deal skills you learn from working in different industries.
As the world gets more complicated, the ability of one small team or one person to do a deal is disappearing. So, what we try to do at Lazard is blend the two models, bringing together creative generalists and industry and regional specialists. Let’s say we’re advising a French company on buying a computer services firm in India. We’ll bring in people with technology expertise, a local French banker, and someone with M&A experience in India.
At the same time, we’re careful to preserve the broad perspective, to prevent thinking that’s too compartmentalized. Our pharma people, for instance, were inspired by the advantages of scale that became apparent in the oil industry and drove its consolidation. Or if we’re looking at, say, the roll-up of the cable television business, we’re going to ask, “Is there an analogy with another industry, where the dynamics are similar?” If so, that industry is probably going to roll up as well. In that case, we should analyze what went right, what went wrong, and who did it well in cable, and figure out how to transport those lessons and advise firms in the other industry.
You have a reputation for thinking carefully about management structures. What’s your approach at Lazard?
The key to running Lazard is recognizing that we have a clear brand personality: global, trustworthy, creative, smart, agile, focused on advice. It is the quintessential intellectual capital business. I spend a lot of time and thought on management, but I try to find people who are more gifted than I am to actually do the administering. We plan the structure of management to make sure it’s consistent with our objectives. That’s a central skill set of managing a business where the people are the product.
When I came to Lazard, it had a variety of counterproductive structures. One was what I called the cell-theory structure: You hire a banker. He or she has three assistants. They keep all their information to themselves, and they fight for revenue with other cells. Another was our fee-splitting system, which was well intentioned but caused undesirable behavior. If you were in Madrid and you worked with a banker in New York on a deal, you’d split the fees. Fair enough. But that led the bankers in Madrid to do the deals on their own. That system might have worked in the past, but it generally doesn’t work now. Why? Because the world is so complex and interrelated that you lose your competitive advantage with that structure. It prevents the conceptual leaps I’m talking about. Lazard’s competitive advantage is working on difficult, complex assignments, so having a very deep, global team is a necessity, especially in light of the impact that globalization has had on industries.
You’ve created extraordinary collections of highly talented people a number of times. How do you attract, motivate, and keep them?
You attract the people your system invites. If you create a bureaucratic system and have meetings every day at 8:00 am and send a report card in at the end of the day, you may think, intuitively, that’s good management. That works for some companies. But if I did that, I’d lose my best people—the people I want. We sacrifice some degree of efficiency by deliberately having a somewhat less centrally managed culture.
We’ve been very fortunate. Since I’ve been here, we have had a very low turnover rate. Our culture retains people who like the atmosphere—it’s fun here. There’s a lot of trust. Individuality and creativity are valued. People have a great deal of independence. And they get satisfaction from the visibility of their work, particularly people who came from major banks where they didn’t have the same platform. While there’s satisfaction, of course, in being paid well for your work, there’s also satisfaction in finding elegant solutions that create value.
We’re thought of principally as an M&A advice business, but what we do runs broader than that—and that breadth is another thing that helps us retain talented people. We advised on the restructuring of Eurotunnel. We’re advising the UAW. We advise many of the governments in Europe and in a lot of other places around the world. We have a deliberate policy of working with finance ministries and other governmental and nongovernmental organizations to increase our knowledge and sophistication—but we also do it because our employees are happier when they’re doing a good thing. For example, if you’re in Belgium, and you’re giving economic policy advice to the government, the firm is not getting paid much for that. But if you asked the people involved, they’d say Lazard’s an asset for Belgium, which makes them proud of the company and happy with their jobs.
People also stay, I think, because we invest an enormous amount in developing the younger staff. Everyone gets a lot out of that. At the other end of the spectrum, if you look at our most senior people, many of us have worked together, on and off, for 10 to 30 years. That’s pretty rare in this business, and it creates continuity.
How do you develop individual talent?
We have and want to attract a network of stars—people who communicate and cooperate but are entrepreneurial and stand out as quality individuals, who are not the cogs in a corporate machine. Quality people must be managed with customized approaches. The idea is to create a hothouse where young talent is nourished by our culture and people are encouraged to think creatively, think deeply, think about the long-term client relationship—but above all, think. I want them to reflect on what they are doing and why, and then wonder, “Can we do better?”
Management’s role is to help them. It’s an iterative process. Create an atmosphere where we can all teach one another and stimulate the imagination. Ideas are not hierarchical—they come from all levels—so allowing the talent of younger people to bubble up is our imperative. Our model also requires that senior managers lead by example—they are all “doers.”
We’ve taken a similar approach in our asset-management business. As with our advisory business, we had to make Lazard a welcoming home for creative talent. The products were somewhat outdated, marketing needed more structure and focus, and generally we had underinvested. So we brought in some new leadership but also gave the veterans more freedom and responsibility. In particular, we promoted a new generation of talent and added depth to the investing function.
In both investment banking and asset management, we think we have an advantage in creativity by understanding industry trends, global investment themes, and emerging markets. It’s the same management philosophy.
Talk about the advice business. What are CEOs looking for as you’re helping them understand the landscape? What do they need that you’ve got?
The point of advice is to create value. The first thing in that effort is not to assume the banker knows more than the client. The second thing is to remind the CEO that corporations have to change in order to prosper and that inaction isn’t prudent—it’s radical. What we can do is help the CEO think through an array of options, partly by asking the necessary questions, but also by inserting some very practical observations about the effects of specific decisions.
Good advice is at least as qualitative as it is quantitative. A firm may have people churning out reams of statistics, providing a detailed analysis showing margins of this company versus that company. But are they asking, “What’s the point?”
In most cases, you start out with a personal question: What’s the CEO’s objective? A new CEO may have a very different objective than a CEO who wants a valedictory. If he wants a valedictory, why does he want it? Does he want to prove something? Does he want to show that he’s created a platform for the future? How does he measure success? And how should he? Is he looking for an impact on his company, or an effect on his stock price? In the short term or in the longer term? How much time does he have? And, ultimately, you have to ask, how will pursuing his objectives benefit the company and its shareholders?
A good banker can ask the right questions, marshal the arguments, highlight the risks, and detail the options from the financial market and practical implementation perspectives. On the one hand, the financing structure for any deal must give the CEO the flexibility to run the company in periods of difficulty. And part of that means you’ve got to help him look at his financing structure and ask, “What if things don’t go well? What do I do, and will I be okay?”
Your working assumption in a takeover, and in many mergers, is that the top layer of management will be gone within a year.
On the other hand, there’s the more qualitative part of the advice. This strikes me as being an underdeveloped side of most investment-banking relationships. Knowing the characteristics of the industry and possible consequences of a deal comes from having seen what’s happened in many companies and industries over time. So, for example, you might say, “Look, you need a very different mentality to manage this type of business than your other businesses. You have a process-oriented mentality, but you need a more market-oriented approach. Are you confident that you’re going to be able to keep the number-two guy in the company you’re acquiring? Because the number-one guy will probably leave.” Your working assumption in a takeover, and in many mergers, is that the top layer of management will be gone within a year. Implementation after a deal can be more important to its success than initial pricing.
You’ve talked about letting young talent bubble up. But when it comes to advising CEOs, what’s the value of seniority?
Much of the ability to have these conversations with CEOs comes from the perspective you get from simply doing this for many years. You have experience observing and participating in the strategies of companies, and trying to relate that to what’s happening in the capital markets, and you can bring it to bear on a particular CEO’s problem.
You also realize, having been around the block, that there are lots of people in a company, all arguing for their own political interests or constituencies. Other advisers may be more interested in pushing the use of their proprietary Double Backflip bond than in the long-term interests of the client. And boards may have different tolerances for risk than chief executives do. Experience is useful when you’re trying to help the CEO make sense of these sometimes conflicting interests.
Is the plan doable? Who else is going to be interested in it? What’s the most efficient approach? What will the fallout of that be? Answering these questions depends on the ability to anticipate what’s likely to happen and not happen. Often that insight comes from having seen this movie before. The actors may be a little different, but the odds are that the deal is going to play out a certain way. Ultimately, this is about making deals that make sense.
Deals that make sense. Can you elaborate on that?
Law school taught me to focus on dissecting premises. Anyone who’s a good logician can build an argument on just about any premises. The argument may be taut, but the premises may be faulty. When we do deals, I always ask, “Are the premises sound? Is the risk exposure worth it for this particular company, and have I protected my client’s back?” We proceed by identifying and evaluating qualitatively and quantitatively the key elements of risk in the transaction—overall economy risk, strategic risk, operating business risk, financing risk, people risk. Similarly, you need to fully understand the upsides. What are the opportunities in cost cuts, synergies, internal development, additional investments, or revenue enhancement? It’s useful to apply all the paraphernalia of mathematical science in an analysis, but focusing on the sense of things is a much better use of time.
When we do deals, I always ask, “Are the premises sound? Is the risk exposure worth it for this particular company, and have I protected my client’s back?”
Part of determining the sense of a deal involves understanding the macroclimate, the broader context, which I think gets too little attention. Where is the industry going? What external factors will affect it? If you’re looking at a plastics company: What’s going to happen to the price of oil? If you’re a cement company: How will the outcome of government elections affect things? That road bill is going to get passed if one candidate wins, but not if the other does. Recently we had conversations with a CEO who was looking at buying a company that makes doorknobs. It may have been a great company. But it didn’t occur to him that many knobs are bought as replacements. Well, if people can’t get mortgages, they can’t do home improvements, and that affects the knob business.
Whether a deal makes sense relates directly to the question of the CEO’s objectives, of course. Having an appreciation of the personality of your client, both the corporate personality and the individual personality, is key. In the case of the knob company, you’d ask the CEO, “If you acquired this company, what would you do with it?” You can’t advise on the sense of this deal unless you really know what the plan would be. If Ace Hardware bought the knob company, it would do something completely different than Martha Stewart would.
Look at a deal through a prism, and you see one set of causes and effects. Turn the prism, and you get a different view. By repeatedly turning the prism and viewing the deal from all possible interrelating angles, you can determine if its premises are sound, what the risk exposure is, how to hedge risk, and what the opportunities are. It may make sense in one view but not another.
When you’re examining a potential deal, how do you gauge general business conditions?
Well, that’s the snake-in-the-tunnel problem.
The snake in the tunnel?
It’s a metaphor people use when talking about monetary policy; it refers to currencies pegged to trading between two “bands”—a high price and a low price. If you draw the bands on a chart (one above the currency price, one below it), the chart looks like a snake going through a tunnel. I use the expression, misapplying the metaphor, because deals work the same way. There’s an upper band and a lower band between which a deal makes sense. They are defined by factors like the state of the economy, the state of the industry, the region, the stage of the business cycle, the trajectory of interest rates, and the evolution of technology or regulations. You’ve got to understand where the bands are and what sets them there, and where the deal—the snake—lies between them. If someone wants to do a deal for 12 times EBITDA in a business where similar companies sell at, say, six to eight times, that person’s probably making a mistake. But then again, context will affect where you set the bands. A deal worth six times EBITDA in the United States might be worth 10 times EBITDA in India.
How do you look at an industry and see what is coming two or three or four years out?
Some things are easy to see. Financial services will, over the next five years, become much more global. There will be more regional consolidation in Europe. It’s almost inevitable there will be more consolidation of U.S. banks. If you’re a financial services firm in Italy or Spain, you have a choice about whether you’re going to be a major competitor or be squeezed by those that are. And the mission of many insurance companies will change as they vacillate between being primarily investors and being insurers. Some will end up doing one thing or the other.
It used to be that the place you went to insure against a hurricane was an insurance company. Now you might turn to hedge funds. A number of institutional investors are either buying catastrophe bonds or trading weather derivatives. Derivatives have now been created to help move all kinds of risk all around. So we’re seeing a number of financial institutions redefining what their role is in the marketplace.
Technology is obviously transforming the news industry, where there’s been a degree of consolidation already. We spend a lot of time on biotech here. And one thing that’s clear is, the old big pharma business is evolving into a biotech-based product business, so the form of these companies will continue to change.
You’ll see industries in India, Brazil, China, and the Middle East—and the regions themselves—taking more prominent positions in the world marketplace. The trend toward globalization is inevitable, so you have to ask, “What are the manifestations of that? What are the implications?” If you’re a maker of railroad ties in the United States, your growth may become more linked to U.S. trade with China. Why are Chinese companies affecting the use of railroad ties? Because rail shipping volume’s going up in the United States as trade increases with China.
You said that implementing deals, not just setting them up, is part of your competitive advantage. What’s your execution process for a complex deal?
As the world becomes more integrated and more regulated, the implementation side of a deal requires more finesse. Some of this is counterintuitive. At an art auction with 10 bidders, holders three through eight feel wise because they’ve arrived at a general consensus. The two top bidders look like giddy high rollers, and the bottom two seem to lack a practical market feel. But, of course, only the top bidder buys the painting, and his judgment may turn out to have been right.
Similarly, in the deal business, to be a buyer you should have a conviction that is stronger than consensus. Good advice for one company may not be appropriate for another. When we say Lazard has a custom-tailored approach, we mean that we think about opportunities, including pricing, from the client’s unique perspective. An asset price that’s attractive to one buyer may not be a good opportunity for a company with different characteristics.
This idea is also reflected on the sale side. When we’re presenting on a client’s behalf to potential buyers, we tailor our presentations to suit each prospect. One may want to focus on cost synergies, another on opportunities in China.
Soft language in a supposedly no-outs contract will live to haunt a deal.
We think of each deal in terms of a flow chart with a series of black boxes. Each box represents a facet of the deal—for example, valuation, financing structure, approach to the other party, negotiating tactics and deal process, taxes, legal structure, contracts, market reaction, and regulatory hurdles. Then we try to optimize within the boxes and weave the results into a cohesive recommendation. But each box affects the others: Soft language in a supposedly no-outs contract, for instance, will live to haunt a deal. So you have to keep going back to make adjustments.
Many people think of deals as a macho, one-on-one, zero-sum game. But they are multidimensional, because of the many constituencies involved.
Many people think of deals as a macho, one-on-one, zero-sum game. But deals are in fact multidimensional, because of the many constituencies—managers, boards, employees, shareholders, regulators, communities, and customers. Winning may not be about paying $1 more or less but about creating opportunities for the future, managing the target well after the closing, and not being unduly pressured by an inappropriate financing structure. And sometimes winning is not doing the deal at all.