For lack of a will
One tiny oversight by its founder could wreck Reliance Industries, India’s largest conglomerate.
When Dhirubhai Ambani built Reliance Industries from scratch into India’s largest conglomerate within little more than two decades, he joined an elite fraternity of global super-entrepreneurs. But when Ambani died of a stroke at age 69 in 2002, he joined a much less exclusive club: people who never got around to writing a will. This dubious group includes more than half of all Americans, not to mention U.S. Presidents Abraham Lincoln, Andrew Johnson, Ulysses S. Grant and James A. Garfield. A chief justice of the U.S. Supreme Court, Frederick Vinson, died without a will. Even Thomas Jarman, who was once widely considered the world’s greatest authority on wills, somehow never managed to write one for himself.
No legal document matters more than a will, yet the mere thought of a will induces a kind of intellectual paralysis among otherwise mature and rational adults. Even those folks who do compose wills usually fail to devote sufficient time to reviewing the document with their lawyer and relating it to their specific family situation (see my item about Jack Kent Cooke below). And sometimes, after taking the trouble to prepare a proper will, they put off signing it until it’s too late.
Why does a will provoke such irrational behavior? The reason is obvious: Writing a will involves contemplating death for ourselves or our loved ones—a painful process indeed. A will forces us to quantify the relationship between people we love and the property we own. And from the moment of death, a will is permanent: It can’t be changed. How much simpler just to put the whole thing off altogether?
Lincoln, Grant, Justice Vinson and Thomas Jarman doubtless aggravated their immediate families with their dithering. But at the close of the day they were merely public functionaries or private citizens with limited estates. The damage done by Dhirubhai Ambani’s dawdling, on the other hand, is incalculable. Reliance Industries is India’s largest private company, with almost $25 billion in sales and a market value of some $17 billion, spread among millions of investors. The Ambani family controls 46% of the shares—12.6% through an investment trust, the rest through hundreds of companies whose ownership is obscure. And since the founder died intestate, Indian law decrees that his holdings be divided equally among family members, most notably his four children.
Ambani’s two sons—Mukesh, 47, chairman of Reliance Industries, and Anil, 45, chief of its affiliate, Reliance Energy—had been bickering even before their father died. But after he died without establishing a clear ownership plan, they fell out so badly that, at this writing, they haven’t met privately for more than a year. The brothers’ feud surfaced last August when the Times of India reported “deep turmoil” between the two, and in November Mukesh acknowledged the existence of “ownership issues,” an admission that caused panic waves to ripple from Reliance’s hordes of small investors to all publicly traded Indian companies.
Mukesh sought to control the damage by claiming that his remarks had been “torn out of context.” In an e-mail to 80,000 Reliance employees he insisted his father had left no ambiguity and that he, Mukesh, was the “final authority on matters concerning Reliance.” Anil responded by orchestrating the mass resignation of six directors at Reliance Energy, a show of symbolic defiance that further panicked investors.
What caused this sibling feud? Some observers blame personality differences: Mukesh is cerebral and introverted, while the extroverted Anil runs marathons and consorts with celebrities. Friends of Anil say Mukesh wanted to oust Anil because Anil was questioning Reliance funds poured into Mukesh’s pet project, a mobile-phone unit called Reliance Infocomm. Other observers blame the mutual antipathy of the brothers’ wives, and especially Mukesh’s determination to secure the succession for his ambitious wife and their children.
But the causes of this feud are really irrelevant. Sibling rivalry is a fact of nature—one that flourishes in a vacuum. Dhirubai Ambani created that vacuum with his careless failure to write his will. It’s not as if Dhirubai had no advance warning of his mortality: He suffered his first stroke in 1986, fully 16 years before he died.
The moral for family business patriarchs couldn’t be clearer or simpler: Write your will. Do it sooner rather than later. Come to think of it, why are you reading this column when you could be at your lawyer’s office, ensuring the smooth future of both your family and your enterprise?
Stop procrastinating. Do it right now.
And while we’re on the subject…
Jack Kent Cooke drafted a will, but it took seven years to figure out what he meant.
In life, the late Jack Kent Cooke amassed a $1.3 billion collection of media companies, real estate and sports teams, most notably professional football’s Washington Redskins. But upon his death in 1997 he left a convoluted will, amended eight times, that named seven executors, took seven years and $64 million in professional fees to untangle, and produced one genuine business tragedy: the forced sale of the Redskins out of the Cooke family.
As recounted by the Wall Street Journal, when Cooke wrote his original will in 1987, he had assumed that the Chrysler Building in Manhattan (which he bought that year for $87 million) could be sold to pay his federal estate taxes. The Redskins—then regarded as little more than an expensive hobby—could be handed down to his eminently qualified son John, a passionate football fan who had spent his adult life running the team’s business side. Cooke also named John as an executor of his will.
But nine years later, the elder Cooke reneged. With the Chrysler Building virtually worthless and the value of the Redskins franchise soaring, the father told John that the Redskins would have to be sold to pay the estate taxes. Crushed, John nevertheless assembled a group of backers after his father’s death and offered to buy the Redskins for $420 million, slightly higher than the then-record sale for a National Football League franchise. But the other executors—six of them, by this time—decided to hold an auction for the team. John’s group duly upped its offer to a staggering $730 million, only to see it topped by an $800 million bid from Washington businessman Daniel Snyder.
To add insult to injury, the other executors awarded themselves (as well as John Kent Cooke) $37.6 million for their work, a figure subsequently trimmed to a still-outrageous $17.5 million after John objected. All of which could have been avoided if Jack Kent Cooke had clearly specified how much his executors should be paid. But he didn’t. Nor, apparently, did he consult a lawyer on many of the occasions when he altered his will.
The bottom line of this carelessness: The estate’s executors, including John Kent Cooke, are richer by millions, and the estate’s primary beneficiary—the Jack Kent Cooke Foundation—is richer by hundreds of millions. But John, who ran and loved the Redskins, is no longer with the team and is now planting a vineyard at his Virginia estate.
Moral #1: With a complicated estate, it’s tough to anticipate the likely size of the estate tax and how best to reduce it—especially since no one knows what will happen to the federal estate tax over the next few years. Better to keep things simple and revisit your will at least once a year.
Moral #2: If you do revisit your will, do so in the company of your lawyer. A little legal advice before you die can avoid a lot of legal headaches after you’re gone.
Two old banks, two separate directions
Rothschild and Lazard tried to pour new wine into old bottles. Only one of them succeeded.
For more than a century and a half, the venerable European banking firms of Rothschild and Lazard have evolved constantly—but almost always in similar directions. The House of Rothschild arose more than 200 years ago when Mayer Amschel Rothschild, a coin and antiques dealer in Frankfurt, started extending credit to his customers and discovered that credit was a more profitable business than antiques. As his banking business flourished, he dispatched his four sons to set up sister banks in London, Paris, Vienna and Naples.
Lazard Frères arose from the ashes of a little clothing store in New Orleans that burned down in 1847. With their shop in flames, the three Paris-born Lazard brothers followed the Gold Rush to California and subsequently set up a gold-dealing business and then a proper bank with offices in New York, London and Paris.
Until recently, both blue-blood banks remained privately owned by their founding families—each operating branches in the same three cities, each branch functioning more or less as a separate fiefdom. In an age of banking leviathans, both houses managed to prosper despite their small size, relying instead on the prestige and “glue” that a fabled family operation brings to corporate advisory work.
No more. Today Rothschild and Lazard are evolving in opposite directions. Lazard has reached the end of its family line and is trying to go public, kicking and screaming. Rothschild has revamped its operation but remains committed to its unique niche as the last global investment bank still owned by a European dynasty.
For Lazard, the beginning of the dynasty’s end occurred in 1997, when sixth-generation heir Edouard Stern departed in a huff, leaving his father-in-law and Lazard’s controlling shareholder, Michel David-Weill, without a suitable family successor. In his quest to recharge Lazard’s batteries, five years later David-Weill went far outside the box for a CEO, hiring Bruce Wasserstein, a wheeler-dealer who gained fame as “Bid-’em-up Bruce” during Wall Street’s leveraged buyout mania of the ’80s. Although Lazard’s main business—corporate advisory work—is best conducted privately, Wasserstein quickly set about doing what he does best: taking the firm public, a strategy designed to increase management’s flexibility (for example, by using stock options to lure talented bankers).
David-Weill soon realized that Wasserstein’s brash brilliance and lavish spending on salaries and entertainment was a bad fit with Lazard’s gentlemanly and parsimonious culture, but by then Wasserstein and David-Weill were exchanging angry public e-mails and otherwise burning all bridges between them. Last fall Wasserstein got David-Weill to agree to an initial public offering. But the conditions that David-Weill extracted for his agreement seemed designed to guarantee the IPO’s failure.
First, Wasserstein must get a price that values Lazard at more than $3 billion—more than most people think the firm is worth. Second, the deal must be completed by the end of this year or Wasserstein must resign—a deadline that leaves Wasserstein scant wiggle room to time the market, especially when he must convince investors that Lazard is an attractive buy even though the IPO proceeds will buy out David-Weill and other old shareholders instead of being invested in the business. The House of Lazard is no longer lethargic, but in the process of pouring new wine into its old bottles, most of the bottles may have been smashed beyond recovery.
The House of Rothschild, meanwhile, was shaken out of its lethargy not by a family gene shortage but by an external threat, and it responded very differently. In 1982 the French Socialist government of François Mitterrand nationalized Rothschild’s Paris business and renamed it. But Mitterrand failed to perceive that the Rothschilds’ most valuable assets were to be found not in their office but inside their heads. Baron Guy de Rothschild, in his fury over the nationalization, promptly departed for New York, there to establish the House of Rothschild’s first serious foothold in America. Meanwhile, Baron Guy’s son David, then 39, decided to remain in Paris and rebuild, creating a new entity from scratch with just three employees and $1 million in capital. Today that Rothschild Paris operation numbers 22 partners and accounts for a significant chunk of the Rothschilds’ global business.
What Rothschild sells its clients, David Rothschild says, is “savoir-faire and connections,” as well as the knowledge that his firm won’t put quarterly earnings ahead of clients’ long-term interests. “Our model,” he says, in an implied swipe at Lazard, “is the long-term trusted adviser, and that fits better with a privately owned bank.” In another implied swipe, he adds: “Having a collection of individuals with no glue is not a good recipe for an investment bank.”
Well, whose recipe is likely to work better? Consider these two contradictory straws in the wind:
Lazard’s most famous alumnus, Felix Rohatyn—the great conglomerateur of the ’60s and ’70s, savior of Wall Street’s back-office financial crisis of 1970-71 and New York City’s municipal financial crisis of 1975, and former U.S. ambassador to France—was recently recruited onto the Rothschild board.
On the other hand, Baron David de Rothschild’s 46-year-old half-brother Edouard, long considered the Rothschild firm’s heir apparent, last year quit the family bank to head France’s horse-racing association. Which suggests that sooner or later the House of Rothschild may confront the same fact of life that bedevils today’s House of Lazard: When it comes to holding together an investment bank, the best glue is blood—a commodity that’s in short supply and isn’t easily manufactured.