Inside the Private World of Allen & Co. Putting a premium on personal ties, this family firm thrives in the land of the giants.
(FORTUNE Magazine) – A few weeks from now, private jets of the large, CEO-carrying kind will start streaming into Hailey, Idaho, for what may be the biggest annual event on the corporate calendar: Allen & Co.'s conference at Sun Valley. Headline names from the media, entertainment, computer, and Internet worlds--people like Bill Gates and Michael Eisner and Meg Whitman--will alight with their families and settle in for a real stretch of time, five days. They'll listen to speeches and participate in panels, bicycle, play golf, and go whitewater rafting. And, of course, they'll engage in the ever-riveting (though seldom physically dangerous) mogul sport known as elephant bumping.
You'll probably read a lot in the days ahead about the Sun Valley conference--its star power has earned it coverage in the likes of Vanity Fair and The New Yorker. But you probably won't read much about Allen & Co., the tiny outfit behind the splashy extravaganza. So here's a rare look inside this very private family firm as it moves to a third generation of Allen leadership with a revamped structure and some new hands onboard.
To say the firm is unusual would be an understatement. With 175 employees spread over three floors in an undistinguished building at 711 Fifth Avenue in Manhattan, Allen & Co. functions in some ways like a typical investment bank, pursuing underwriting, mergers and acquisitions, and other advisory work. It is an institutional broker and manages money for wealthy individuals, including members of the Allen family. But it has no research department and has never had a New York Stock Exchange membership. Statistically the firm is insignificant; Securities Data rankings show, for example, that in mergers and acquisitions, Allen has not ranked higher than 11th among all securities firms in any of the past 15 years. Yet Allen & Co. is a consummate niche player. Its specialty: forging long-lasting and lucrative relationships with corporate leaders. Its latest coup: a plum role in the coveted Google IPO.
Right now Allen & Co. is at a true inflection point. Famed investor Charles Allen and his brother, Herbert, founded the firm in the 1920s. Herbert's son Herbert Anthony Allen, now 64, expanded the business and still watches over it today. In late 2002 control passed to his son of the same name, Herb, 37, who keeps so low a profile that most executives in the securities industry probably don't even know he's now the boss. (In an attempt to cut down the confusion, we'll call the father Herbert and the son Herb, as the Allen office does.) On Wall Street, where consolidation has been the rule, family firms are a scarce commodity. To have one that has navigated its way into the third generation of management, maintaining all the while a considerable mystique, is thoroughly remarkable.
As part of the transition to a new generation, the firm has made a little-noticed change in the way it does business. The corporation that was and is Allen & Co. Inc. has turned over all its operations to a new limited-liability company, Allen & Co. LLC. The original company will continue to function as an investment vehicle, with a net worth of $1 billion (about 60% of that money is Herbert's, and the rest belongs to his sister, Susan, and a first cousin, Bruce Allen, Charlie's son). Meanwhile Allen & Co. LLC commenced life with $40 million of capital, which came from the Allens, though a number of employees are being given stock.
So it is not exactly his father's $1 billion company that Herb is driving. Why so little capital? Herbert says it was his son's choice (as in "I can handle it from here, Dad"). Couldn't you argue that the underwriting business could easily use more than $40 million or so of capital? Answers Herbert: "If they need more money at any given time, we"--that is, Allen & Co. Inc.--"can always lend it to them."
Having trouble keeping that straight? We're not surprised. The overlapping entities with similar names are characteristic of the Allens' merchant-banking business, which takes stakes in clients and other companies and does arbitrage. Herbert Allen has often described that operation as featuring "circles around circles of investing." By that he means that when an attractive place to put money surfaces, the firm invests, its people invest, Allens personally invest, until the mind reels at sorting things out.
Under any structure or boss, Allen & Co. will continue its entrepreneurial and opportunistic ways, and personal relationships will reman the key to its success. Take the case of Google, the season's must-have IPO. One of the firm's bankers, Nancy Peretsman, knew Google's president, Eric Schmidt, at Princeton and has patiently worked, as Allen & Co. habitually does, to build a client relationship. The payoff came when Google announced the names of the 31 underwriters that would handle its IPO. Allen is slated to be in a small group of firms just below the two giants serving as managing underwriters, Morgan Stanley and CSFB. And if the timing of Google's offering doesn't get in the way, one or both of the company's young co-CEOs, Sergey Brin and Larry Page, will be at Sun Valley (as will Schmidt). Joining them will be Allen's three marquee clients, Rupert Murdoch, Barry Diller, and the newest Coca-Cola CEO, Neville Isdell, on whose board Herbert sits, sometimes knocking heads. (See "Coke: The Real Story" on fortune.com.)
The kind of person-to-person banking that Allen practices has paid off nicely. Each of the past four editions of the Forbes 400 has estimated Herbert's wealth at $1.8 billion. Asked recently about the accuracy of that figure, Allen claimed not to have a clue what he is worth but also snorted, "Forbes has no idea, and neither will you." About us, at least, he's largely right: There's no way of knowing, for one thing, exactly what Herbert received from his father during his life or at his death (in 1997) or how well he's used whatever money he got. But if you poke behind the economics of Allen & Co.'s recapitalization in 2002, you can determine that since the mid-1980s the firm had been returning more than 40% a year to its shareholders. That's sweet--very sweet.
Almost everything about the Allens' world signals wealth. The walls of Allen & Co.'s wood-paneled offices are filled with the superbly chosen American paintings Herbert began collecting when he was young and unable, he says, to afford the impressionist works he really wanted. The office also holds a large collection of T.D. Kelsey's prized Western sculptures, an indicator of the affection that the Allens feel for that part of the country. Herbert has a ranch there, in Cody, Wyo., that he himself calls "paradise," that the son loves as well, and that Warren Buffett, annually a guest, says is so wonderfully comfortable and luxurious that it might even beat Omaha as a place to live.
Herbert has other houses, in Williamstown, Mass., near his alma mater, Williams College, and in Southampton, N.Y. When in New York City, he lives in a Carlyle Hotel apartment with Donnie, his 10-year-old black Labrador. Donnie often spends the day in Herbert's office and travels regularly with him. At one point Coca-Cola's Atlanta hotel of choice for its directors was the Ritz-Carlton, which did not allow dogs. So Herbert and Donnie stayed at a nearby motel. Today Coke has switched to the Four Seasons, which welcomes dogs--and therefore Herbert Allen also.
As all this suggests, Herbert is now single, though he has been married and divorced twice (the first time to Laura Parrish, the mother of his four children, and next to Ann Reinking, the Broadway dancer). He is often accompanied today by Gail Holmes, a Colorado breeder of cutting horses. Herb, the son, has been married for five years to Monica de la Torre, a public-interest lawyer who is a native of Puerto Rico. They live on New York City's West Side and have no children. Herbert's other son, Charles, 35, whom his father calls "happy-go-lucky," works at Allen & Co. as an institutional salesman and is not married. But do not worry about any lack of fourth-generation in this family: Herbert's two daughters, Leslie and Christie, have eight children between them--five girls and three boys.
Talking to Herbert and Herb, you can sense their respect and affection for each other. The father is tall, athletically broad-shouldered, fast-talking, unassuming, and witty. He's given to spurts of both surprising candor and impenetrable reserve. Son Herb has the same self-deprecating manner and athletic build--he played lacrosse for Yale--and is persistently diffident. "Compared to him," says his father, "I'm outgoing." The son at this point is short of the confidence his father exhibits and generally shuns the spotlight.
But he does enjoy digging into the guts of, say, an Allen investment or the firm itself, whereas the father is typically bored by details. "If my dad hears the term 'business plan,' he tunes out," says Herb. "But that's not toxic for me." Herbert has even been known to tune out in a Coke board meeting, having at one of them blocked the minutiae he was hearing about Sarbanes-Oxley and begun to think about (as other directors heard later) how to spell the title of the 1940s song "Mairzy Doats."
Herb the son joined Allen in 1992, at first spending his time searching for highly speculative stocks--the $2 kind--to go into the firm's eclectic portfolio. Today, a year and a half into the CEO job, he gets excellent marks from many people. "He's very smart, he listens, he has a great sense of humor," says institutional investor Michael Larson, who runs Bill Gates' money. He's also made himself into a good public speaker, says Larson, where once he wasn't at all.
Inside Allen & Co. you wouldn't expect to find many vocal critics of the boss. Nonetheless, the praise you hear there seems genuine. Says Stanley Shuman, 69, the firm's senior banker: "He's a terrific young person, quite bright, very curious, and serious in a constructive way." Shuman does remember one period a few years ago when some people in the office thought Herb seemed more interested in golf than in the firm. "But it has got to be difficult," Shuman says, "when your father runs a place to come in and do something helpful without feeling like you're getting in the way. I would have played golf too."
Herb is continuing the firm's distinctive ways while slightly remaking the mold. On its investment-banking side, Allen & Co. has a peculiar operating system in which its senior bankers are viewed as "profit centers" who basically run their own businesses. In this "silo" arrangement --we're simplifying a little here--a banker is paid, on the spot, 30% of any M&A and advisory fees he generates. From that money he must cover certain expenses, such as travel, a portion of Allen's rent, and the possibly hefty costs of signing up other Allen bankers to help with the deal. What's left over is his to keep.
For both the firm and the profit-center crew--a dozen bankers strong right now--the system has an appealing simplicity: You produce, you get paid. Nancy Peretsman, 50, who has been at Allen nine years, remembers that things really didn't work that way at her previous employer, Salomon. There, she recalls, the investment-banking bonus committee arrived tortuously at decisions that were "fundamentally subjective and political." Her opinion: "What we've got at Allen is much fairer."
And highly lucrative as well. Allen bankers like Stan Shuman, who has worked on Rupert Murdoch's deals since the mid-1970s (the two met through their 4-year-old sons, who were best friends at a Manhattan nursery school), and Enrique Senior, 60, who works with Coke and its bottlers, have clearly made fortunes.
For Allen the big drawback of the system is that it is not well suited to compensating and developing young bankers. So Herb has taken a couple of remedial steps. First, 5% of the advisory fees and underwriting dollars that come into Allen & Co. now go into a bonus pool for the young bankers, a.k.a. the "support staff." Second, Herb, acknowledging the firm to be less than a "bastion of teamwork," has been setting up procedures for getting his top bankers out of their silos and into meetings that can foster cooperation and school the younger set.
Or the older set, for that matter. One of the newest additions to the profit center roster is Bill Bradley--yes, former Senator and presidential candidate Bill Bradley--who after the 2000 elections joined up with old friend (and fellow Democrat) Herbert Allen. Bradley, 60, hasn't done any deals yet, but he's delighted with what he calls the "values" and "long-term thinking" he sees at his new place of work. His summation of what Allen provides its clients: "honest, direct, and discreet advice."
Another newish profit center is Steve Greenberg, 55--son of baseball Hall of Famer Hank Greenberg--who arrived at Allen with all sorts of sports world contacts that are already generating deals; he's been hired, for example, to help sell the Milwaukee Brewers. Arriving at Allen in early 2002, Greenberg found the silo system completely at odds with his fondness for collegiality. But Herb's efforts to get people working together have been very heartening, he says. He also empathizes with Herb because he knows what it's like to have a larger-than-life father.
Of course, it took Herbert Allen a while to achieve that intimidating stature. He arrived at the investing partnership of Allen & Co. in 1962 bearing an "indifferent" record as a student-- "Williams should really have thrown me out," he says--and zero knowledge of the securities business. Four years later he was named president of a new corporation, also called Allen & Co., which his uncle, Charlie, and his dad, Herbert, had set up to handle underwriting and related activities. It wasn't that he'd done anything to deserve the title, he says: "The corporation had to have a president, and they couldn't find anyone else to take the job." He was 26.
After that the company sailed through good years in the market and endured bad years that sent it into the doldrums. It pulled off one notable deal in 1973, when it bought control of Columbia Pictures for the bargain price of less than $4 a share. (The Hollywood foray embroiled the firm in a scandal four years later when Columbia president David Begelman was charged with forgery; Herbert Allen came under fire for being too soft on him.) But Allen & Co.'s true watershed year was 1982. That's when it launched the Sun Valley conference, and when Herbert Allen hooked up with Coke.
For starters, the deal made a bundle for Allen & Co. After some intense negotiations, Coke bought Columbia in July 1982 for about $750 million in cash and stock, of which around 6%--or $45 million--went to the Allen "circles around circles." Herbert went on the Coke board. Today the Allen establishment has about $445 million of Coke stock; $310 million of that belongs to Herbert personally.
Beyond that, the relationship has had a deep impact on both Coke and Allen & Co. Herbert says there's almost no way of overstating what this new, "accidental" Coke connection did for his firm's reputation: "It was like you were a parish priest, and the Pope comes along and says you're okay." There was an immediate reaction, he recalls: Business poured into Allen simply because it had gained Coke's blessing.
Coke also became a business papacy directly sprinkling its carbonated beverages on Allen & Co.'s investment-banking business. The firm has handled around 15 different deals and underwritings for Coke and its affiliated bottlers, and earned millions in advisory fees as well. The deals included Coke's 1986 creation of Coca-Cola Enterprises, a $1.2 billion IPO. At $16.50 a share, CCE was aggressively priced and didn't sell well. As managing underwriter, Allen had to save the deal by swallowing stock it never intended to buy. "It was tight and uncomfortable around here for a while," says Herbert. But the rescue cemented the firm's relationship with Coke.
Of course, not all deals ended quite so happily. Prime example: Coke's proposed $16 billion purchase, in 2000, of Quaker Oats, which owned Gatorade. Douglas Daft, then CEO of Coke, incautiously let the deal get all the way to a boardroom showdown (from which Herbert Allen recused himself). There, dissenting directors, including Warren Buffett, whose Berkshire Hathaway is the largest owner of Coke, killed it. Buffett's argument was simply that Quaker's assets did not seem worth the price. Later Pepsi, paying less, bought Quaker--and other investment bankers, not Allen, walked off with the spoils.
While Coke was sending business from Atlanta to New York, Herbert Allen was becoming an increasingly influential Coke director, with sometimes controversial results. Allen established close ties to the company's CEO, Roberto Goizueta (who died in 1997), and president, Donald Keough, 77. Ultimately Keough, upon his 1993 retirement from Coke, became chairman at Allen & Co., where he is highly valued today for his contacts, business sense, and gregarious Irish charm. In keeping with the firm's all-in-the-family ethos, Keough's son, Clarke, is an institutional salesman at Allen & Co. As FORTUNE described in its recent cover story, Keough, named not long ago to the Coke board, has played a strong--too strong, his critics in the article argued--behind-the-scenes role at Coke while the company whipped through two successors to Goizueta, Douglas Ivester and Douglas Daft, and signed up another, Neville Isdell.
Herbert Allen, too, has not been shy about exercising his power when he's unhappy with Coke's management. In late 1999, most notably, he joined with Buffett in ousting Ivester. Choosing not to consult the rest of the board, the two directors met Ivester at a Chicago airport hotel and told him he had lost their confidence. Conceivably Ivester could have fought back, hoping to find support elsewhere on the board. But instead he flew to Atlanta and resigned, stunning the other directors. Allen has no apology except to wish that the board had been wiser, earlier. "Where we really missed the boat was in not questioning Ivester's getting the job in the first place," he says. "He was way over his head."
But denying Ivester the job would have meant ignoring Goizueta's apparent wishes, and nobody on Coke's board was good at that. In fact, the most questionable events in the long, close relationship between Coke and Allen & Co. came when Herbert was head of Coke's compensation committee, a job that's now off-limits for him because he doesn't qualify as an independent director. Goizueta sought to be a compensation pacesetter, and Allen helped make him one, time after time.
A particularly interesting moment came in 1995, when Allen learned that Goizueta wanted to be awarded one million options. "It wasn't that Roberto cared about the money," said Allen recently. "He just wanted to have that big number on his record." Allen, in any case, asked Buffett's opinion. Buffett, no fan of options generally, did not like the idea. But recognizing that Goizueta had added immense value at Coke, Buffett told Allen that if Berkshire had happened to own 100% of the company, he might well have set up a comp system that would have paid Goizueta even more than he'd earned. So Buffett told Allen he would not oppose the grant. And it was made, going on the record as one important and unfortunate milestone in the long, crazy climb in executive pay.
Let's turn back to the other momentous event of 1982, the starting of the Sun Valley conference. It was an idea whose time had not really come: Herbert Allen initially had to beg clients to attend. But today the problem is keeping the crowd down to the 300 or so adults who will fit into Sun Valley's main conference room.
Essentially Allen needs three kinds of people at Sun Valley: CEOs, families of CEOs, and institutional investors. It was Herbert Allen's genius to encourage his attendees to bring their children and turn them over to armies of babysitters. This hospitality induces guests like Bill and Melinda Gates to bring their three kids and stay for the full five days, not just the one that might well be Bill's maximum at some other kind of gathering.
The CEOs are obviously needed for their presentations and brainpower. "Sun Valley," says Disney's Michael Eisner, "is a cross between summer camp and an SAT test." Eisner, of course, also was a participant in a famous deal first discussed on a roadway in Sun Valley: Disney's 1996 purchase of Capital Cities/ABC. For that transaction, Allen was later paid $2 million for providing Cap Cities with a fairness opinion.
The institutional investors are essential in this picture because Allen wants their business and gets a large amount of it--often simply because of Sun Valley. Lacking analysts, Allen tends to turn to what it sometimes calls "direct research," which typically involves bringing money managers together with clients and other corporate executives at small meetings that the firm has arranged. If you will pardon the topographical dissonance of this comparison, Sun Valley is the Mount Everest of direct research.
The 50 or so institutional investors who come to the conference are apt to be media experts or value investors or just big, powerful buyers like Larson, Bill Gates' money manager. Larson says he finds himself using the firm for a broad range of trades. In equities, he adds quite amazingly, Allen is probably his No. 1 broker.
If you're Allen & Co. and have a success like Sun Valley, you might want to try a second such event. Indeed, Herb started a small-cap conference in Arizona five years ago. Among the presenters have been the CEOs of companies like Activision, TiVo, and Ask Jeeves.
But don't expect a lot to change at Allen & Co. When he is asked what the firm may look like ten years from now, Herb says it will have stuck to its principles, probably added a couple of bankers to be profit centers--maybe to specialize in something like health care--and expanded its money-management business (headed by his first cousin, Bradley Allen Roberts). Beyond all that, he feels the firm will just need to see where its business goes. "If you had asked me ten years ago where we'd be today, I doubt that I would have said we'd be doing a lot with companies that are making progress in the Internet world," he says. "But we certainly are."
One thing that's definite: There won't be bureaucracy. "Right now we have only two committees, fire safety and sexual harassment," Herb says, "and my job is to see that we don't get a third." Another is that the firm will not grow much overall. "If you aren't small, you can't really focus on relationships." His father has stronger words. "I don't think there's a firm on Wall Street that's been improved by size," he says. "Morgan Stanley was a great small firm. Salomon was a great small firm." And he lets the thought hang in the air.
Of course, Herbert points out, the large firms have an advantage in one respect: While regulators may fine them heavily for transgressions, they probably would not take the momentous step of closing a big firm down. "Us ..." he says. "If we did something wrong, they'd close us down in a minute." As one precaution against that, he adds, he has a compliance officer who has the skills of--and he apologizes for the term--a "Gestapo agent."
Even so, he's asked, how does a firm like Allen really guard against some errant employee doing it in? "Well," he answers, "you walk the halls. You look and you watch and you see everybody. You know who's a drunk and who's chasing skirts, and if they're chasing skirts, whether they're buying jewelry or dinner. If they're only buying dinner, that's okay."
And with that rundown you get a sense that the boss of a small firm like Allen needs to perform certain tasks that maybe aren't on the agenda of a Stan O'Neal at Merrill Lynch or a Hank Paulson at Goldman Sachs. From all that the Allens say and do, you also get an idea that this family firm might just stay around for a long time. Fourth generation, anyone?
(P.S. from a journalist: Could the next boss please be named something other than Herbert?)