(FORTUNE Magazine) – Early on the morning of Aug. 15, 2002, Laurence Alan Tisch told his family that he was dying. He was sitting at his desk on the seventh floor of Loews Corp. headquarters in New York City, as he did most mornings. His office was sparse--beige walls, a sensible gray carpet. There was little evidence of his legendary career as one of the great business tycoons of his day. Here and there--on a windowsill, in a corner--a smattering of items hinted at it: a CBS Sports baseball bat, a matchbook from the Laurel-in-the-Pines hotel, a Loews human resources manual. On the couch across from his desk, oddly out of character, were two teddy bears. No one could remember where they came from.

That morning Larry Tisch came into the office early with Billie, his wife of five decades, and summoned the rest of his family: his brother, Bob, and his four sons, Andrew, Danny, Jimmy, and Tommy. No one except his wife knew why they'd been called. But they all knew it was serious; they'd never been summoned like this before. Now gathered, they waited for him to speak.

Larry did not say the words. He sat upright behind his desk, his eyes closed, as Billie uttered the technical terms: "metastasis," "chemotherapy," "secondary tumor." Tisch had gastroesophageal cancer. It was inoperable.

When Billie finished talking, the room was quiet. The news was an unexpected blow. Though 79, Tisch had seemed quite healthy. He'd gone to the doctor's the day before because he had a slight pain in his side. He thought he'd cracked a rib.

For decades Larry Tisch had been his family's patriarch, the dominant figure in the lives of everyone in that room. At the age of 23, Larry had started a business with his 20-year-old brother, Bob. Over the next six decades, the Tisch brothers built one of America's great family fortunes, estimated at more than $4 billion. Two of Larry's sons, Jimmy and Andrew, along with Bob's son, Jonathan, had spent their careers at Loews, working side by side with their fathers. Members of the younger generation at Loews regularly popped their heads into Larry's office to solicit his advice or bounce an idea off him. It was hard to imagine what life would be like without Larry Tisch.

Not that Larry was about to let anyone dwell on that. When he finally opened his eyes and looked around at his family, he said very simply, "Okay. Let's go." That had always been his way: terse, concise, abrupt. Without much else said, his family trooped out of his office and did what he expected them to do: get back to work.

Larry Tisch died last November. He left behind a reputation as one of the greatest value investors and dealmakers ever, as well as a staggering philanthropic legacy: There must be a dozen buildings in New York with the Tisch name on them, including the Tisch Hospital at New York University, the Tisch Galleries at the Metropolitan Museum of Art, and the Tisch Children's Zoo in Central Park. And to his everlasting credit, he left behind a family that has none of the friction and strife that so often divides wealthy families. Larry Tisch's values--both in business and in life --appear to have been completely embraced by the next generation of Tisches.

But Larry Tisch also left behind a company--Loews--that the next generation now runs and that has some real problems. Last year Loews lost more than $600 million (on $16.5 billion in revenues), and though it is on track to do better this year, it is far from clear that the next generation has succeeded in turning the ship around. The Loews that exists today is an unwieldy conglomerate, with a hodgepodge of assets that include Lorillard Tobacco, CNA Financial, and Bulova Corp. Most of those are companies Larry Tisch bought decades ago, and they once made the family billions of dollars. But today, almost across the board, they are struggling. Loews stock, currently around $58 a share, trades roughly where it did two years ago.

In the short term the task for Larry's heirs is to fix the immediate problems facing each of Loews' companies. Over the long haul, though, the task ahead is more difficult. They need to come up with their own vision for what Loews ought to be, separate and apart from the vision Larry Tisch laid out almost 60 years ago. If they can do that, they'll have put their own stamp on Larry Tisch's legacy.

It's a brilliant early spring morning and James S. Tisch--known to everyone as Jimmy--is at work. Though Larry Tisch has been dead four months, Jimmy hasn't moved into his father's old office; it sits empty beyond the wall behind him. It's not yet 8 A.M., but Jimmy is already in the thick of his workday. The phone rings. It's an executive at one of Loews' companies, calling to give him a sales forecast.

"What makes you think you can hit those numbers?" Jimmy asks. His tone is friendly, even cheerful--but he's clearly not buying the man's numbers. "Let's not look at this thing with rose-colored glasses," he warns. By the end of the conversation, the executive has agreed to rethink his forecast.

Jimmy, 51, is his father's most direct heir at Loews. He is the CEO. Along with his brother Andrew, 54, and cousin Jonathan, 50, he is also part of the office of the president, a management arrangement established by his father and uncle in 1999. The Tisches assiduously downplay issues of power and status--it's part of the way they maintain family harmony--and sure enough, Jimmy insists he relies on his brother and cousin in running Loews. ("I can say things to my brother and cousin that I can't say to anyone else," he says.) But he is clearly the man in charge.

At first his personality could not seem more different from his father's. Larry Tisch was a tough, imposing figure. Curt and abrupt, he never said a paragraph when a sentence would suffice, and never uttered a sentence when a word would do.

Jimmy, by contrast, is friendly and outgoing. "Larry could enjoy a good joke," says Lester Pollack, a former general counsel and board member of Loews. "Jimmy can convey a good joke." Jimmy's voice is slightly high-pitched, and when he talks, his hands and fingers move swiftly in all directions. He has an easy smile and an infectious laugh, which can burst forth even in the middle of an argument.

But in other ways Jimmy Tisch is just like his father. Despite his gregarious nature, when it comes to business he can be as tough as the elder Tisch. He has the same natural instinct for numbers. And he simply thinks about business in the same way. But then, why wouldn't he? Jimmy Tisch spent 26 years working with his father, picking up almost by osmosis Larry's core beliefs about business and investing. By now they are in his bones.

Larry Tisch was the ultimate value investor. He was a brilliant contrarian: He saw value where other investors didn't--and he was usually right. He avoided anything that seemed remotely like a fad--from the Nifty Fifty stocks of the 1970s to the Internet stocks of the late 1990s. He looked at companies purely by the numbers--as he liked to say, "The numbers don't lie." And he thought constantly about risk. "He always wanted to know what the downside was," says Joe Rosenberg, Loews' chief investment strategist, who worked with Larry for 30 years. "You never went into his office without knowing that--it would be his first question." Rosenberg adds, "Jimmy's got Larry's DNA."

For all the time that they worked together, Larry and Jimmy had an ongoing conversation about business that even now hasn't completely stopped. Recently Jimmy was thinking about buying some stocks in oil-drilling companies. He immediately thought of what kinds of questions his father would ask. Are they cheap enough? Are you getting a good price? What could go wrong?

"There have been a number of times when I had an idea, and the first thing I'd do was pop up to go talk to him and ...," says Jimmy, pointing to his office wall, behind which his father's empty office sits. Very abruptly, he stops talking. Finally he says, "Then I think, 'He's not there.' "

The story of how Larry Tisch started Loews is business legend. In 1946 he and his brother, Bob, borrowed money from their parents to buy Laurel-in-the-Pines, a small hotel in New Jersey. By 1956 they were running a hotel chain that stretched from New York to Miami--and had amassed a multimillion-dollar fortune. Over the next few decades they kept investing in companies, including Loews, the movie theater chain (that's where the name comes from, though the chain was sold in 1985), Lorillard, CNA, and CBS. The companies that made up Loews had nothing in common except this: At the point at which the Tisches bought them, they were seriously undervalued. And over time, under the Tisches' control, their value rose dramatically.

The Tisches' partnership worked in large part because Larry and Bob were opposites--and they each understood and respected the other's strengths. "Larry was always the financial end; I was the sales side," recalls Bob Tisch, now 78, who owns the New York Giants and still serves as chairman of Loews. Knowing that Bob would keep the businesses he bought running, Larry was free to focus on what he was really good at: making deals. A classic example was Tisch's brilliant 1968 purchase of Lorillard, maker of Newport cigarettes. Loews put up no cash for the purchase--but instead used debt and warrants on Loews' stock to pay for the transaction.

Short, bald, and full of energy, Larry Tisch was an imposing, often intimidating figure. With colleagues and subordinates he could be gruff and brusque. He had no patience for long meetings and never wrote memos. "You always had to know your stuff. If you were bullshitting, he stopped talking," says Nancy Peretsman, the prominent media banker who worked with Larry and became a Tisch family friend.

He was also a fierce competitor in business. Once a company was in his sights, he was remarkably tenacious about getting it. When Tisch went after CNA in 1974, its management didn't want to sell--and hostile takeovers of insurance companies were virtually unheard of. Marty Lipton, another family friend, who was Loews' attorney on the deal, tried to talk Larry out of buying it. "I told Larry that it couldn't be done. He shouldn't even try it," says Lipton. His response: "You want to be my lawyer or not?"

In 1995, Larry showed his contrarian stripes when, through CNA, he bought 25% of Canary Wharf, the huge London commercial center that had been developed by the Reichmann family. But the Reichmanns had fallen on hard times, and the banks had taken over Canary Wharf. Few other big investors were even willing to look at Canary Wharf--but when Larry saw it, he quickly realized that there was virtually no downside: The rents more than covered his initial $164 million investment. In the subsequent nine years, CNA made more than $750 million through a combination of rental income, dividends, and sales of portions of its stake. (CNA sold off the final piece this month.)

Larry's most famous deal, though, was his purchase of CBS in 1985. For one of the few times in his career, he became the CEO of one of his investments--and got more intimately involved with it than with any other company he'd ever acquired.

From the start he applied his usual discipline--cutting costs and selling off assets. But nobody had ever done that before at a television network, and Tisch became perhaps the most vilified figure in the media industry. Dan Rather wrote an op-ed piece in the New York Times criticizing CBS management for shutting down news bureaus and laying off news employees. 60 Minutes' Andy Rooney told the Times that the layoffs were disastrous. Former CBS music chief Walter Yetnikoff referred to Larry as an "evil dwarf." After Tisch died, the Times, in the very first paragraph of its obituary, said he'd been "reviled for diminishing what was once the nation's premier broadcasting network."

For his part, Larry found the criticism bewildering. "He had trouble with some of the entertainment people," recalls Peretsman. "He couldn't understand people who showed up late to work, did drugs, and couldn't talk about P&L." He also believed that if he didn't take corrective action, CBS would wind up in far worse shape. And in that he was probably right. "Larry took a lot of the negative hits for what went on, but the story that got written of that era wasn't really accurate," insists Peter Keegan, who was Larry's CFO at CBS and is now Loews' CFO. "Larry was ahead of his time." Indeed, the other major networks, ABC and NBC, ended up making the same kinds of cost cuts CBS did. By the time Tisch sold CBS to Westinghouse in 1995, Loews made a $1.1 billion profit.

On Jimmy Tisch's first day as a full-time employee at Loews, his father brought him into the office of Joe Rosenberg, Larry's longtime consigliere, and asked him to take a half-hour to teach him the business. After that, Larry added, it would be up to Jimmy, then 24 and fresh out of business school, to learn the rest. Larry was only half-kidding--he really did expect his son to pick up things as he went along. In truth, Jimmy and his brothers had been doing that most of their lives. Growing up with Larry Tisch as a father, it was hard not to absorb the Tisch way of doing business.

"My father and I were not close growing up," says Jimmy. That sentiment is echoed by his brother Andrew, who recalls that when he was arrested in college for riding a motorcycle without a helmet, he was too scared to tell his father. But over time, business became an important way for father and sons to relate. From an early age the Tisch children went to work with their fathers. Jimmy spent one vacation baking rolls in the Tisches' Americana Hotel in Miami. Andrew spent weekends as a child working in the same hotel, filling out guests' bill forms and filing. His cousin Jonathan spent a summer as a front-desk clerk. "This is how we grew up: watching Bob and Larry," explains Jonathan.

Even at home, business was a part of the young Tisches' world. Andrew remembers an incident that occurred when he was a teenager: Larry and some cronies were playing bridge in the living room when Andrew walked in to relay a message about one of his father's business deals. Larry gave him a look; Andrew knew he was in trouble. Excusing himself from the table, he pulled Andrew into another room. "He said, 'You have to be very, very careful because this is information other people should not hear,' " recalls Andrew. (Larry's bridge partners included Bear Stearns' Alan "Ace" Greenberg, Jimmy Cayne, and on occasion Warren Buffett.)

Rarely, though, were Larry's lessons conveyed that explicitly. "He never said to me, My expectation of you is going to be this or that," says Andrew. "He was just good at setting an example and letting me follow." Says Jimmy: "What my father did was give me enough rope to see what I could do with it." As the younger Tisches grew up and watched their fathers at work and talked to them about business, Larry and Bob's business principles became deeply ingrained.

By the time they arrived at Loews, they got it. On Jimmy's first week on the job, for instance, he suggested that Loews acquire AT&T. Why? Because Jimmy believed it was a good value stock--a company whose dividend was higher than its borrowing costs. "He was right," says Rosenberg. "It would have been a good buy." Larry said no--not because the idea didn't make sense but because Ma Bell was just too big for Loews to swallow.

But the sons weren't just absorbing their fathers' investing principles. They were also learning how to run a business as a family. Again, it was not something Larry and Bob talked about explicitly. But their example spoke volumes. Larry and Bob had worked out their different roles at Loews without letting sibling rivalries or jealousies interfere. Neither brother tried to trump the other or gain power over the other. Though most people assumed Larry ran the show, both held the title of CEO.

Their sons knew they were supposed to act the same way. When Jimmy was still in his 30s, it was clear that he was going to run Loews one day. It is the sort of thing that can tear a family apart. But the younger Tisches accepted their roles. Today Andrew oversees Lorillard and Bulova, and Jonathan is in charge of the hotels. And none of the three ever makes a major business decision without consulting the other two.

Jimmy came into his own at Loews when Larry was at CBS. There was never any formal announcement declaring that Jimmy was in charge. It just happened. "Larry was gone, so people started going to Jimmy when they had questions or ideas," explains Rosenberg. It was during this period that Jimmy made his first major acquisition for Loews. In the late '80s he began buying offshore-oil-drilling rig contractors and grouped them together to form Diamond Offshore. It is now one of the largest offshore-drilling businesses in the world and the third-biggest company in Loews' portfolio.

When Larry returned to Loews full-time in 1995 after the sale of CBS, he did not take back control from his son. "It takes such amazing wisdom to say, 'It's time,' " observes Andrew Tisch. "I've seen a number of instances where a senior generation has failed to move aside when the junior generation felt it was more than ready, and it destroyed not only the company but the family." While Larry continued to come into the office every day, he didn't interfere with Jimmy.

For his part, Jimmy remained deferential to his father, consulting him on decisions large and small. During the Internet bubble, Larry was convinced that the stock market was overpriced. He decided to short the S&P 500. Jimmy, who felt the move was too speculative, argued against it. But he didn't stop his father. Larry, of course, would turn out to be right about the bubble--but too early. His short positions cost Loews $2 billion.

One day not long ago, Jimmy Tisch and a handful of Loews executives squeezed themselves into Jimmy's small office to discuss whether they should make a particular investment. Watching Jimmy, you could see the ways in which he was his father's son. His main question about the investment was, What was the downside? "What are the chances it will go into bankruptcy?" he asked. "And if it does, what does that mean for us?"

But you could also see how he's different. He made the junior staffers feel at ease. He told some jokes. He gave his own opinions but didn't push them on anyone. He asked questions more than he made statements. And when the meeting broke up--with the issue still unresolved--he told the assembled executives that it was up to them to come to a decision. "With Jimmy you can really brainstorm--and talk about things," remarks Joe Rosenberg. "With Larry you didn't get as much feedback: He was more apt to give one-word answers."

Right now, Jimmy Tisch's biggest problem as Loews CEO is one of his father's oldest, and at one time best, investments: CNA Financial. This is Loews' largest holding, accounting for about 60% of revenues. But lately CNA, the country's 11th-largest property and casualty company, has been flailing. For the past several years its reserves have been inadequate to cover unexpected claims that developed in such areas as asbestos liabilities and worker's compensation. Last year CNA took a $1.8 billion charge to increase its reserves. That charge was the main reason Loews lost $600 million last year.

It is critical for Jimmy Tisch to turn CNA around. As long as it's floundering, Loews will be constrained, primarily because the insurance company is consuming cash that could be deployed more productively. To fix CNA, Jimmy is radically changing the company. In 2002 he brought in a new management team and began a total overhaul of the business. He sold off several subsidiaries, including life insurance, reinsurance, and group insurance. He also cut back on some of the firm's riskier underwriting. And he's forking over $750 million of Loews' money to give CNA time to get back on its feet.

Will it be enough? Jimmy thinks so. "I see growth coming out of CNA," he says. "I'm very positive about its future." Last year CNA was paying out more in claims and expenses than it was generating in premiums; this year the situation is reversed. "There finally seems to be a glimmer of light at the end of a long tunnel," says Robert Glasspiegel, an analyst with Langen McAlenney, who covers Loews. Still, it's far too early to declare victory at CNA.

Loews' second-biggest holding, Lorillard, is also causing headaches. Like all tobacco companies, Lorillard is reeling from litigation woes and pressure from discount cigarette makers. Last year its sales dropped 14%, and net income fell 31% from a year earlier. Recently the bond-rating agency Moody's gave Loews a negative outlook on its debt, reflecting its "concerns that litigation risk remains significant for its tobacco subsidiary."

Even putting aside the immediate problems, it's hard to see why this company makes sense in the way it's now configured. It owns middling businesses in some of the toughest industries around. None of them have anything in common with the others. And its three largest assets, representing about 90% of its revenues--CNA, Lorillard, and Diamond Offshore--all have publicly traded shares. (Lorillard trades via a tracking stock, while CNA and Diamond Offshore have a small public float.) So if you're an investor, why do you need the umbrella of Loews?

That is precisely the question Jimmy is trying to answer. He obstinately believes that Loews remains a great company; to hear him tell it, the biggest problem is that no one knows it. To change that, Jimmy is actively courting Wall Street--something his father would never have done. He's begun holding regular investor meetings. He's hoping that by the end of the year four more Street analysts will be covering Loews. Currently four do.

Ironically, Jimmy portrays Loews as an undervalued stock. At a recent $58 share price, Loews trades at a discount to the value of its parts. Its market cap of $11 billion is roughly equal to the sum of its Big Three: CNA, Lorillard, and Diamond Offshore. Its other holdings--hotels, watches, pipelines--don't seem to factor into the market's valuation. By Jimmy's calculations, the market math is short by $4 billion. He sees a big part of his job now as proving that to Wall Street. So far, he's had some success--the stock is up 40% in the seven months since his father died.

But clearly the larger questions about Loews--and about Jimmy Tisch--go well beyond whether he'll turn CNA around or get Wall Street back on his side. He's a smart, sensible businessman; chances are, he'll fix Loews' short-term woes. The real question is long term: What kind of company should Loews be, and how can he get it there?

"When somebody from the outside looks at our businesses, they see them as static," says Jimmy. "They are not static at all." He firmly believes that getting the companies back on track--and making shrewd new investments--will make Loews great again. "Our overriding goal is to create shareholder value," he says. "That's what we've been trying to do for the past 40 years."

He also believes that sticking by his father's principles is the best way to create that value. "Nothing is going to change about how this company is run," he says. "I was lucky enough to have a 26-year tutorial with a great CEO. So I want to take the company in a similar direction."

But maybe, to be truly great, Loews needs something more drastic. Like his father, Jimmy wants to do deals only when there are good values to be had. Fair enough. Last year he bought Texas Gas in a classic value play. However, it was also Loews' first big deal in a decade, and though he hopes to make more acquisitions soon, he's not going to do a deal just for the sake of doing one. "I have a general rule: If there's nothing to do, do nothing," he says.

But as long as Jimmy stands pat, Loews will continue to be stuck with a tobacco company mired in litigation, a third-tier insurance company, a drilling company that ebbs and flows as the oil business goes, and so on. The real test for Jimmy Tisch is whether he can honor his father not just by sticking to the old man's principles, but by finding his own path as well.

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