The last tycoons: the secret history of Lazard Frères & Co

by William D. Cohan

  In the late summer of 1987, Campeau and Bruce began strategizing about having Campeau acquire the giant Cincinnati-based Federated Department Stores, parent company of Bloomingdale's, and merging it with Allied. This was another audacious idea, especially since Campeau had not yet made the Allied deal a success and did not have the money to buy Federated. But just as he did not have the money to buy Allied and he did it, by following a strategy mapped out by Bruce, on January 25, 1988, Campeau launched an all-cash $47-per-share bid for Federated, nearly a 50 percent premium to its trading price a month before. Campeau's bid for Federated set off an astonishing bidding war between the Canadian and Macy's, the icon of American retailing. On April Fools' Day 1988, Campeau won Federated with a bid of $73.50 a share in cash, for a total of $6.5 billion, most of which Campeau had once again borrowed, including another $2 billion bridge loan put up by First Boston and two unlikely small investment banks, Dillon Read and Paine Webber.

  Less than two years later, on January 15, 1990, the entire Campeau retailing empire had filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court in Cincinnati, the largest bankruptcy in history to that time. First Boston was one of Federated's largest creditors, owed several hundred million dollars. "These collapses will be long and despairingly remembered," Fortune reported in a lengthy article six months later about the Campeau fiasco titled "The Biggest Looniest Deal Ever." Forbes observed: "Blood is everywhere." First Boston was left holding some $300 million, face amount, of Federated junk bonds and a $250 million Federated bridge loan. These securities were worth pennies on the dollar. The firm also faced numerous lawsuits about its role in the collapsed deals.

  BY THIS TIME, Teflon Bruce had moved on, with a good chunk of the fees the Allied and Federated deals had generated in his pocket. And of course, he was no longer talking to the press about the deal. He told Fortune the only way he would comment for its treatise was on a not-for-attribution basis, an arrangement the magazine rejected. The combination of his promotion to co-head of investment banking in February 1986 and the improbable success of his strategy for Campeau in winning Allied that Halloween had convinced Bruce that he would be able to one day--soon--rise to the very top of First Boston. He was no politician, though, and some of his partners were far more skeptical about his career trajectory. One of them said later: "He didn't see that, while he was a great deal guy, he was not suited to running a business." Bruce had taken to going around the office wondering selfishly why First Boston management would allocate bonuses to anyone other than him. Naturally, this kind of talk at a full-service firm like First Boston--where the CEO, Peter Buchanan, had been a bond trader--started to grate on his partners' nerves. Said a friend at the time: "Bruce had incredible leverage within First Boston but the way he used it guaranteed that he would never get the influence he wanted. He had them by the throat and he flaunted it. And First Boston management resented it."

  Frustrated with the increasingly low likelihood he would one day run First Boston, Bruce began, in the spring of 1987, seeing if he could scare up a bid in the marketplace for his own services. Dubbed "the Muppet Caper" inside First Boston, the idea was for Bruce to leave the firm with a handful of his fellow M&A bankers, including Perella. He spoke with Felix about coming to Lazard, as well as to Dillon Read. Bruce also considered starting his own firm. Word started to leak out that he was looking to leave First Boston. Buchanan called Perella to tell him he heard that Bruce was going to Lazard. "I thought Wasserstein was out of line and I told him so," Buchanan said. Perella then called Alvin Shoemaker, First Boston's chairman, and pleaded with him not to let Bruce leave. "If you shoot him, the bullet goes through me," Perella said he told Shoemaker. "I decided to marry Bruce in 1979 and I'll decide when to get a divorce." Bruce and the Muppets decided to stay at First Boston for the time being. As part of the agreement to stay, Bruce presented Buchanan with a list of his "personal goals" at First Boston that included taking over Buchanan's job as CEO in a year and then becoming First Boston's chairman in five years. He came away from his meeting with Buchanan thinking he had a deal for this aggressive career path. "It was smoke," a First Boston banker told Fortune at the time. "But Bruce acted the way people do when they're in a love affair. He heard what he wanted to hear."

  Having passed on both starting his own firm and going to Lazard, Bruce went back to working on deals during the fall of 1987. One such deal brought him plenty of notoriety and, not for the first time, a seat at the table opposite Felix. Bruce agreed to advise Ron Perelman, the corporate raider, on his attempt in 1987 to buy Salomon Inc., the parent company of Salomon Brothers, the large Wall Street investment bank focused primarily on bond trading.

  It was a given that if Perelman succeeded in buying control of Salomon, all of the firm's top management would be canned, in keeping with Perelman's typical behavior. Indeed, the rumor mill at Salomon had it that if he were successful in buying the firm, Perelman intended to install none other than Bruce Wasserstein at the top. Perelman denied the rumor, but the Salomon brass were worried nonetheless. This really was unprecedented stuff. Never in the annals of Wall Street had bankers from a couple of rival firms teamed up to attempt an unfriendly takeover of another Wall Street firm, let alone have one of the bankers--an M&A banker no less--act as the CEO of the target. When Michael Lewis, the author of Liar's Poker and a former Salomon bond trader, confronted Bruce about the rumor, Bruce "lowered both his eyes and the tone of his voice" in a most un-Bruce-like manner and responded: "I don't know how these rumors get started. How could it be true? I was in Japan at the time the bid was announced." In the end, Perelman failed when Warren Buffett stepped in to rescue Salomon. Bruce has maintained his relationship with Perelman, and the two men are equity partners in Nephros, a publicly traded renal-therapy company.

  In the wake of the Muppet Caper, First Boston hired McKinsey & Company to analyze its businesses and make recommendations for changes, if appropriate. While awaiting the results of the McKinsey report, Bruce hunkered down again with Campeau to work on the hostile offer for Federated. But he was also monitoring the McKinsey work through a few M&A bankers who were on the committee that was working with the consultants. At that time, whenever the CEO of First Boston sent a memo around to the entire firm, it was printed on yellow paper. On the morning of January 22, 1988, Mike Biondi, who worked for Bruce, remembered, "The memo came in. It said, 'The report's in. The consultants agree. Our strategy is the right one. We're not changing anything. And by the way, we're putting Bruce and Joe [also] in charge of real estate and high yield origination because they're such great guys.'" Biondi was thunderstruck. He had just been promoted to vice president and attended his first officers' meeting the day the report came out. He remembered seeing both Bruce and Joe at the meeting. They didn't say a word. To make matters worse, the firm announced it would be laying off 10 percent of its fifty-five-hundred-person workforce. His wife had just given birth to their first child. "I was really pissed," Biondi said. "I mean, I had looked up to these guys. I couldn't believe they were just going to take this. This is bullshit."

  The press reported the addition of high-yield and real estate finance to Bruce's portfolio as "a coup," but behind the scenes Bruce and Joe were seething. "Wasserstein was embarrassed," one of Bruce's friends told Fortune. They had wanted to run the firm. The next day Biondi got a phone call from his boss, Chuck Ward. "Chuck's obviously reading from a script the lawyer gave him. 'Hi, Mike. We've decided to resign. I'm over at Wachtell, Lipton. If you'd like to chat with us, we're in conference room so-and-so and so-and-so.' Click. That was basically the call."

  This time there was no equivocation. Wasserstein and Perella had decided to start their own firm. Three days after the release of the McKinsey report, Campeau commenced his $47-per-share tender offer for Federated. In the middle of the management turmoil at First Boston, Bruce had found time to advise Campeau. But he had not told his client that he was seriously considering leaving the firm. On the morning of February 2, Bru
ce went to a board meeting at the Dalton School, which his son Ben Churchill Wasserstein attended. (At Bruce's insistence, all of his five children have short, punchy, monosyllabic--and supposedly memorable--first names and the middle names of historical figures.) After he joined up with Perella at Wachtell's offices, they walked over to see Buchanan. Reading from notes prepared by their Wachtell lawyers, Wasserstein, Perella, Ward, and Bill Lambert, Bruce's M&A idea guy, walked into Buchanan's office and resigned. Bruce was to be the president and CEO of the new firm; Perella would be the chairman.

  Meanwhile, First Boston's $1 billion market value fell $127 million, or 13 percent, in the two days after Bruce's announcement. Such was Bruce's power and reputation at the time that even competitors acknowledged from the outset that the breakaway firm would be a success. "They can make a few phone calls and get $100 million in 10 minutes or $500 million in half an hour," a rival banker said. In a testament to the faith the First Boston M&A group had in Bruce and Joe, within a month twenty more bankers, including Biondi, had left for the ambitious startup, Wasserstein Perella & Co. Naturally, a number of Bruce's friends from college were noting his progress with interest. "I'm in Boston at a journalism conference," his Michigan friend Dan Okrent recalled.

  And [the writer] Betsy Carter is there, and Betsy is a very good friend of mine and is a very good friend of Bruce's. I wake up in my hotel and I go get the newspaper from outside the door, and it's the announcement that Bruce has left First Boston and is starting Wasserstein Perella. So I see Betsy downstairs for breakfast. And I said, "Did you know about this, that this is happening?" She says, "Well, yeah, Bruce told me about it a few days ago." And I said, "Well, why would he want to do this?" And she said, "He said to me, 'I thought it was time to make some real money.'" Which, you know, to a journalist schlepper like me, and this is the late 1980s, you know, he made $7 million a year before. Not a lot of people were making that. It was before the big salary inflations in the executive suites in America. And now he wants to make some real money. And I realized that he lived in a very different world from the one that I lived in.

  Wasserstein Perella & Co. set up shop in an office tower that had once been the home of the now defunct E. F. Hutton & Co., at 31 West Fifty-second Street. The business plan of the new firm was to provide M&A advice and to have $1 billion of private equity to use in leveraged buyouts. From the outset, it was clear to everybody that Bruce would be calling the shots, from the order of the names on the door to the color and shape of the firm's logo. "I didn't give a shit," Perella said about the name of the firm. "I didn't care if you called it Mickey Mouse. Bruce's personality required him to have his name first, to have his logo design [a cypress tree], to have his color [cranberry] be the color of the tree and on and on."

  At first, everything clicked. The firm advised Philip Morris on its $13 billion acquisition of Kraft, and Time Inc. on its famous $15 billion acquisition of Warner, which Felix represented. The LBO mogul Henry Kravis hired the firm to sell Tropicana. Then Kravis hired Bruce for advice on KKR's legendary $25 billion LBO of RJR Nabisco. The firm earned a $25 million fee for that assignment, and Bruce's reputation as the king of the strategic leak to the press was confirmed. Campeau demanded that Bruce serve as his "tactical adviser" on the Federated deal. Even though, as a professional matter, First Boston did its best to prevent him from being too involved, Bruce remained a key adviser to Campeau on the deal every step of the way and got a $10 million fee.

  From the outset, foreigners were eager to invest in Bruce's new firm. And in less than six months, the firm had negotiated a $100 million cash investment from Nomura Securities, in Tokyo, for 20 percent of Wasserstein Perella at a valuation of $500 million. Everything seemed to be going well. "For 18 months we were golden," Perella recalled. "Successful beyond our wildest dreams. At the end of 18 months, we had $200 million of cash in the bank, a billion-dollar unspent private equity fund, and we were ranked second in the M&A league tables, and we had no debt."

  It is difficult to pinpoint the exact catalyst that caused the good times to end at Wasserstein Perella. The firm's reputation--especially Bruce's--was highly leveraged to the continuing boom in the public and private financing markets. The stock market crash of 1987 did not for a moment give Bruce pause as he and Perella devised the strategy for their new firm. Indeed, the crash merely served to hang a "30 percent off" sign on his clients' wish list of desired companies. But after Citibank failed to syndicate the financing for the $6 billion management buyout of United Airlines in the fall of 1989, the music stopped. And Bruce was left without a chair. Suddenly his high-profile, highly tactical, and highly leveraged deals came a cropper.

  Bruce's reputation was also highly correlated to the mountains of favorable publicity he and Perella had garnered--and actively pursued. And Bruce received, justifiably, the lion's share of the blame for his years of aggressive tactics. Whereas for at least twelve years Bruce had been the focus of fawning publicity--publicity that he both sought out and encouraged--he was now being widely lampooned. At first, he waged his own counteroffensive against the criticism, claiming either that his advice was right at the time or, worse, that nobody had forced the clients to take his advice (a position that is surely the last refuge of a scoundrel). Soon enough, though, Bruce, the once notorious leaker, stopped talking to the press altogether, an irony richly noted by reporters.

  The drumbeat of trouble began in July 1989. A Newsweek article noted that the Delaware Supreme Court had recently "chastised" Bruce for the advice he had given the year before to the board of directors of Macmillan Publishing, which had put itself up for sale. The court claimed Bruce perpetrated a "fraud upon the board" by "secretly giving more information to one bidder"--KKR--"for the publishing company than to another," Robert Maxwell. This "tip," in the words of the court, enabled KKR to know Maxwell's penultimate bid for Macmillan and helped KKR win the auction. Bruce was indifferent to the lashing he received. "Macmillan shareholders received a spectacular price," he said. But Forbes had another thought. "What advantage would Wasserstein get for tipping off the Macmillan-KKR group?" the magazine wondered. "We don't know. But we do know that about a month later Wasserstein Perella emerged as an investment banker on KKR's $25 billion RJR Nabisco buyout. Wasserstein Perella's take: a neat $25 million in investment banking fees."

  Newsweek also reported on the ongoing battle that pitted the Time-Warner merger agreement against an unexpected and rich $200-a-share offer for Time from Paramount Communications. To fend off Paramount, Bruce restructured the Warner deal into a highly leveraged acquisition by Time of Warner from the debt-free original stock merger. At the time, Gerald Levin, Time's vice chairman, called Bruce "right up there with the best," adding, "Bruce was a good cheerleader for being bold." Fred Seegal, then a banker at Lehman Brothers, who worked with Bruce on the Time-Warner merger and whom Bruce later recruited to Wasserstein Perella, recalled the show Bruce put on in that deal. "It was the first time I'd ever really seen him in action," Seegal said. "Bruce would start getting on the soapbox, and he'd say, 'Well, you play this videotape, and you do this, and you do that.' It was all gobbledygook. And the Time guys, it was clear that they didn't understand. I didn't understand what he had said. But he had this mystique about him." Some seventeen years later, the combined Time Warner is still suffering from the crushing debt load Bruce advised management to take on. Levin, meanwhile, is long gone after becoming the CEO of Time Warner and engineering the disastrous 2000 merger with AOL.

  The full-fledged media assault on Bruce began in earnest, though, three weeks later, in the first week of August, when Forbes, his old stomping ground, put a plump, well-dressed--now dark-haired--Bruce on its cover next to the devastating headline "Bid-'Em-Up Bruce." Like Nicholas von Hoffman's "Felix the Fixer," Forbes's "Bid-'Em-Up Bruce" would stick. And like Felix, Bruce hated the moniker, especially since, as the CEO of his own firm, his profile in 1989 was far higher than Felix's was in 1972. Like the other publications that had profiled B
ruce, Forbes could not ignore his prodigious and ongoing success. Not only had he masterminded the merger between Time and Warner, but there was also McCaw Cellular's $6.1 billion bid for LIN Broadcasting and three other large deals, totaling some $32 billion. "All at one time and all riding on Wasserstein's expertise," the magazine wrote.

  What the article sought to answer was how Bruce was able to pull all this off. Its unflattering answer was that his "carefully cultivated image" had become his firm's "most powerful selling point," a conclusion Bruce actually agreed with. Whether he agreed with the next thought, that he was a master media manipulator, was not addressed. "In building this imposing image as a powerful friend and a dangerous enemy, Wasserstein has been positively brilliant in manipulating newspaper reporters," Forbes continued. The time had come, Forbes suggested, to call into question the wisdom of Bruce's standard "Dare to Be Great" speech that had time and again been successful in egging on his clients to pay the higher and higher prices necessary to win deals (it is binary after all, either a client wins or he loses). "Who will be to blame, then, if some of today's mega-billion-dollar mergers and acquisitions end in disaster?" the magazine asked rhetorically. "Wasserstein and his ilk? Or the corporate boards and corporate brass who let dreams of glory separate them from hardheaded reality?"

  Although Forbes concluded that "the ultimate responsibility remains with the clients," Bruce's behavior at the end of the 1980s had prompted a rare--and unprecedented--attempt to determine why the well-paid bankers are not held accountable for their advice. In December 1989, the Wall Street Journal added to the debate. "Mr. Wasserstein has found himself under unaccustomed criticism--from courts, shareholders and even a few clients--for his conduct in several big takeover battles," the paper stated, damningly. "He has been accused of manipulating valuations; of encouraging clients to pay too much for companies, and of favoring the interests of corporate executives over the interests of shareholders." Even Bruce's old Harvard Business School professor Samuel Hayes chastised him for the Campeau debacles. Bruce "was the principal architect and was very proud of it at the time," Hayes said. "He can't escape the criticisms of the overpricing." Bruce refused to be interviewed for the article, in keeping with his new approach to the press.