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

by William D. Cohan

  By this time, any number of his deals had gone bust or were about to. Take, for instance, a company called Interco, formerly known as the International Shoe Company. Over time, Interco had transformed itself into a Fortune 500 conglomerate comprising the well-known brands Converse, London Fog, Florsheim, and Ethan Allen. In the summer of 1988, two brothers from Washington, D.C.--Steven and Mitchell Rales--launched a hostile, $64-a-share, $2.4 billion, all-cash takeover for Interco. The Raleses later raised their offer to $70 and then $74 a share, or $2.7 billion. After the brothers made their offer, Interco hired Wasserstein Perella.

  Based on Bruce's advice that he thought Interco was worth first $68 to $80 a share and then $74 to $87 a share, the Interco board rejected the Raleses' deal. Bruce also devised a controversial counterstrategy--a complicated recapitalization, dubbed Project Imperial--whereby the company itself would borrow $2.9 billion and use that money to buy most of its outstanding shares in the market. Bruce valued the package at $76 per share, or $2 a share more than the Raleses' bid. Two other buyout firms--KKR and a Merrill Lynch fund--looked at Interco but decided they could not get close to Bruce's $76-per-share valuation. "I don't think the company is worth anything that starts with a seven," the KKR partner Paul Raether told Bruce. Although Bruce did not force the Interco board to take his advice, it did anyway, rejecting the Raleses' bid in favor of the Bruce-designed highly leveraged recapitalization. Bruce valued the stub equity at $5 per share, but it never traded above $4, and it was $2 at the time of the Forbes article. The newly issued high-yield debt also quickly traded down, causing those investors to lose money, too. Worse, 640 longtime Interco employees at two Florsheim shoes factories were fired from their jobs when Interco management decided to sell the facilities to raise money to try to service the new debt.

  One of those who lost his job was Edwin Bohl. He was fifty-eight years old and had worked at the shoe factory for thirty-seven years. He had joined the company after graduating from high school. Over time, he rose to the level of supervisor. He lost his $19,000-a-year job two weeks before Christmas 1988. "The minute we came back from lunch," Bohl remembered, "they called us supervisors together.... The man read us the papers and said there were no jobs held for anybody.... They told us they had to close the plant because of the restructuring.... They had to raise money.... They told [us] it was not because of the quality. We were rated the top in quality and cost.... We had no idea this would happen." He opted for the lesser of the two evils Interco offered. In exchange for having Interco continue to pay his health insurance, he received a reduced pension. "We thought this would be the best time of our life," his wife said. "Now he doesn't know when he's going to get a day off. You either take a poor retirement and have your insurance, or have your retirement and pay for high insurance." Bohl took a job at a local Western Auto store. He was paid $4 an hour. At the time, Bruce was making "in the vicinity of $6 million annually," the New York Times reported. Perella was making around $5 million.

  THE ALLIED AND Federated bankruptcies in January 1990 were the culmination of four months of rumors and financial distress for Campeau and his team. At the very least, there is no question that Bruce's architecture of the two deals proved way too complex for his client to execute successfully. Some people also charged that Bruce caused Campeau to overpay for Federated by $500 million. At the dinner celebrating the completion of the Federated deal, Campeau told the bankers and lawyers assembled at Le Cygne, a fancy East Side restaurant, "I'd like to thank all of you for your help. I couldn't have done this without you." Then he turned to Bruce and said, half joking, "Bruce, you cost me an extra $500 million," by encouraging Campeau to increase his winning, final bid to $73.50 per share, from $68. "The idea," Bruce later countered, "was to get the deal done."

  But his nemeses at Forbes would have none of Bruce's justifications. "Wasserstein knowingly failed to stop his client from paying more than Wasserstein knew the company was worth," its reporters wrote two weeks after the bankruptcy filing. "Bid 'em up, Bruce." Meanwhile, in the bankruptcy proceeding, highly skilled, well-paid lawyers came to the conclusion that Bruce had orchestrated a "fraudulent conveyance" on the Allied Stores "estate" by encouraging Campeau to sell Brooks Brothers and Ann Taylor--two Allied assets--and then advising him to use all of the proceeds and a bit more ($693 million in total) to repay loans that Campeau had taken out from the Bank of Montreal and Bank Paribas as the equity for the Federated deal.

  Even though he once eagerly took the credit for Campeau's successes--"It was like playing three-dimensional chess," Bruce told the Times in 1988--after the companies filed for bankruptcy protection, he sought to shift the blame for the fiasco away from himself and onto others. He now told BusinessWeek his post-First Boston arrangement with Campeau prevented him from orchestrating asset sales or refinancings. "The financing was not done on a timely basis" by First Boston, he told the magazine. "The asset values are there." But Campeau blamed Bruce. "Campeau is said to have raged through his Toronto headquarters like Lear on the heath, naming Wasserstein as the author of all his woes," the New York Times Magazine reported. In this forum, too, Bruce sought to deflect blame. "Robert Campeau failed to do three things," he said, "any one of which could have saved him. He did not float a new junk-bond issue when he could. He did not mortgage his properties, although Citicorp offered him one. And he did not sell assets. Anyway, I haven't been his adviser for a year and a half."

  "People invent a simple, convenient fiction to account for our involvement in these deals," he told the Times, before articulating one of the inexplicable truisms of M&A advice. "Running something is not the job of investment bankers. Our job is to give people the options, to help them understand the risks and the rewards of what they're doing. But we don't make the ultimate decisions."

  There was no question of the scheme's brilliance. The combination of Bruce's ideas and First Boston's balance sheet had enabled an unknown Canadian real estate developer to get control of the largest collection of retail stores ever assembled under one roof. And as far as could be determined, Campeau had put up virtually none of the money himself but still had control. But it was too clever by half, as they say. When all was said and done, the consensus seemed to be that if Campeau had only bought and run Allied, the deal could possibly have worked with enough time. While Campeau paid a full price for Allied, he did not overpay. He also received full prices in return for both Brooks Brothers and Ann Taylor. The problem developed when Campeau, with Bruce at his side, decided to reach for Federated. The bidding war with Macy's caused Campeau to overpay for sure. The two companies were never fully integrated to take advantage of the synergies on which the deal was based. When the economy slowed and they were stuffed to the gills with debt, the companies never had a chance.

  But the true malfeasance came when Campeau took the proceeds of the Brooks Brothers and Ann Taylor asset sales and, instead of paying down the Allied debt, used the money as his equity to buy Federated. Thus, Campeau robbed the Allied estate to buy another overleveraged retail chain. This became the basis of a claim of "fraudulent conveyance" asserted by the Allied bondholders. This claim was sufficiently well documented and proven that, as part of the Allied-Federated plan of reorganization, the Allied bondholders received some $225 million of value beyond what they would otherwise have been entitled to. First Boston also made a multimillion-dollar contribution to the bankruptcy estate, as part of the plan of reorganization, in order to end the litigation that resulted from Bruce's advice.

  It is simply not true to say, as Bruce did, that "people invent a simple, convenient fiction to account for our involvement in these deals." The inconvenient truth for Bruce was that he was directly responsible for what happened in the Allied and Federated bankruptcies, and he was not held even the slightest bit responsible. He had already banked his multimillion-dollar fees and moved on. The First Boston senior management could not even penalize him, because, of course, he no longer worked at First Boston when the bankruptcies occurred
. This is the advice that supposedly savvy corporate CEOs pay millions for?

  Despite Bruce's spin, this bankruptcy filing was unequivocal proof of the danger of horrific M&A advice. "What he was always best at," one investment banker said of Bruce at the time, "was getting boards of directors to take leave of their senses." But there was more. About two weeks before the Allied and Federated filing, the Wall Street Journal published a fifty-five-hundred-word excerpt from its reporters Bryan Burrough and John Helyar's Barbarians at the Gate, the soon-to-be-best-selling account of KKR's $25 billion LBO of RJR Nabisco, until November 2006 the largest leveraged buyout of all time. In the article--and the book--the authors reported that Henry Kravis accused Bruce (and Jeff Beck at Drexel) of leaking the news, to both the Journal and the Times, not only that Kravis's KKR intended to enter the fray for RJR Nabisco but how he planned to win. If true, this bizarre portrayal was an unconscionable breach of a client's confidence. Kravis was livid. Barbarians at the Gate also described, unflatteringly, how Kravis kept Bruce out of the most important meetings during the deal and how Kravis had hired him--and paid him $25 million--just to keep the other bidders from doing so.

  Bruce fought back. He demanded the Journal print a retraction. But it would not. Instead, the paper printed Bruce's 242-word letter of denial. Bruce questioned the reporters' statement that the source of the leaks may never be known since Burrough and Helyar were the reporters on the RJR story. "Consequently, they do know for a fact who leaked to the Journal," Bruce wrote. "They also know I wasn't the one.... I hereby release you and also any other paper from any pledge of confidentiality to reveal if I was the source of the alleged leak." Burrough, as he should, said he would go to his grave without revealing the source of the information. Some eighteen years after the fact, he said he found Bruce's reaction to Kravis's accusation that Bruce had leaked the story to be a somewhat halfhearted "show of fighting back" and nothing more "than an elaborate presentation to his existing clients and prospective clients" that he could still be trusted. But another reporter couldn't fathom how Bruce would recover from Kravis's accusations. "Kravis had to know the damage his portrayal of Wasserstein would inflict," wrote Joe Nocera (now a columnist at the Times) in a May 1991 profile of Bruce in GQ. "Investment banking is based on trust. Takeovers rely on secrecy. For Wasserstein, having the world see him as Wall Street had long seen him--as a loose cannon who couldn't be trusted--was bound to have devastating consequences."

  Bruce's mug was now squarely in the media's crosshairs. Even when he found a friendly shoulder to cry on, the resulting story did him no favors. For instance, New York magazine's financial columnist Christopher Byron wrote sympathetically in February 1990 about how the rap against Bruce for the Campeau disaster may be "a bum one" but was wholly unsympathetic to the once-loquacious Bruce's refusal to consent to an interview. "Requests for interviews get shunted to an outside P.R. firm, and the stonewalling begins," Byron wrote. Still, Bruce allowed Byron up to his twenty-seventh-floor office for an off-the-record chat about the "exaggerations and distortions that have crept into the record regarding his deal-making activities." This didn't work out too well, either. "Get Wasserstein talking, even on background, about the potshots being taken at him, and, in frustration, he whips out page after page of documents justifying his actions," Byron observed. "Out come the lists, the tombstones, the internal memos and analyses. Poring over them, he can get so excited that he becomes a kind of mad professor, hunched over next to you, unaware that he has actually pulled off his shoe and begun picking eagerly at his toes." Byron's unalloyed conclusion: "A backlash is building against Wall Street's unrestrained decade of dealmaking, and Wasserstein has become a handy lightning rod for public frustrations." Even the reliably fawning M, Inc. trashed Bruce in its September 1990 annual New York power-broker article, claiming that he was "in a slump." (Felix and Michel were listed among the still powerful.)

  THE ONSET OF the so-called credit crunch, following the collapse of the United Airlines buyout and the Allied-Federated bankruptcy, brought deal-making activity to a near standstill. Restructuring activity took center stage. There was a glimmer of hope for deal makers, though, toward the end of 1990, when the Japanese industrial giant Matsushita bought the Hollywood powerhouse MCA for $6.6 billion. From an investment banking standpoint, the deal was a testament to the growing importance of M&A boutiques after the dominance, during the 1980s, of the full-service, well-capitalized Wall Street firms. Felix and Lazard advised MCA. Allen & Co. and Michael Ovitz, the then-powerful chairman of Creative Artists Agency, advised the Japanese. The big firms were shut out of one of the biggest deals of 1990. At the end of November 1990, the Wall Street Journal reported that according to an unnamed source, and unbeknownst to both Allen & Co. and Ovitz, three Japanese bankers in the Japanese affiliate of Wasserstein Perella had secretly advised Matsushita's senior management by providing a "second opinion on price and structure" without attending any of the meetings for the deal. The Matsushita management "didn't want to disturb Ovitz" with Wasserstein Perella's involvement, the Journal's source said, "but they really liked having a second opinion, someone who could be impartial." Wasserstein Perella's M&A ranking in 1990 stood at a dismal eleventh--down from the top echelons of previous years. The MCA deal would have doubled the dollar amount of the firm's merger activity in 1990 and raised its ranking to ninth.

  But the story--and Wasserstein's involvement--were an embarrassing hoax. After further investigation, the contrite Journal discovered that it had been duped. Other bankers involved in the MCA deal openly questioned Wasserstein's role. Finally, when the required filings were made with the SEC, listing bankers and their fees, Wasserstein Perella was not cited. This fact the Journal--and others--conveyed with thinly disguised glee. "All in all, the incident made the once-fearsome Wasserstein look a little desperate: desperate to be connected to a big, sexy deal; desperate to recapture some of his old reputation; desperate to be seen as a player still," Nocera observed in his GQ profile. "Myself, I saw that story and thought, It's over for Bruce Wasserstein. It's amazing, when you stop to think about it, how dramatically the worm has turned on Wasserstein. It was once inconceivable that such a high-profile deal as Matsushita-MCA could go from start to finish without his getting his pudgy little fingers around it."

  At this moment, many a Master of the Universe would succumb to the fire hose of criticism and, at the very least, begin to question his faith. Not Bruce. He saw himself as the ultimate Nietzschean Ubermensch. He played by different rules from everyone else. He refused to give the naysayers the satisfaction of affecting him. He dug deep into Bruceania and set out to prove his critics wrong. "Neitzsche's whole posit was that there are certain superhumans who are above the fray, above normal constraints," a friend of Bruce's said. "He believes he is that. And so if you believe that, you're not bound by common morality, and you're just incredibly ambitious and impatient and not held back by that." He decided to make some changes.

  Bruce separated from his second wife, Chris, and their three children. The family continued to live in their 1030 Fifth Avenue apartment, and he moved around the corner to the Westbury Hotel, off Madison Avenue. At a party in Bridgehampton a few months earlier, he had met Lorinda Ash, a lithe, dirty-blond beauty who was then working for Larry Gagosian, the uber-art dealer. Eric Fischl had even painted her portrait for the billionaire art aficionado Eli Broad, whom she had dated (although the painting was snatched up by a New York collector before Broad could get it). Bruce fell for the much younger Ash hard and pursued her aggressively. "He was very decisive, even about leaving his wife," explained someone who knows both Bruce and Chris. "It wasn't this harangue about being back and forth and 'What do I do?' and 'What do I do?' He's just not a person who tolerates being unhappy." Soon after his divorce was finalized in 1992, he and Ash moved in together, first to East Sixty-first Street and then to 817 Fifth. Although his appetites remained robust, at Ash's suggestion Bruce started exercising, and lost fifty pounds. He took t
o wearing contact lenses instead of the preposterous eyeglasses that had been one of his goofy sartorial trademarks. Some of his studied schlumpiness appeared to recede. Ash introduced him to hip young artists and their work. But by all accounts, for Bruce art seems to be nothing more than another asset class with which to display his investment prowess. Under Ash's influence, he bought work by many of the artists in the Gagosian stable: Salle, Warhol, Serra, Halley, and Lichtenstein. Before he met Ash, he bought a few Impressionist paintings by Monet and Matisse. Art "is just another acquisition for Bruce," a friend observed. "It is totally the Charlie the Tuna syndrome--'I'm a rich guy, I gotta have class. I gotta have art.'" On the other hand, Bruce has always been enamored of creative people and enjoys spending time in the company of artists. He encouraged Ash to invite artists to dinner or to wrangle an invitation to an artist's studio. At one point in the doldrums of the art market in the early 1990s, Bruce, the lusty contrarian, paid $1 million for a painting by Mark Rothko. From an investment point of view, the purchase was a stroke of brilliance. (The painting is said to be worth $15 million today.)