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

by William D. Cohan

  The new year not only brought the announcement of Bruce's "new" management team but also revealed to all the partners the complexity of the deal Michel had cut with Bruce. A summary of the 116-page "Third Amended and Restated Operating Agreement of Lazard LLC, Dated as of January 1, 2002" bluntly stated the changes: "BW will take over from MDW as Chairman of the Executive Committee, will take on the positions of Head of Lazard (for an initial five-year term) and CEO of Lazard and will assume all of the powers of MDW and the Executive Committee. In these positions, BW will have all the powers with respect to Lazard LLC, subject to the approval rights of the Lazard Board described below." As for Michel, "MDW will become the non-executive Chairman of Lazard and Chairman of the Lazard Board. MDW will hold these positions until the earlier of his death, adjudicated incompetence or voluntary withdrawal or the date on which the MDW Group ceases to hold a Class B-1 Profit Percentage. The position of Chairman of Lazard will cease to exist after MDW ceases to hold this position."

  While not then publicly revealed, the new Lazard board of directors consisted of Bruce and the four people who reported directly to him--Agius, Braggiotti, Jacobs, and Ralli--and Michel and his five close allies, Francois Voss, Didier Pfeiffer, Bruno Roger, Antoine Bernheim, and Alain Merieux, the CEO of bio Merieux. By a majority vote, which Michel felt confident he could then easily obtain, the Lazard board had the right to approve, among other powers, a material acquisition of, merger with, or joint venture with another investment banking firm; the appointment or reappointment of Bruce; the removal of Bruce, only for cause (as "narrowly defined"); and the appointment or removal of a board chairman other than Michel.

  As far as the day-to-day operations of the firm, though, it was clear Bruce had all the power. He alone could appoint or remove, with or without cause, all "Heads of House, Senior Managers and Global Heads." He could appoint or remove any managing director he wished "at any time with or without cause," with the notable, and interesting, exception of the managing directors in Paris, "where the existing system for nomination and removal of Managing Directors will be continued" (reflecting, no doubt, the deal he had to cut with Ralli and Braggiotti and longstanding practice). Bruce alone had the approval right over all other appointments at the firm and, of course, was given the sole right to determine the compensation of managing directors and the "aggregate compensation" of other employees of the houses, and retained the right "to determine the individual compensation of any particular employee of a House." For the working partners, Bruce would have the right to set and change at any time their Class A-1 profit percentage, their interest in the annual profits and losses of the firm. For the nonworking, limited partners and also for the so-called capitalists--Michel and the other founding families, plus Eurazeo, among others--their share of the annual profits and losses plus their share of the goodwill interests worked pretty much the same as that for the working partners except that the percentages were firmly set and not alterable by Bruce. The working partners were to get about 58 percent of Lazard's profits and the limited partners and the capitalists were to get 42 percent of the profits, although this split was subject to change, through dilution, as Bruce hired new partners.

  Quite simply, the depth and breadth of Bruce's control of the firm were not only unprecedented for Lazard; they were unprecedented for almost any financial institution. His deal for a minority stake with full management control confirmed what many Lazard professionals had feared--that he stole the firm from Michel. Michel's deal with Bruce appeared to violate one of the cardinal rules of takeovers: never sell operational control of a company without being sure to fetch a "control premium," or an above-market price that attempts to value what selling management control is worth. But that is exactly what Michel did: in a decision rich with irony, he sold near-absolute control of Lazard--a firm worth roughly $4 billion--to Bruce for $30 million. What's more, the $30 million Bruce invested, it could be argued, came from the $75 million or so he saved by not paying state and local taxes in New York on his $625 million windfall from the sale of his former firm. In effect, it had not cost Bruce a dime to take control of Lazard.

  Indeed for many Lazard partners, the January 1, 2002, documents conjured up a sense of another contract of adhesion forced down their gullets. Just as in 2000, the execution copies of contracts and "acknowledgment" forms started flying around the globe, with very little time to review them and no opportunity to negotiate. Scott Hoffman admonished the managing directors to sign the forms, without fail, by January 31, 2002, or "you will lose all the A-2 goodwill that has been allocated to you." Worse, the 2002 documents contained none of the vital schedules and annexes that were in the 2000 merger documents. The Lazard managing directors would no longer know, for instance, who was on the Lazard board of directors or how their fellow managing directors were to be paid. They also would not be given a copy of the crucial "BW Employment Agreement" that contained the details of Bruce's financial deal with Michel. Hoffman responded when asked for the addenda, "I have not included the schedules and annexes as they are not available." One longtime partner had his goodwill percentage diluted by 5.5 percent and his profit percentage diluted by 10.6 percent as a result of Bruce's appointment--all without his approval, consent, or ability to prevent or challenge the new arrangement. Another partner had his goodwill percentage diluted by 5.8 percent and his profit percentage diluted by 27.2 percent, again without notification or consent.

  Such dilution was permitted by the third amended agreement. One infuriated longtime partner sent around a note to his colleagues: "In thinking about the end game, it occurred to me that Lazard is a corporation, a Delaware corporation, even though we call it a partnership, and that in corporate law, as I remember it, controlling shareholders have a duty not to self deal in a way that they profit to the harm of the minority." Even though Hoffman had warned the managing directors to sign their documents by January 31, 2002, or "forfeit all of your goodwill interest," and wrote that, "unfortunately, there cannot be any exceptions," the bickering between many of them and the firm went on through at least the end of March. These partners, smart men all, were struggling mightily to receive from Hoffman, Bruce's new consigliere, whatever tiny shreds of information they could to allow them to make an informed decision. Requests came into Hoffman for more information. Hoffman, as instructed, stuck to his guns and stonewalled. The changes were adopted and a new veil of secrecy descended on the house of Lazard.

  KIM FENNEBRESQUE'S CONCERNS aside, Bruce clearly thought there were still Great Men available. Soon after taking over, he went into recruiting overdrive, ignoring the fact that other firms were madly cutting excess bankers to reduce costs. Hiring new bankers would, of course, further reduce Lazard's profitability, but Bruce did not care about that. He was determined to build Lazard's long-term equity value at the cost of its short-term profitability. Michel made the mistake of thinking that the short-term incentives he gave Bruce--an increasing percentage of higher profits--would be a bigger driver of his behavior than the 8 percent ownership he had. Instead, Bruce was determined to make Lazard relevant again by finding the next generation of Great Men; only, it turns out, the ones he ended up recruiting to Lazard bore an uncanny resemblance to his longtime band of banking brothers.

  One week after taking over Lazard, Bruce recruited six bankers from DKW. Five of them--Neal Lerner, Michael Gottschalk, Douglas Taylor, Steve Campbell, and Justin Milberg--had resigned, and Bruce rewarded them with fat, guaranteed pay packages. No firm was doing such things in January 2002, let alone one that had been on the brink of financial disaster the entire previous year. He also reportedly paid this group a total of $10 million to get them out of their existing DKW contracts. Campbell reportedly was to be paid $3 million per year plus "several million dollars in additional compensation" plus between 0.5 and 1 percent of the Lazard equity. The other bankers were to receive compensation packages of several million dollars per year plus equity. They were then sent on "gardening leave" and did not start at the
firm until April. The sixth DKW banker, and the most senior--Jeff Rosen--was still negotiating with Bruce, as his existing pay package at DKW, where he was a vice chairman and head of investment banking in continental Europe, was more complicated. Those negotiations lasted but a few days longer. On January 14, Rosen, a founder of Wasserstein Perella, announced he, too, was joining Bruce at Lazard. The same day, Bruce also announced he was rehiring Dave Tashjian, the former head of capital markets who had been fired by Loomis two months before and remained a consultant to the firm. Tashjian had once worked at Wasserstein Perella, too, as the head high-yield trader. Ironically, had Loomis not fired him, Tashjian would have been at the firm when the goodwill points were distributed and would have fared far better than he did in his negotiations with the firm in mid-January. Alasdair Nisbet, also from DKW, was hired as managing director in London.

  In February, Bruce was successful in recruiting Chuck Ward, the co-head of investment banking at First Boston, to Lazard as president. Ward, who had worked with Bruce at First Boston and then Wasserstein Perella (before returning to First Boston), got a pay package reported to be $7 million per year. Of these FOB hires, one Lazard banker wrote to a chat room: "With super rich contracts for the next few years and equity stakes in the company, what incentives do they have to do anything esp[ecially] since Lazard will most probably be sold within the next couple of years? Just sit back...get chilled...enjoy the expense accounts and wait for the acquiring firm to accelerate their guaranteed contracts. At best we cruise at current levels, but most probably the increased overhead and politics will mean tougher times."

  Bruce's first unscripted challenge as the new head of Lazard came on the morning of February 28, when Michael Weinstock, Andrew Herenstein, and Chris Santana announced they were quitting the firm within hours to join Bruce's friend Steve Rattner at the Quadrangle Group, Steve's two-year-old private-equity firm. In October 2001, Weinstock and Herenstein, who had previously been Lazard's highly regarded distressed-debt research analysts, became the key professionals of Lazard's new Debt Recovery Fund. Weinstock and Herenstein not only had helped Lazard recruit outside investors but also were the ones primarily responsible for making the fund's investments in distressed securities. Santana was the fund's head of trading. By the time the trio split for Quadrangle, the fund had amassed some $280 million, most of which had come from outside investors. Lazard had spent $8 million on startup costs to get the fund going.

  On the day Weinstock and Herenstein quit, Steve called Lazard and told the firm that the men had signed employment contracts with Quadrangle and would be starting a distressed fund at his firm. He also said that Lazard had "little choice but to transfer the Fund and its assets to Quadrangle where they could be managed by Weinstock and Herenstein." If Lazard chose not to do this, Steve reasoned, the fund's "partners would suffer severe harm, and the Fund would likely be destroyed." Bruce ignored Steve's threat. Instead, he decided to wind up the fund in an orderly manner. He also decided to sue Weinstock and Herenstein. Lawyers for Lazard alleged, among other things, that the two men violated the "fiduciary and contractual duties" they owed the fund, "and their failure to disclose their consideration of their possible departure is alleged to have been fraudulent." In August 2004, Judge Leo Strine, vice chancellor of the Delaware Court of Chancery, threw the case out (except for a small dispute over the taking of supposed confidential information). "What [Weinstock and Herenstein] are alleged to have done wrong is to have plotted their departure from the Fund in order to seek what they perceived as a better opportunity elsewhere, and to have executed their departure in a manner that made it difficult for Lazard to continue to run the Fund itself and that therefore gave Lazard an incentive to accede to the suggestion that the Fund be transferred to Quadrangle," Strine wrote. "Candidly, I find this argument rather astounding."

  Strine blamed Lazard for not "adequately" planning for the potential departure of Weinstock and Herenstein, who were not under contract and were therefore, of course, free to leave at any time without notice, just as Lazard was free to fire the two at any time without notice. The count that Strine allowed to proceed--on the question of confidential information--was later settled. Bruce also sued Steve in Bermuda, but Lazard lost there as well. Lazard was required to pay the legal fees of Weinstock and Herenstein since the firm had indemnified them. Bruce paid some, but not all, of what Lazard owed Quadrangle. Michel said that had he still been in day-to-day control of Lazard, he would not have pursued the legal option. "I've never sued anybody," he said. Still, he was not at all pleased with the way the former Lazard professionals handled their swift departure. Michel said the high-yield group that Weinstock and Herenstein were part of made about $30 million annually for the firm. When the two men urged the firm to set up the distressed fund, and to close the high-yield department, the firm agreed. The $30 million in profits turned into $15 million of losses as the fund was being established. The expectation was, of course, that the fees and profits from the fund would more than make up for the loss of the $30 million. "And then within minutes of them being ready to do a fund, they left," Michel said. "I found that, at the very least, inelegant frankly. Inelegant. In my way, this is a very severe condemnation, because in life you have to try to act decently."

  The first outside hire who had not previously worked with Bruce came in March, when Bruce hired George Bilicic, then thirty-eight, from Merrill Lynch, to run Lazard's utility banking effort. Bilicic had been at Merrill for sixteen months after years at one of Bruce's other alma maters, Cravath, Swaine & Moore. Bruce also hired Perk Hixon, then forty-three, as a managing director from First Boston. In November 2002, he hired three "senior media bankers" from Merrill as new Lazard partners. In sum, he hired twenty-four new partners in eleven months. "People are cheap at the moment," he told the Financial Times. Along with his recruiting drive, Wasserstein called his first global meeting of all 150 Lazard partners, many of whom had never before met. "No more politics," Wasserstein declared again. "From now on we focus on clients." Of course, by reassembling his brood, Bruce had made Lazard as political as ever, much to the fear and frustration of the longtime Lazard partners, who felt very much alienated by his unilateral moves and the fact that the new hires were rewarded with large contracts and a disproportionate amount of the equity.

  An eerie new dynamic was emerging inside the firm: there were all these new partners with explicit loyalty to Bruce who had been hired without their "teams," and so, in order to get anything done, they had to figure out a way to maneuver around the old Lazard partners, who by and large had no particular affinity for Bruce, to get access to the very limited resources. At the same time, the old partners and the new ones, many of whom were generalists, had to figure out who was going to call on which clients, all without upsetting the new partners who were close to Bruce, the absolute monarch.

  In addition to upsetting the working partners, Bruce's hiring spree was also annoying the capitalists, such as Michel, Bernheim, and Guyot, who were beginning to figure out that the large guaranteed pay contracts were likely to mean Lazard would be hard-pressed to make money in 2002, a fact that was a serious threat to their normal annual dividend stream and something that had never happened in the post-World War II era of the firm--yet another example of how Bruce had outfoxed Michel.

  One day in mid-April, in the midst of Bruce's manic hiring, Adrian Evans, the much-admired ten-year Lazard partner in London who briefly took over as Lazard's chief operating officer after Loomis's resignation and before Bruce took over, went out for an early-evening jog in the environs of his Eaton Square home in London. When he got back from his run, he collapsed on the stairs, and with his wife watching, he announced, "I'm gone." Evans had died of a heart attack, at age sixty, leaving his wife, two daughters, and two stepsons. At his memorial service in London, Verey, the former head of Lazard in London, remembered Evans--often described by his colleagues as "Verey's brain"--as a man who had the ability to make everyone feel as if he was your best fr
iend. Michel did not attend the memorial service.

  Soon thereafter, Bruce held a meeting at Paris's Bristol Hotel for about seventy managing directors to discuss ways to improve cross-border marketing and deal flow. "Historically, people had talked about the business in New York or the business in Paris," Chuck Ward said. "They never really talked about the telecom business or the media business." Now, he said, "we have industry groups really talking to each other on a global basis." After the meeting at the Bristol, Michel invited his partners to his fabulous maison particulier on Rue Saint-Guillaume for dinner, wine, and sumptuous surroundings. "He's the only guy that will serve '61 Petrus at the bar," said longtime partner Al Garner.

  Bruce, meanwhile, who was still living in London during 2002, was not making many friends there. In July, he fired six managing directors in London, out of twenty-two, a move that caused one London securities lawyer to tell the Financial News, "After this, no corporate financier, however senior, can feel totally secure." The six were given a week to vacate their offices. The firings may have been harsh, but one European Lazard banker applauded them. "Recent layoffs of MDs were necessary and will encourage young and ambitious VPs and associates to push their way up," he wrote to a blog. "Deal flow improving after a difficult first half. Overall the franchise remains strong and confidence is pretty high that the firm will recover." But another banker, in London, was not so sure. "Morale is pretty low," he wrote. "And people are waiting when their turn will come to be sacked...There is no improvement in the situation in London."