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

by William D. Cohan

  Bloomberg Magazine, for one, decided that all of Bruce's hiring was merely a prelude to the sale of the company. In a February 2003 article, "Dressing Up Lazard," the magazine wondered if Bruce's aggressive efforts to reassemble his loyalists from First Boston and Wasserstein Perella--and then some--were just "to do one last deal: the sale of Lazard."

  SINCE THE DAYS when Felix worked for Harold Geneen at ITT, Lazard has primarily been known for its M&A advisory prowess. Indeed, about 65 percent of its managing directors around the world today are M&A bankers. And M&A bankers have always run Lazard, whether when it was three separate firms or in its newly merged state. Andre, Felix, Steve, Loomis, David Verey, and Bruno Roger were all M&A bankers. Michel was not an M&A banker per se--he rarely worked on deals--but he thought of himself as a banker. Bruce and all of his deputy chairmen were M&A bankers. Bruce's focus--and much of the media attention, too--have been on whether he could restore the firm's luster by hiring a new breed of high-priced M&A bankers to replace the wave of talented ones that started leaving the firm in the wake of Felix's departure.

  Despite the focus on M&A, Lazard has pursued other business opportunities over the years. Among them have been raising money for corporations and municipalities, investing capital in private companies for its own partners' accounts and those of other institutional investors, and managing the portfolios of individuals and institutions in public securities--the so-called asset management business. Indeed, aside from the M&A business, Lazard's asset management business has been its most important. At the end of 2002, Lazard managed $64 billion for institutions and wealthy individuals. And during 2001 and 2002, while the M&A business was suffering, the asset management business continued to produce a steady stream of profits, mostly from recurring management fees. The astounding declines in the troika of Lazard's other businesses--M&A, capital markets, and principal investing--during 2001 and 2002 made the importance of asset management disproportionate to the overall weal. In 2001, the money management business earned about $135 million, 93 percent of the firm's total profits of $145 million. In 2002, Lazard Asset Management, with its steady stream of annuities and fees, generated about $130 million, or about 65 percent of the entire firm's profits. Even before these difficult years for the firm as a whole, the asset management business steadily provided one-third to one-half of the firm's profits. "I wish I had Lazard's asset management franchise," said one former partner. "It kept Michel afloat. It is very well run--the hidden secret of Lazard." When Herb Gullquist and Norman Eig arrived at Lazard in 1982 from Oppenheimer Capital to head Lazard Asset Management, the firm managed a modest $2 billion. As of November 2006, Lazard managed about $100 billion and was sixty-fourth on the 2004 Institutional Investor list of the three hundred largest money managers.

  In 1997, Michel sought to merge the money management businesses of the three houses (as a prelude, one supposes, to the eventual merger of the houses themselves in 2000). He was able to merge the New York and London businesses under Eig and Gullquist's direction, but Paris balked. And Michel acquiesced. It remained a separate entity, under the name Lazard Freres Gestion, with around $17 billion of assets under management. As part of this quasi merger, Michel agreed, in yet another of his infamous side deals, to grant Eig and Gullquist an extraordinary 30 percent of Lazard Asset Management's profits, or 15 percent each. In 1998 alone, Lazard paid each man $15 million, which helps explain why Eig and Gullquist had among the largest capital accounts at the firm--more than $10 million each.

  As, theoretically, a partner's capital account represents a 10 percent holdback of his accumulated paid compensation, a $10 million capital account would imply aggregate total compensation in excess of $100 million each for Eig and Gullquist. In 1998, Eig and Gullquist hired William von Mueffling to start a second hedge fund, called Lazard European Opportunities. (Lazard first offered investors a hedge fund in 1991.) In its first full year, von Mueffling's fund returned 182 percent for its investors. The fund stopped taking new investors after it had reached $1 billion in assets in August 2000. Von Mueffling began another hedge fund, Lazard Worldwide Opportunities, in 2001, and even though it lost 14.4 percent the first year--a difficult market for all--in 2002 it increased 20 percent. The importance of von Mueffling's hedge funds to the firm's overall profitability was quickly becoming apparent. In the summer of 2001, amid all the other turmoil at the firm, John Reinsberg, another partner in asset management, hatched a scheme where he would replace Eig and Gullquist as CEO of asset management and von Mueffling would become chief investment officer. Loomis reportedly took the idea to Michel, but Michel was busy with his own schemes--specifically working on jettisoning Loomis in favor of hiring Wasserstein. The idea died. But the dissatisfaction among the asset management team with how they were being compensated was one of the chronic problems in 2001.

  When Bruce took over as CEO in January 2002, he immediately had to grapple with the ongoing demands of the asset management group for its own equity incentive plan. For years, Eig and Gullquist had conveyed the importance of having such a plan as a way to retain and reward portfolio managers, many of whom were fleeing the firm. In December 2002, Bruce floated a trial balloon with the Financial Times about his desire to take public the asset management business, which he valued at $2 billion. He viewed this partial IPO as a way to raise capital for Lazard and refocus its business on investment banking. As a prelude to any planned public offering, Bruce and Eig settled on the idea of granting the asset managers equity that would attain value upon a sale or IPO of the business. Eig doled out the packages, but von Mueffling, then thirty-five, and his hedge fund teams protested and demanded from Eig a greater serving of equity. When Eig refused, von Mueffling quit. Even Bruce's personal appeal to von Mueffling--"What can I do to get you to stay?" he asked--failed, and the star manager left to form his own hedge fund business along with most of his team.

  "Norman Eig misread the whole situation," one insider said. "There was a huge amount of complacency. He thought nobody would leave because of the job market. It was a mistake." Another observer said, "These departures will be catastrophic for Lazard's revenue stream. These guys were rock stars and you replace them with people who will just push buttons." The possibility of a near-term IPO for asset management evaporated when von Mueffling and his team left the 30 Rock offices. Within eight months, 75 percent of the assets in Lazard's $4 billion hedge funds had flowed right out the door, too, most of it following von Mueffling.

  In October 2003, Gullquist announced his intention to retire, setting off another round of political infighting to decide his successor. Bruce had previously--and very quietly--lured an old confidant, Ashish Bhutani, the former co-CEO of DKW North America, to be his adviser for "strategic planning" and quickly installed him in the asset management business, initially as part of an "oversight" committee. There was very little press coverage of his hiring. Word was that Bhutani would succeed Eig and Gullquist, but several of the senior asset managers objected vigorously to that appointment. A solution was promised for November. Finally, in March 2004, Bruce announced that along with a rash of new hires for LAM, Eig would move up to become chairman and Bhutani would be the new CEO. Soon after this announcement, in another "serious blow," Simon Roberts, LAM's head of U.K. equities, quit to join BlueCrest, a hedge fund. "What happened at LAM shows that even when a traditional money management firm is able to build a successful hedge fund business, the cultural and compensation issues can still come back to haunt you," one hedge fund consultant told Institutional Investor.

  AROUND THE TIME Bruce got the situation at Lazard Asset Management under his control and despite his many public denials on the matter, he made a preliminary foray into the market to sniff around to see if any firms on Wall Street had an interest in buying Lazard. His first visit, accompanied by Gary Parr, was to none other than Dick Fuld at Lehman Brothers. According to Goldman's Ken Wilson:

  Bruce came in and they started to talk, and Bruce said, "Look, the purpose of this meet
ing is we want to get together and have you know something more about our firm, so if we started to want to do anything, we've already done sort of the homework, this sort of thing." Dick, who hates Bruce, said, "Cut the shit, Bruce. You're here to sell your fucking firm. So how much do you think it's worth?" They go into this discussion of the amount of synergies that are going to come out as $500 million and you capitalize it and Lazard's worth $6 billion or $7 billion. And Dick says, "You know, I can see why you're such a shitty M&A banker. Why you give such bad fucking advice. If this is what you tell people, you gotta be out of your fucking mind." It went just downhill from there.

  Two weeks later, according to Wilson, Michel called Fuld and said, "'You know Bruce, he knows all along the right value for Lazard is $4 billion.' Dick says, 'Look, that could very well be the case. I know you have a lot of options, so what I think you should do is to explore all of your options. If nothing comes back, maybe we can talk, but it would be at a value well below $4 billion, and a good portion of the payments would be contingent.' [Fuld] never heard back." Bruce was also said to have spoken with Chuck Prince, the CEO of Citigroup. And with John Bond at HSBC, who reportedly said his meeting with Bruce was the "worst business meeting he ever had." And with Kenneth Lewis at Bank of America, who referred to Bruce as a "sleazoid." According to Wilson, Bruce had shopped Lazard around to such an extent that "it's just generally known it's a bid-wanted situation."

  PERHAPS THE BIGGEST news Bruce made in 2003 had nothing to do with Lazard at all, and illustrates how good he is at getting what he wants, repeatedly. Through Wasserstein & Co., his $2 billion private-equity firm that he kept for himself when he sold Wasserstein Perella to the Germans, Bruce owns a number of industry-focused publications, including the New York Law Journal, the American Lawyer, and the Daily Deal (an M&A industry publication). In August 2005, Wasserstein & Co. paid $385 million to buy seventy industry publications, such as Beef and Telephony from Primedia, the struggling media company owned by the buyout mogul Henry Kravis.

  But what got the media itself buzzing with amazement was Bruce's winning the auction for Kravis's New York magazine in December 2003. True, he agreed to pay more than anyone else--$55 million, a high price by any standard for a magazine then making about $1 million of profit. But he also emerged out of the auction's wings, using his long-standing and complicated relationship with Kravis, and snatched it out of the hands of the self-proclaimed winners--a high-powered investor group comprising such journalistic entrepreneurs as Mort Zuckerman, Harvey Weinstein, Nelson Peltz, Donny Deutsch, and Michael Wolff. Bruce made headlines and confirmed, yet again, his deal-making prowess. "It has to be considered brilliant that he managed to hide his interest so well," one media investment banker told Bruce's Daily Deal. "He lay low with the press, then came storming out of the shadows." No doubt his access to Kravis didn't hurt Bruce's ability to make sure he got the last look at the property. "What do you gain by having people know what you are doing before you do it?" Bruce said. He cited two reasons why he was able to win. First, he said, "We should be able to execute deals well, if nothing else." Without flinching, he then said his personal integrity was the key to his victory. "It basically goes to confidence," he said. "In other words, it's a funny business, but people trust certain other people because if they say something, they believe that they create a credibility over years, so I think partly that if I make a commitment, people know it will happen."

  The New York Times found Bruce "maddeningly vague" about why he bought the magazine. John Huey, the editorial director of Time Inc., said of the sale: "Certainly, if you look at it from a business point of view, it is insignificant. But because it is New York, with the New York media covering the sale of New York magazine, it takes on an aura that defies all logic." Curiously, Bruce bought New York not through Wasserstein & Co. but through a series of personal trusts set up for the benefit of his children, the same trusts perhaps that own the majority of his stake in Lazard.

  People were left scratching their heads by the high price Bruce agreed to pay for the magazine, which some considered oceanfront property. "It's really weird," one private-equity investor commented. "I don't understand why he is doing it. This may be an interesting hobby but it is not an investment." Mark Edmiston, an investment banker specializing in media deals, thought Bruce's purchase of New York was symptomatic of what he perceives to be a growing phenomenon in the magazine business. "A lot of them are big ego trips," he said. "You know, you get to own a magazine about your friends and neighbors, and be the king of your universe. This is a little bit of what we call the New York magazine syndrome...meaning I don't think Bruce Wasserstein bought New York magazine to get richer.... Obviously, the price of the magazine is not justified by the facts."

  The conventional wisdom on this point seems to be that even though Henry Kravis couldn't make New York work as a financial enterprise, Bruce believed that by focusing on more upscale stories about business and fashion, the magazine would be able to benefit from the improving metropolitan economy. He also intended to revamp the magazine's ineffectual Web site. "At best, the magazine is the embodiment of New York, a very exciting city," he told the New York Times. "All you have to do is be a good mirror of this city."

  A question even more fundamental than whether Bruce overpaid for this one magazine is why the CEO of a Wall Street firm is permitted to make deals for his own private account, at his own personal and separate buyout shop, when he is running a twenty-five-hundred-person regulated securities firm. With a staff of about thirty in three offices (New York, Los Angeles, and Palo Alto), Wasserstein & Co. manages "approximately $2.0 billion of private equity and other assets" for individuals and institutions beyond just Bruce Wasserstein. The firm has been quite active in the past few years. Wasserstein & Co. bought the company that owns the Harry & David direct-mail fancy-food operation (a planned IPO is on hold) and Sportcraft, the maker of foosball and Ping-Pong tables. Along with Centre Partners, a buyout fund affiliated with Lazard, Wasserstein & Co. also owns American Seafoods, the largest harvester and at-sea processor of pollack and hake and the largest processor of catfish in the United States. In November 2006, one of Wasserstein & Co.'s portfolio companies announced the acquisition, for $530 million, of Penton Media, Inc., a portfolio of fifty trade magazines, eighty trade shows, and an array of online media sites.

  Bruce is the firm's chairman, its principal owner, and its main beneficiary. His carefully crafted biography at the Wasserstein & Co. Web site makes no mention of his role at Lazard. Michel, who allowed Bruce a luxury no other Wall Street CEO would ever even contemplate, let alone be permitted by any self-respecting board of directors, said he didn't care whether Bruce had his own buyout firm as long as it didn't detract from his running Lazard. The third amended and restated operating agreement required Bruce to get Michel's "written consent" if he "desires to make available to Wasserstein & Co., Inc., any corporate opportunity of Lazard or any of its subsidiaries that arises from a relationship of Lazard or any of its subsidiaries or affiliates" other than any relationship Bruce may have had with Lazard prior to November 15, 2001. Of course, what is not clear is what is meant by "any corporate opportunity." Can Wasserstein & Co. look at an investment or buyout that Lazard is also looking at, or that one of Lazard's funds is looking at? And this document, of course, says nothing about why he is permitted this conflicting dual role. Bruce even permitted Lazard managing director John Chachas, with his own investment company, Sand Springs Holdings, to be one of the lead investors in the February 2005 $8.5 million acquisition of Gump's, the famous San Francisco department store. And he permitted the superstar Gary Parr to be a meaningful investor in the February 2006 buyout of Fox-Pitt, Kelton, an investment banking competitor of Lazard's, from the insurance giant Swiss Re. The question is, why?

  Others have wondered about this, too. Although the New York magazine purchase appears to have been made through a company that controls his family trusts--by an entity called New York Magazine Holding
s--for some reason the vice chairman of Wasserstein & Co., Anup Bagaria, helped to negotiate the deal and is the CEO of New York Magazine Holdings. "Mr. Wasserstein has stated that he wants to take the magazine up-market and increase its business reporting," the New York Observer editorialized. "But how can he avoid the conflict between New York's coverage of corporate America and the city's high-profile C.E.O.'s and investment bankers, and the fact that he runs an investment-banking firm that does business with dozens of companies as well as dozens of investment and commercial banks?...What will happen the next time there's a $20 million M. and A. fee on the table for Lazard, and New York is about to cover the comings and goings of the corporate C.E.O. whose company is paying the fee?" The question of Bruce's objectivity as a publisher is even more interesting considering that the American Lawyer, the Daily Deal, and New York aggressively cover the M&A business (indeed that is all the Daily Deal covers). One of Bruce's "friends" suggested the New York purchase was about ego and social influence. "I think that Bruce was surprised by how little cachet there has been in owning American Lawyer and the Deal," he said. "This purchase should fix that."

  Only time will tell whether Bruce, the former journalist who is on the Board of Visitors of the Columbia University Graduate School of Journalism, commits the cardinal sin of journalism, imposing prior restraints on his reporters who dare tack too close to windward. And yet an overt act may not even be necessary to have the desired chilling effect, as Great Men work in a landscape of great subtlety and nuance. In her reporting on Bruce's tactical victory for New York, Yvette Kantrow, who writes a media column for the Daily Deal, allowed how, "just to be clear, Media Maneuvers has absolutely no inside information on any of this, and if we did, we probably wouldn't say. Which is the point. As fun as this collision of dealmaking and the media is, this will be one Media Maneuver you won't read about here." Exactly.