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

by William D. Cohan

  One clue to why Bruce bought New York became apparent during the summer of 2005, when it was revealed that his son Ben would, after Labor Day, become the magazine's associate editor, the only associate editor. There is nothing unusual or nefarious in any of this, of course. It is no different from the Murdoch children working at News Corporation or the Sulzberger children working at the New York Times Company. The company that owns the magazine is private and is likely controlled by a trust whose beneficiary is Ben Wasserstein (so he in effect already owns the magazine). What is amusing, though, was the need of the new editor Adam Moss (whom Bruce had plucked from the Times after summarily dismissing Caroline Miller, the previous editor) to justify the hiring to his staff. On July 14, 2005, Moss sent an e-mail to the magazine's editorial department, which said in part:

  everybody,

  i am happy to announce that ben wasserstein will soon be joining our staff. as many of you know, ben is now an associate editor of vitals, where he helps edit/assign all the text (there's more of it than you think).

  for obvious reasons, i have had the opportunity to get to know ben over the last year. he has impressed me as a smart and lovely guy, a talented editor who wants to work hard and to learn. i have remarked to some of you that he'd be a perfect candidate for a job here if he weren't a wasserstein--and then recently, it began to seem like his last name was a pretty dumb reason not to hire him.

  If the past is any prelude to the future, what will undoubtedly not be covered by Bruce Wasserstein's New York is the topic of Bruce Wasserstein's Lazard.

  BY JANUARY 2004, in his two years running the firm, Bruce had hired fifty-five new partners at a guaranteed pay of a total of at least $180 million. And by April 2004, the number of new partner hires was up to fifty-nine. "There's a view at the big firms that you can put any guy in a suit and go out and sell products," Wasserstein told the Wall Street Journal in partial justification of his hiring spree. "I believe it matters who's in the suit." But did Lazard have anything to show for its expenditures? M&A revenue increased to $420 million in 2003, from $393 million in 2002, a 7 percent increase. The firm increased to twenty-nine, in 2003, from twenty-one, in 2002, the number of deals it worked on greater than $1 billion in value (flat with 2001 and down from forty-seven in 1999). The firm's real success in 2003, though, was its restructuring business, where revenues increased to $245 million, from $125 million in 2002. Restructuring advisory powered the financial advisory business to operating income of $311 million in 2003, up 54 percent from $202 million in 2002. But Bruce had nothing to do with Lazard's restructuring business; Loomis had hired those partners. In the closely watched M&A league tables, according to Bloomberg, Lazard ranked seventh worldwide in 2003, the same as 2002 and up from twelfth in 2001--commendable but modest progress to be sure.

  Parr hit the jackpot for the firm in January 2004, when he advised his longtime client Jamie Dimon on the $53 billion merger between Bank One and JPMorgan Chase. Lazard received a $20 million advisory fee when the deal closed in July 2004 (JPMorgan paid itself a $40 million fee). Between his A-Rod-like compensation package and his Bank One coup, Parr has reached iconic status. Not unlike Felix or Steve, he began the obligatory Great Man campaign of writing "thought" pieces for respected journals. His essay "Europe's Banks Do Not Have Easy Options" appeared in the Financial Times in June 2004.

  Anecdotally, though, the firm's performance after two years with Bruce at the helm was mixed. Lazard advised Pfizer on its $60 billion acquisition of Pharmacia in July 2002, although that had nothing to do with Bruce or someone he had hired, either. But the bulked-up Lazard had missed out on many of the largest deals of the past few years, including some of those that ended up being worked on by former Lazard bankers: Comcast's $72 billion acquisition of AT&T Broadband (worked on by Steve; Felix was then on Comcast's board), Comcast's attempted $60 billion takeover of Disney (worked on by Steve and Felix, who by then had left the Comcast board), Cingular's $41 billion acquisition of AT&T Wireless (worked on by Felix and Michael Price), SBC's $16 billion acquisition of AT&T and SBC's $89 billion acquisition of Bell South (worked on by Felix and Michael Price), and, most painful perhaps, Sanofi's $65 billion acquisition of Aventis. Lazard was excluded from the deal because of its close ties to Pfizer. Yet both Sanofi and Aventis are French, and Lazard long dominated the merger advisory business in France; and Merrill Lynch advised Sanofi, even though Merrill was also an adviser to Pfizer. Even the difficult Edouard Stern had a role in the deal. Tout Paris was abuzz with the fact that for the first time in some forty years, Lazard would not have a role in an M&A deal of such import to the French economy.

  At a meeting of about a hundred Lazard partners held in late January 2004 at London's Claridge's hotel, Bruce said he would focus in 2004 on boosting revenue after spending the past two years rebuilding the firm. Michel sat next to him, stone-faced, during the presentation and said nothing, according to people there. Of course, that is in part due to Michel's poor decision, "after twenty-five years of blowing cigar smoke into every corner of the firm," to cede to Bruce operational control of the firm, leaving him only the ability to veto Bruce's rehiring, in 2007, or to veto a sale or merger of the firm as a whole.

  What had Bruce squarely in Michel's crosshairs, though, was the genuine dispute the two men were having about the firm's financial performance during Bruce's first two years. Bruce thought the firm was doing fine--great even--and he pointed to the 54 percent increase in operating profit as proof. Michel thought the firm was being totally mismanaged for the benefit of the working partners, who owned 64 percent of the firm, at the expense of the capitalists, such as Eurazeo, Michel, and his French cronies, who owned the remaining 36 percent. "The capital partners are concerned because the capital position has been eroded by losses," one Lazard banker said.

  For Michel, who in some years received more than $100 million himself from Lazard, Bruce's destruction of short-term profitability was infuriating, especially when he thought he had given Bruce the necessary financial incentives to return the firm to the robust profitability of years past. "You can understand that the capitalists are not very happy about all this," one observer told Financial News. "If you have a big illiquid asset, like the stake in Lazard that is paying no income, would you be happy?" Added another: "Lazard is doing very well for Wasserstein, the equity partners and particularly the new partners but not for the external shareholders." Bruce was completely unsympathetic. "You'd go to a board meeting and it was entirely Michel's guys," he told BusinessWeek in November 2006, not entirely accurately. "They'd say, 'We don't like hiring new people.' I'd say, 'Well, thank you very much.'"

  Michel and Bruce were locked in a tense stalemate. Outsiders began to wonder whether Lazard would be Wasserstein's Waterloo. Would Michel jettison him as he had all the others? It was now obvious to the world that Michel was nearly impossible to work for and to work with.

  And it was equally clear that his Chinese water torture had already commenced its insufferable dripping on Bruce's forehead, as evidenced by the start of a well-orchestrated press campaign against him. In February 2004, British newspapers began to report the growing rift between the two men. In addition to all the new partners hired, Michel was upset with Bruce because of the new London headquarters building, the inexplicable purchase of Panmure Gordon, a venerable London broking firm (sold a little more than a year later at a small profit), and the establishment of a European private-equity business based in London at a time when other Wall Street firms were jettisoning their captive private-equity units (this has since been disbanded after all the partners who were recruited left). Relations between the two were said to be "cordial" but "not warm, let alone intimate." In truth, they were no longer speaking.

  The New York Post reported the dispute a few days later. "Bruce has done a decent job by motivating people, building the firm's brand and leading by example," one Lazard banker said. "But he's wrecking the balance sheet and spending the shareholders' money, and it's not cle
ar what the long-term future is for the firm." A columnist at Bloomberg.com wondered how Michel could have expected otherwise from Bruce. He described their argument as "absurd." "If you hire a brash, aggressive Wall Street banker, there's not much point in turning squeamish when he starts acting like a brash, aggressive Wall Street banker," Matthew Lynn wrote. "It's in his blood. He's only delivering what he has always delivered, and what he has always promised.... Wasserstein's path at Lazard may well be troubling for the older bankers, and for its complex network of shareholders. The dividends they used to rely on may be drying up. But the foundations of the firm are being rebuilt. It's being dragged into the modern financial world, where working bankers expect to make at least as much money as their shareholders. That must be the right thing to do." He also predicted, in February 2004, that the likely solution for both sides would be a face-saving IPO. "Don't expect either Wasserstein or David-Weill to leave quietly," he concluded. "But any row will accelerate a public offering of Lazard. Wasserstein needs to solidify his control of the firm. And the older shareholders need to be given a dignified, and lucrative, exit route. Only an IPO can achieve that."

  In March 2004, Michel dismissed talk of a war between him and Bruce and told the Financial Times, "Mr. Wasserstein is head of Lazard on a five-year contract and we hope he will return it to a money-making position as he expects to this year," and added, comfortingly, "There is no war between us." He also said, though--in classic Michel fashion--that Bruce had enjoyed "some successes but had not yet become a success." He said that the "firm's improved position"--particularly in the States and Italy--had come at a "high cost," and "by definition it is not satisfactory to lose money after expenses, nor can it continue forever." The Financial Times editorialized that the "ungentlemanly tussle" between Michel and Bruce "raises questions over what investment bankers really do to justify the money they are paid."

  This rather straightforward warning shot from Michel came a day before the scheduled board meetings to approve the $3.2 billion merger between two of Lazard's cascade of holding companies, Eurazeo and Rue Imperiale, which had been announced in November 2003. The merger was the final step in a four-year process designed to simplify Lazard's byzantine ownership structure and came about chiefly as a result of the ongoing efforts of Jon Wood at UBS, the activist shareholder. After the merger with Rue Imperiale, Eurazeo would become, essentially, a large publicly traded private-equity fund. Together, Michel and the onetime Lazard suitor Credit Agricole would control 54 percent of the voting rights of Eurazeo.

  Michel had a huge influence on Patrick Sayer, the forty-seven-year-old Eurazeo CEO. He had handpicked the "hyperkinetic" Sayer to be CEO in 2001 after he presided over the withering away of Lazard's media and telecom business in New York, following the burst of the telecom bubble and Rattner's departure to form Quadrangle. Sayer was in a particularly difficult position. On the one hand, he was a creation of Michel's and existed, in this context anyway, solely as long as the Sun King wished. On the other hand, he was the CEO of a publicly traded company, which, even in France, meant he must occasionally pay some homage to his public shareholders, who controlled 61 percent of the ownership and 46 percent of the vote. Although the merger diluted its ownership stake to 8.9 percent of all shares outstanding, from 11 percent, UBS still controlled 4.2 million shares and was the largest single public shareholder. Inasmuch as its minority stake in Lazard was a huge percentage of Eurazeo's portfolio, Sayer had to be mindful--on behalf of all shareholders--of its lack of liquidity and the lack of dividends. Indeed, the puny--1 percent--return that Eurazeo had received on its Lazard investment in 2003 had pushed down its share price. Some analysts believed that for Eurazeo to be perceived as a "serious player" in private equity, the firm had no choice but to sell its stake in Lazard.

  In an effort to play to his public audience, Sayer said, on occasion, that he would sell the Lazard stake if appropriate. Few believed it would be that simple. In his first "message" to Eurazeo shareholders as the chairman of its supervisory board, Michel wrote: "I am gratified by the relationship of complete trust which exists between myself and the Executive Board, in particular, its chairman, Patrick Sayer. Indeed, when the proposal to simplify our corporate structure"--the merger between Eurazeo and Rue Imperiale--"was presented to the Executive Board, it immediately elicited their full and enthusiastic support, together with a recommendation that it should be implemented as quickly as possible." For his part, Sayer added some fuel on March 8 when he told the Daily Telegraph, "If Lazard goes back to delivering the kind of profits it has in the past, it might be a good idea to hold on to the stake. If and when there is a liquidity event, which is something Eurazeo will have a say in, then we will have to look at it." He declined to answer when asked whether his comments meant he was unhappy with Lazard's performance.

  THE DISPUTE--it was quickly turning into a civil war--between the shareholders of Lazard and its management, while unfathomable prior to Michel's decision to cede power to Bruce, is certainly not without precedent. Private, family-owned companies often face generational clashes, as do public companies, as evidenced by the raucous fight between the large pension fund shareholders of Disney and the Disney board of directors about whether to keep Michael Eisner as CEO. What's extraordinary in this instance is that Michel did this to himself by cutting a secret deal with Bruce, without his partners' input and ignoring their voluble warnings. In an effort to salve these open wounds, Michael Castellano, Lazard's CFO, wrote a memo to the nonworking partner shareholders on March 12 suggesting that perhaps they had overlooked some accounting benefits in 2003--to the tune of $47 million--as a result of a positive currency translation that ended up in their illiquid capital accounts. In addition, he reminded them that they had also received $22 million in cash, or a total of $69 million in both cash and noncash benefits. He added they may have "overlooked" an illiquid $41 million currency translation in 2002 as well, along with $20 million of cash, or $61 million that year. "Because we have not highlighted this translation gain in 2002 or 2003, it is possible that [nonworking partners] may not have focused on the total benefits and proceeds they received," Castellano wrote.

  The appeal fell flat, since these shareholders correctly pointed out that their illiquid capital accounts were frozen unless they sold their equity stakes in Lazard or died. "Lazard management is currently leading an investment policy which we will judge in 2006," Michel told the Wall Street Journal. He said, in a separate interview, that the Castellano letters were just "window dressing" and a complete fabrication since he received no dividends whatsoever from the firm in 2002, 2003, and 2004, only a small amount of contractual interest on his capital (all of which formed the basis for Michel's amusing comment that he could no longer afford to buy art because he was "so poor"). The same day that Castellano sent his letter, Greenhill & Co., the small advisory boutique founded in 1996 by Robert Greenhill, had filed an IPO registration statement with the SEC that valued his firm at around $500 million. This was a watershed event, and not lost on anyone at Lazard, least of all Bruce Wasserstein. In the wake of the recent myriad of Wall Street scandals, boutique firms offering impartial, independent advice had once again been garnering an increasing share of corporate advisory business.

  The dispute between Bruce and Michel carried on into the spring. On April 3, after the contents of Castellano's March 12 letter were leaked to the press, Patrick Sayer told the Financial Times that "we have been told that this year the bank will be back to profit after all the working partner costs. We would be happy to keep an investment which has been very attractive in the past." Michel added that "all votes on issues such as the renewal of Bruce Wasserstein's contract as head of Lazard or a transformation of the Lazard business must be taken by the majority of the Lazard board." And here he pointed out that Bruce had nominated five of the board members, Eurazeo could nominate two, and "I, Michel David-Weill, have the right to name four representatives."

  Despite his promises to Michel, Bruce kept on
hiring in 2004. After all, if one of the legendary Great Men offered you the once-in-a-lifetime shot to remake one of the most storied franchises in all of investment banking history, complete with a huge guaranteed compensation and an equity stake for when the firm gets sold, how could you ever turn that down? In April, Bruce recruited William Lewis, forty-seven, as co-chair of investment banking. Lewis, who ranked thirteenth on the Fortune list of Most Powerful Black Executives (his new partner Vernon Jordan ranked ninth), spent his entire twenty-four-year investment banking career at Morgan Stanley, where he became the first black partner and achieved that milestone in seven years, faster than any other person in the firm's history. Lewis had been co-head of Morgan Stanley's global banking group.

  The Lewis appointment, which should have been huge news, curiously received only the slightest publicity--the Wall Street Journal failed to mention it, to say nothing of Bruce's Daily Deal--and was another unkind cut in the long-simmering feud between Wasserstein and Perella (Perella had just been appointed head of the department to which Lewis belonged). But it revealed plenty about just how dictatorial and absolute Bruce's reign at Lazard had become. When the internal press release went around inside Lazard announcing Lewis's arrival, partners discovered that the e-mail had been marked in such a way as to prevent its being printed out or forwarded to others.