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

by William D. Cohan

  Over that first weekend after the IPO, Barron's, one of the bibles of Wall Street, roundly criticized the deal under the headline "King's Ransom for Lazard" with a caricature of Bruce striking a particularly Napoleonic pose. "There are numerous negatives associated with the Lazard deal," the magazine stated. "The company has the dubious distinction of being one of the few financial firms ever to come public with a massively negative book value and junk-grade bond ratings from two major credit-rating agencies. Other drawbacks include Lazard's home in Bermuda, whose laws provide less protection to public shareholders than those in the U.S." The article went on to catalog the flaws of the deal and its high price tag nonetheless. "The Lazard IPO shapes up as a great deal for Wasserstein, former Lazard partners and current managing directors," Barron's concluded. "But other investors probably should stay away. There are far better Street franchises available at much better prices, including Goldman, Lehman, Bear Stearns and even embattled Morgan Stanley." For his part, Goldman's Tuft said the Lazard IPO proved to be a tough sell, at least initially: there were too many hedge funds looking to short the stock or that got into the deal looking for a short-term pop, and when that didn't happen, they dumped the stock in the market.

  Per the Wall Street settlement rules, even though Lazard received its nearly $2 billion in proceeds on the night of May 4, the firm did not have to pay the money it owed to Michel, Eurazeo, et al. until May 10. On that day, via wire transfers, the money flowed. Michel received a little bit more than $328 million. He also had a small interest in two trusts that he set up--Louisiana Corp. and Sociedad Recovia--that together received $70 million. A trust named after the first initials of his four daughters--B.C.N.A.--received $1.1 million. Michel's sister, Eliane, received $99.4 million. Eurazeo, in which both Michel and his sister were large shareholders, received $784 million, by far the largest chunk of the proceeds. Eurazeo's stock increased some 37 percent in the year after Lazard filed the original S-1 and now has a market value of close to EU5.5 billion. Antoine Bernheim, the eighty-year-old Lazard Paris consigliere and eminence grise of French deal making whose parents died at Auschwitz, got $64.3 million. Jean Guyot, a few years older than Bernheim, the former associate of Jean Monnet and the man behind the merger of the carmakers Peugeot and Citroen, received $61.2 million.

  Some of Andre Meyer's descendants also got windfalls. Philippe Meyer, Andre's son, who had recently retired as a physics professor in Paris and who never sold the Lazard stock his father had bequeathed him, received $18 million directly and another $57.4 million through the "PM" trust. Philippe's son, Vincent, received around $43.6 million. Andre's other grandchildren, the Gerschels, got nothing.

  WHILE IN THE aftermath of the IPO, champagne corks could be heard popping from Paris to New York, where Bruce threw a large private party for his partners at the Four Seasons restaurant to celebrate, Lazard's bankers down at the headquarters of Goldman Sachs, at 55 Broad Street, were left with a terrible hangover. As Lazard's stock dropped on the first day of trading, Goldman fulfilled its obligation to make a market for investors, eventually accumulating the unheard-of short-term position in Lazard's stock of more than 10 percent. "Goldman obviously went way out on a limb to protect the Lazard offering," observed John Coffee, a well-known securities law professor at Columbia University. "Very, very rarely do underwriters do enough to become 10 percent holders." During the ten days or so after the IPO, Goldman continued, in vain, to make a market in the Lazard stock as the price continued to fall, causing Goldman to suffer a loss estimated to have exceeded $15 million. Goldman also made a fee of about $25 million for agreeing to be lead underwriter. The Goldman partner Ken Wilson said his firm's financial support for his former firm "left us with a little bit of a black eye." Luis Rinaldini suggested that another part of Goldman's metaphorical face suffered, too. "Bruce got his $25 and Goldman is licking its wounds from paying to help support a stock that is $21," he said on May 23. "Goldman has the slightly more bloody nose than Lazard." A Goldman spokesman countered, "It is our obligation as a market maker to step up to the plate for our clients." The New York Times financial columnist Andrew Ross Sorkin likened Goldman's defense of its support for Lazard to a "doctor who botched a brain surgery but bragged about his skill in stitching the patient back together." Tuft had obviously hoped for better but insisted that Goldman did the right thing for both its client--Lazard--and for its reputation as a leading underwriter of IPOs. "I was just very gratified that we were able to take what could have been a very difficult, terrible situation, if it didn't get public, and to really make this a public company and to make it a better firm," he said. "And I think it is a better firm." As for the decision to act as a backstop for the IPO in the marketplace, Tuft said, "The trading decisions were made because we wanted to stand up and support the stock, and we probably supported it a little too long in retrospect. Because the selling kept coming in and we expected the selling to dry up, and it didn't dry up, and when you look back at it, you see that the short interest expanded, and basically there was a whole group of people coming in shorting it."

  The broken IPO and Goldman's trading losses did nothing but further bolster Bruce's reputation as a too-clever-by-half self-interested wheeler-dealer. And the bad news kept coming. The same day the IPO started trading came word that Lazard's capital markets business--now part of the separated company and wholly owned by the firm's working partners--had become the target of a federal probe by the U.S. attorney in Massachusetts into whether executives in that business lavished inappropriate gifts and gratuities on traders at Fidelity Investments, the behemoth mutual fund company. This was in addition to the SEC's investigation into the matter. The U.S. attorney Michael Sullivan in Boston impaneled a grand jury to investigate reports that Wall Street firms, including Lazard, had offered "sex and drugs" to the Fidelity traders to try to win their lucrative trading business. One published report told of a wild bachelor party--including the requisite antics of a stripper and of dwarf tossing--for a Fidelity trader, held in South Beach, in Miami, with transportation on a private jet and a private yacht, all paid for by Wall Street. Lazard disclosed both that Sullivan's office had asked it for information and that several employees in the capital markets business had resigned, including Greg Rice, the partner in charge of the firm's equities desk.

  Ironically, within days of the news that it was the target of a federal probe, Fidelity filed a report with the SEC announcing that it owned 5.5 million Lazard shares, or 5.5 percent of the firm. A few weeks later, JPMorgan Chase announced it was the beneficial owner of 5.8 million shares of Lazard, which made it then the largest single outside shareholder of the firm. Other institutions piled into the Lazard offering as well, including T. Rowe Price, Morgan Stanley, Prudential, and Jennison Associates.

  As serious as the federal probe was, its likely consequences for Lazard--the newly public company--were immaterial. A far larger problem, though, emerged on May 30 when word started to trickle out of Lazard in Paris that the rainmaker Gerardo Braggiotti, then fifty-three, had submitted his letter of resignation because Bruce failed to follow through on his supposed written pledge that he would expand Braggiotti's authority, to include running all of Lazard's European operations, in return for Braggiotti's long-withheld support for the IPO. Braggiotti submitted his resignation after a number of French bankers--among them said to be both Bruno Roger and Georges Ralli--opposed his new appointment. One Lazard banker in Europe thought that naming Braggiotti to the European post "would give him almost unlimited power in Europe and reduce Bruce's own role." Said Bruce: "Gerardo is a really talented guy, but I'm obviously not going to go and put him in charge of the French."

  Braggiotti had almost single-handedly made Lazard the number-one M&A adviser in Italy, and his current fiefdom--Europe outside of France and England--generated 20 percent of Lazard's M&A revenue in 2004. "The loss of Mr. Braggiotti would be highly embarrassing for Lazard so soon after the IPO last month," the Financial Times wrote. Even worse for Bruce than l
osing one of the firm's top bankers was that he had not only promised Braggiotti the promotion but also agreed to pay him in cash for his stock (unlike almost every other Lazard managing director) and allowed him not to sign a noncompete agreement. If he quit Lazard, Braggiotti would not only walk away with all his cash but also be able to set up--or join--a rival firm after a six-week "notice" period. The clock began ticking May 30; the notice period would end on July 11. At this same time, Michael Gottschalk, one of the partners Bruce brought with him in early 2002 from DKW, announced he was leaving Lazard to join its rival Rothschild in New York. Then the partner George Brokaw announced his departure for Perry Capital, a New York hedge fund. And then partner Eytan Tigay, who had taken the laboring oar internally on the S-1 filings, left to join Robert Agostinelli at the Rhone Group. Speculation soon emerged that Braggiotti would return to his former firm, Mediobanca, causing the Italian bank's stock to rise 4 percent on the news.

  But on June 8, in his first public comments about his new feud with Bruce, Braggiotti told Bloomberg in Milan that he had just returned from meeting with Bruce in New York the day before. "I presented my resignation and it's being discussed," he said. "I am going on holiday, not to Mediobanca." Braggiotti added that there was a meeting of the new Lazard board--its first--on June 14 where the matter would be discussed. "Let's leave them to make any announcements," he said. A New York headhunter told Crain's New York Business about Lazard: "This firm is held together with Scotch tape and chewing gum."

  After the June 14 board meeting, Lazard announced a major reorganization of its European operations. In a press release, Bruce said the European reorganization "confirms the emergence of a new generation of talented leaders, who, along with their U.S. counterparts, are the future of Lazard." Left unsaid was the fact that Lazard in Paris was having one of its worst years in more than a decade, having slipped to sixteenth among French merger advisers. As recently as 2000, Lazard had a 40 percent market share in France.

  Also noticeably absent from the new structure was Braggiotti. Lazard announced not only that Braggiotti had resigned, effective July 15, but also that his departure would not cause a "material adverse effect" on the firm's "overall 2005 financial results." The firm added, cryptically: "Lazard has reiterated to Mr. Braggiotti that it has complied with, and will continue to comply with, the agreement that Lazard and Mr. Braggiotti had signed, and Lazard and Mr. Braggiotti are in discussions concerning their relationship." After he sold his Lazard shares in the IPO and resigned, Braggiotti opened G. B. Partners, his own Milan-based boutique advisory firm. At the end of November, he announced that he was buying, for EU100 million, Banca Leonardo, a small Milan-based bank founded in 1999.

  He said he intended to use the bank as a platform to build a pan-European advisory, private-equity, and money management firm. After Leonardo's transformation, Braggiotti would be a formidable competitor to Lazard and Mediobanca. He planned to advise on mergers in Italy, France, and Germany. To accomplish this, he intended to hire about twenty M&A bankers across the continent.

  Braggiotti began seeking EU500 million in new capital for the new Gruppo Banca Leonardo. He quickly announced his first investor: none other than Eurazeo, with a EU100 million commitment, for a 20 percent stake. "He was the deal maker at Mediobanca," Patrick Sayer explained. "He left Mediobanca and became the Italian deal maker at Lazard. I don't see why he wouldn't be able to replicate the same record at Leonardo."

  An analyst in Paris told Bloomberg: "This would effectively be rebuilding the links between Michel David-Weill and Braggiotti." There was much competition across Europe from equity investors to get in on the Braggiotti deal. Even Felix thought Braggiotti was onto something big. "He's putting together a powerful machine," he told Bloomberg. In the summer of 2006, Banca Leonardo acquired a large minority stake in a French asset management company and also bought Toulouse Partners in France to jump-start an advisory practice right under Lazard's nose. Plans for Leonardo to open an office in London were being drawn up. Even Michel's longtime consigliere, Jean-Claude Haas, announced he was joining forces with Braggiotti.

  For his part, Michel was well aware of the irony of his involvement in Braggiotti's firm. He was also well aware that his noncompete agreement with Lazard did not expire until the end of 2007 and that Eurazeo's investment raised a few eyebrows at Lazard. The Financial Times had even taken to referring to it as Michel's investment in Braggiotti's bank, not Eurazeo's. "Look, I'm sure they're not happy," he said of his former Lazard partners. "There have been phone calls, not to me, but to others, saying, 'Are you sure Michel knows what he's doing? Does he remember he has a noncompetition clause?'" He paused and took a deep drag on his Cuban cigar. As the smoke escaped from his mouth and swirled around him in the rarefied, sweet air of his warm Lazard office, a wry smile crept onto his impish face. "I do remember," he continued. "I'm not an officer of Eurazeo. I'm the chairman of the board. I will not be an officer of Braggiotti. I will not be on the board of his company. I'm as removed as can be."

  ALMOST AS AN afterthought to its June 14 board meeting, Lazard announced its financial results for the first quarter, ended March 31, 2005. Net revenue was $245 million, and net income was $31.3 million, or thirty-one cents a share. Compared with the first quarter of 2004, net revenue was up 21 percent, and net income nearly tripled. The consensus of the Wall Street analysts--who for the first time were covering the firm and publishing reports about it--was that Lazard would earn about twenty-five cents a share in the first quarter of 2005. Bruce had beaten the Street consensus by some 24 percent, but it was insufficient to counter the negative news about Braggiotti. After the stock rose ninety-five cents a share, to $23.10, on June 14, in anticipation of the earnings announcement, LAZ closed at $22.90, down twenty cents. The stock still had not closed above its $25 IPO price.

  For Bruce, the IPO was not an anomalous event in the firm's history, but rather an inevitability. "For me, the IPO fits into the continuity of Lazard's history," he said. "What did we actually do? We reinforced the tradition of Lazard, which, for 150 years, has been giving its customers the best possible advice, relying on both sector specialists and locally grounded expertise." He said that Eurazeo's historical stake in Lazard made Lazard a quasi-public entity anyway, albeit accompanied by tremendous and ongoing confusion. "I am happier in the current configuration," he said, "and I have no doubt about Lazard's capacity to fulfill its obligations to the market and its investors." When asked if a sale of Lazard was in the offing, Bruce demurred. "No," he said. "We are an independent bank, and there is no reason why that should change."

  ON AUGUST 10, Lazard reported its financial results for the second quarter of 2005. The all-important metric of M&A net revenues was $182 million, up 35 percent from the second quarter of 2004. For the first six months of 2005, M&A net revenues were $304.3 million, up 46 percent from the same period the year before. As Bruce had promised, Lazard's revenues were surging along with the buoyant M&A market worldwide. Still, Lazard missed by one cent the Wall Street consensus of thirty-three cents a share in net income for the second quarter. Instead, the firm reported net income of $32 million, or thirty-two cents a share. On the investor conference call, which Bruce announced would occur only twice a year, he proclaimed himself satisfied with the firm's results. As to why Lazard had dropped to twelfth in the global M&A league tables to date for completed deals, from fourth in 2004, Bruce said many of Lazard's most important transactions are either private and therefore not included in the league tables or the advice to the client had been not to do a deal--and that does not show up in the league tables, either. But Brad Hintz, a securities industry analyst at Sanford C. Bernstein, said of Lazard, "The real challenge that they face is that their disclosed fee share of M&A has been actually declining since 2001.... If we look at market share, the numbers aren't as impressive." Still, critics aside, Bruce put his money where his mouth was. As the Lazard stock was hovering near the IPO price of $25 and at his first legal window of opportunity
, at the end of August, he bought 119,500 additional Lazard shares in the market, at a cost to him of nearly $3 million. The bulk of the shares--106,000--were bought at precisely $25. Bruce now owned 11,394,534 Lazard shares, which made him by a factor of two Lazard's largest individual shareholder.