The last tycoons: the secret history of Lazard Frères & Co (103 page)

At this moment, Michel decided to play his carefully constructed hand. He called an executive committee meeting for November 8 in Paris, which Golub and Jacobs joined by videoconference from New York. The agenda was full: 2001 performance, 2002 budget, proposed 2001 compensation, ongoing cost control efforts. They also spoke about how to allocate the goodwill points to the partners.

Then Michel announced that he had been having intense negotiations with Bruce Wasserstein, often at Michel's Paris home, about taking over the reins of the firm. He told his senior partners: "A change is required: Either hire Bruce Wasserstein or sell the firm." Michel explained that he had tried to hire Bruce before, in 1997, but that did not work out because Lazard would have had to buy all of Bruce's firm. "Now we just have to hire the guy," Michel said, before moving into sales mode. "He loves Lazard. He is quite international, lives in London, is proud of having gone to Oxford"--Cambridge, actually--"is close to Germany, and he understands the importance of the French to Lazard. He moves around. He will not be an absentee leader." Michel told his partners that he had had some rough negotiations with Bruce, who told him to his face "basically whatever we want, all is fine," and then through his attorneys "makes impossible demands." But now there was enough specificity around the idea--and certainty that it would happen--that he was informing the executive committee: the deal was that Bruce would be head of the firm for five years; Michel would be executive chairman and would appoint six board members; Bruce would be chairman of the executive committee and appoint five board members. Michel reported that Bruce had accepted a compensation arrangement that would vary between 4 and 7 percent, depending on the firm's profitability--if the firm made only $150 million, Bruce would be paid 4 percent (or $6 million), and if the firm made $400 million, he would be paid 7 percent (or $28 million).

Bruce also wanted 7 percent of Lazard's goodwill, or equity, immediately to give to his family trust. If, though, he were to leave the firm before one year, he would sell back two percentage points of the goodwill to the firm for nothing and keep the remaining five percentage points. "He argued that he increases [the value of] our goodwill by coming," Michel said, "and by not buying his outfit, we are getting him cheaply." Finally, Michel said that Bruce intended to buy (from Michel) a $50 million stake in Lazard, at a $3.5 billion valuation, giving him an additional 1.4 percent stake in the firm. He also said that Bruce intended to hire a bunch of new partners to help revitalize the firm.

Michel then asked his partners, "Is this better or worse than a sale? The question is not to be asked of Bruce Wasserstein. It is to be asked of us: Will we, here in this room, stay?" Michel told the executive committee, "I know I cannot do it [run the firm any longer]. I could have done it. It is a matter of how we are looking at the world. Are we winners or not?" With that, the executive committee began discussing the "most difficult clauses" of Bruce's proposal, deciding, for instance, he should only get half his goodwill now. But the committee concluded, "The deal is on." Looking back, Michel only regrets that because Bruce was his only viable option in November 2001--Credit Agricole and Lehman having begged off for different reasons--Bruce had a disproportionately high amount of leverage in the situation. "Well, I've got to say it was my only choice," he said. Did that affect his ability to negotiate a better deal with Bruce? "Sure," he said, after a long pause. "Oh yeah. I'm pretty sure."

IT WAS A
perfect storm, and a perfect vacuum, into which strolled Bruce Wasserstein. The timing of his rejuvenated negotiations with Michel could not have been more propitious for him; indeed, Bruce couldn't have scripted the events of 2001 any better had he tried.

At year's start, in rapid succession--and with no shame--the former yeshiva student from Brooklyn had sold his eponymous firm, for $1.37 billion in stock, to Germany's Dresdner Bank, which a mere half century before had financed, and owned a piece of, the construction company that built the Auschwitz concentration camp. Three months later, in April 2001, Dresdner was sold to Allianz, the huge German insurer, for $20 billion in cash. The improbable Allianz-Dresdner deal resulted in the immediate and unexpected conversion of Bruce's approximately $625 million equity stake in Dresdner into cash--years before it otherwise would have been. Suddenly, in April 2001, Bruce was faced with a not insignificant capital gain of $625 million, assuming that the basis in his Wasserstein Perella stock was at or near zero. Dresdner had expected Bruce to stay in the United States to expand the firm's investment banking presence here and to complement the efforts of Tim Shacklock, who was already well established in London.

But before anyone could figure out what he had done, or why, Bruce promptly moved to London after April 2001, and many people say he did this to change his residence to avoid paying the combined 12 percent in New York City and New York state capital gains taxes on his $625 million cash proceeds from Allianz. (There was no way for Bruce to avoid federal capital gains taxes, since U.S. citizens are taxed on their worldwide income no matter where they live.) Assuming Bruce had a very low basis in his original Wasserstein Perella stock, which is a fair assumption since the business was started from scratch, then 12 percent of $625 million is $75 million. Even if that is an inaccurate assumption because over the years Bruce had bought back stock from his partners as they left the firm--for instance, in the case of Perella's departure--and his basis in the stock was actually higher than zero, say, for the sake of argument, $100 million, his taxable gain would still be $525 million, and New York's cut of that would be $63 million, a sum the city and state would certainly have loved to have had during the fiscal year following the September 11 attacks.

Even Michel said he was struck by this maneuver on Bruce's part. Apparently, Bruce hired Harold Handler, a lawyer at Simpson Thacher, to find the specific, and quite legal, loophole in the New York state tax code that would allow him to avoid the sizable tax. "That's utter baloney," a Wasserstein spokesman told
Vanity Fair
in April 2005 when the matter first came up publicly. "If he'd wanted to evade New York State tax, he could have moved to New Jersey or Florida." But one of Bruce's former partners observed that he had the nasty habit of pushing his advantages to absolute limits--be they legal or financial--in a given situation. What he did to avoid paying New York state and New York City taxes on his windfall, in 2001, is but one example. "It's classic Bruce. When he's got the leverage, instead of taking a 51-49 win, he'll go for the 99-1 win," he said.

As part of the sale of his firm to Dresdner, Bruce also kept for himself and some of his partners Wasserstein & Co. Inc., Wasserstein Perella's $2 billion private-equity business, which he still owns and controls. But even here, he upset many of his former partners at Wasserstein Perella when, in their opinion, he more or less absconded with the buyout fund by forcing them to accept his terms or get a worthless piece of paper instead. Inevitably and almost immediately, the brash Wasserstein and the Germans clashed over strategic direction. They wanted him to spend more time in the United States building the firm's M&A business there, something he did only with great reluctance because he did not want to risk paying state and city taxes on his windfall or on his $25 million annual salary. On the rare occasions when he did come to the United States, he was said to direct his private jet to land and take off at precise moments--11:59 p.m.--to avoid spending an additional "day" in the country if possible, since being in New York more than 183 days a year would have made him a taxable resident. And the Germans were wavering on a supposed promise to him of becoming the CEO of a split-off, publicly traded investment bank, a responsibility he had long coveted. By the end of July 2001, the Germans nixed the IPO of DKW and announced the layoff of 17 percent of the workforce. Bruce was not only antsy; he was said to be "furious" with Allianz. At that point, news reports were saying he considered himself a "free agent," although, through a Lazard spokesman--being ever mindful of the legal implications--he denied having thought that at the time.

According to the
Wall Street Journal,
Bruce told Leonhard Fischer, the head of Dresdner's investment bank, that his contract had been violated and that "he should be free to leave the company." He reportedly reached out to Lazard, Morgan Stanley, and J. P. Morgan to see if any of them were interested in his services. A Lazard spokesperson said that Bruce's recollection was that after the late July announcement, Felix called him--not the other way around--on Michel's behalf to see if it made any sense to think about merging Lazard with DKW. (Felix has no recollection of this.) Word also began getting back to the firm that Felix was also pushing the idea that either Rothschild or HSBC consider a deal for Lazard. (Felix confirmed he did speak with John Bond at HSBC but he had no interest; he could not recall speaking to Rothschild.) Bruce's response was that there was nothing to talk about at the moment but there might well be a time in the near future when that kind of discussion would make sense. Bruce, the former Cravath lawyer, was being extra careful not to do anything to jeopardize his three-year contract with DKW, which gave him $25 million a year.

Michel and Bruce had danced for years, of course, but now the situation at Lazard had become so dire that Bruce started to look like a savior. True, his reputation as an M&A banker had been greatly diminished throughout the 1990s--Henry Kravis referred to him as "old news"--but he was still a well-recognized name, considered brilliant, and had run his own investment bank and sold it at a very high price. There was also no one around anymore who could stand up to Michel about whether or not Bruce was right for Lazard. Indeed, Michel would now show his partners how wrong they had been four years earlier by thwarting his efforts to hire Bruce.

The two men negotiated intensively for two months, mostly in Paris and often at Michel's Rue Saint-Guillaume mansion. The crafty Bruce used the lawyer Adam Chinn, from Wachtell, Lipton, a law firm extremely familiar with Lazard, to negotiate for him. Chinn had been involved with some of the largest financial mergers of all time and also advised Bruce on the sale of Wasserstein Perella. Chinn, who declined to be interviewed, knew many partners at Lazard--and former partners--and availed himself of their advice in the negotiations with Michel. It was as if Bruce had a spy inside Lazard continuously reminding him of Michel's hot buttons. Bruce also spoke extensively with the partners he knew at Lazard and with many ex-partners, including Steve Rattner. (At lunch one day at the Four Seasons, Bruce even asked Steve if he would return to Lazard; Steve declined but realized, for Bruce, Lazard was "unfinished business.")

Understandably, the partners' goal was to make sure Bruce got all the weapons he needed to run the place effectively, to prevent a repeat of the succession failures that had dogged the firm for years. "Before Bruce ever got into a discussion with Michel about economics or anything like that, he went out and spoke to everybody--including Steve and others who had all held this position before--and came to the conclusion that the only thing that mattered was the
'cause definition'
in his contract," explained one senior partner familiar with Bruce's negotiations with Michel, referring to what "termination for cause" meant. "And so that was the first and only thing they negotiated. And when Bruce was satisfied about that, then he did everything else. But that was it. Because without that, there's no power. One of the great ironies of everybody else who preceded him--here, in Europe, it doesn't matter where--is no one had any power. They all thought they did until they actually tried to do something that was different from what Michel ultimately wanted to have happen. And then they all lost it." For his part, Michel used a lawyer from Cravath, George Lowy, but mostly, as usual, kept his own counsel--and some said Michel had a fool for a client.

The head fakes continued, though, even as the negotiations were wrapping up. In a November 12 story, "Can Anyone Run Lazard?"
Business-Week
reported that Bruce declined Michel's offer. "Who would take this job?" the magazine quoted a "close ally" of Michel's as saying. "Bruce would demand absolute control, and I don't think Michel would give it." On November 14, Fischer had given Bruce a two-day deadline to decide whether he was going to Lazard or staying at DKW. If he were to remain, Fischer demanded he start "bringing in business" by spending more time in the States with clients and drop the request for a "guaranteed bonus." Bruce asked for a day to consider Fischer's requests. But in truth, he was awaiting the outcome of the difficult final negotiations with Michel about coming to Lazard. He wanted full executive powers and a significant ownership stake in the firm.

Michel was by now sufficiently confident about reaching an agreement with Bruce that he asked Loomis to call Dick Fuld at Lehman Brothers to tell him Bruce was about to be hired to replace him and that the suspended Lehman discussions were really off. Of course, if Lehman was interested in buying Lazard, this would be the moment to make that absolutely clear so that Michel could seriously consider that option alongside the Bruce option. But Fuld was no longer interested, and he told Loomis that Michel was making a big mistake hiring Bruce. But this was no longer Loomis's concern. The next day Bruce faxed a letter to Fischer. "Dear Lenny," he wrote, "with great regret I am resigning effective immediately." Somehow, just to make Bruce go away quietly--he had become a major irritant to them--the Germans paid him the balance of his contract, another $50 million. (Wasserstein's name has since been removed from DKW, which is now known as Dresdner Kleinwort, and the firm's New York office--the original Wasserstein, Perella--is being slowly dismantled.)