The last tycoons: the secret history of Lazard Frères & Co (109 page)

The drumbeat of trouble began in July 1989. A
Newsweek
article noted that the Delaware Supreme Court had recently "chastised" Bruce for the advice he had given the year before to the board of directors of Macmillan Publishing, which had put itself up for sale. The court claimed Bruce perpetrated a "fraud upon the board" by "secretly giving more information to one bidder"--KKR--"for the publishing company than to another," Robert Maxwell. This "tip," in the words of the court, enabled KKR to know Maxwell's penultimate bid for Macmillan and helped KKR win the auction. Bruce was indifferent to the lashing he received. "Macmillan shareholders received a spectacular price," he said. But
Forbes
had another thought. "What advantage would Wasserstein get for tipping off the Macmillan-KKR group?" the magazine wondered. "We don't know. But we do know that about a month later Wasserstein Perella emerged as an investment banker on KKR's $25 billion RJR Nabisco buyout. Wasserstein Perella's take: a neat $25 million in investment banking fees."

Newsweek
also reported on the ongoing battle that pitted the Time-Warner merger agreement against an unexpected and rich $200-a-share offer for Time from Paramount Communications. To fend off Paramount, Bruce restructured the Warner deal into a highly leveraged acquisition by Time of Warner from the debt-free original stock merger. At the time, Gerald Levin, Time's vice chairman, called Bruce "right up there with the best," adding, "Bruce was a good cheerleader for being bold." Fred Seegal, then a banker at Lehman Brothers, who worked with Bruce on the Time-Warner merger and whom Bruce later recruited to Wasserstein Perella, recalled the show Bruce put on in that deal. "It was the first time I'd ever really seen him in action," Seegal said. "Bruce would start getting on the soapbox, and he'd say, 'Well, you play this videotape, and you do this, and you do that.' It was all gobbledygook. And the Time guys, it was clear that they didn't understand. I didn't understand what he had said. But he had this mystique about him." Some seventeen years later, the combined Time Warner is still suffering from the crushing debt load Bruce advised management to take on. Levin, meanwhile, is long gone after becoming the CEO of Time Warner and engineering the disastrous 2000 merger with AOL.

The full-fledged media assault on Bruce began in earnest, though, three weeks later, in the first week of August, when
Forbes,
his old stomping ground, put a plump, well-dressed--now
dark-haired--
Bruce on its cover next to the devastating headline "Bid-'Em-Up Bruce." Like Nicholas von Hoffman's "Felix the Fixer,"
Forbes
's "Bid-'Em-Up Bruce" would stick. And like Felix, Bruce hated the moniker, especially since, as the CEO of his own firm, his profile in 1989 was far higher than Felix's was in 1972. Like the other publications that had profiled Bruce,
Forbes
could not ignore his prodigious and ongoing success. Not only had he masterminded the merger between Time and Warner, but there was also McCaw Cellular's $6.1 billion bid for LIN Broadcasting and three other large deals, totaling some $32 billion. "All at one time and all riding on Wasserstein's expertise," the magazine wrote.

What the article sought to answer was how Bruce was able to pull all this off. Its unflattering answer was that his "carefully cultivated image" had become his firm's "most powerful selling point," a conclusion Bruce actually agreed with. Whether he agreed with the next thought, that he was a master media manipulator, was not addressed. "In building this imposing image as a powerful friend and a dangerous enemy, Wasserstein has been positively brilliant in manipulating newspaper reporters,"
Forbes
continued. The time had come,
Forbes
suggested, to call into question the wisdom of Bruce's standard "Dare to Be Great" speech that had time and again been successful in egging on his clients to pay the higher and higher prices necessary to win deals (it is binary after all, either a client wins or he loses). "Who will be to blame, then, if some of today's mega-billion-dollar mergers and acquisitions end in disaster?" the magazine asked rhetorically. "Wasserstein and his ilk? Or the corporate boards and corporate brass who let dreams of glory separate them from hardheaded reality?"

Although
Forbes
concluded that "the ultimate responsibility remains with the clients," Bruce's behavior at the end of the 1980s had prompted a rare--and unprecedented--attempt to determine why the well-paid bankers are not held accountable for their advice. In December 1989, the
Wall Street Journal
added to the debate. "Mr. Wasserstein has found himself under unaccustomed criticism--from courts, shareholders and even a few clients--for his conduct in several big takeover battles," the paper stated, damningly. "He has been accused of manipulating valuations; of encouraging clients to pay too much for companies, and of favoring the interests of corporate executives over the interests of shareholders." Even Bruce's old Harvard Business School professor Samuel Hayes chastised him for the Campeau debacles. Bruce "was the principal architect and was very proud of it at the time," Hayes said. "He can't escape the criticisms of the overpricing." Bruce refused to be interviewed for the article, in keeping with his new approach to the press.

By this time, any number of his deals had gone bust or were about to. Take, for instance, a company called Interco, formerly known as the International Shoe Company. Over time, Interco had transformed itself into a Fortune 500 conglomerate comprising the well-known brands Converse, London Fog, Florsheim, and Ethan Allen. In the summer of 1988, two brothers from Washington, D.C.--Steven and Mitchell Rales--launched a hostile, $64-a-share, $2.4 billion, all-cash takeover for Interco. The Raleses later raised their offer to $70 and then $74 a share, or $2.7 billion. After the brothers made their offer, Interco hired Wasserstein Perella.

Based on Bruce's advice that he thought Interco was worth first $68 to $80 a share and then $74 to $87 a share, the Interco board rejected the Raleses' deal. Bruce also devised a controversial counterstrategy--a complicated recapitalization, dubbed Project Imperial--whereby the company itself would borrow $2.9 billion and use that money to buy most of its outstanding shares in the market. Bruce valued the package at $76 per share, or $2 a share more than the Raleses' bid. Two other buyout firms--KKR and a Merrill Lynch fund--looked at Interco but decided they could not get close to Bruce's $76-per-share valuation. "I don't think the company is worth anything that starts with a seven," the KKR partner Paul Raether told Bruce. Although Bruce did not force the Interco board to take his advice, it did anyway, rejecting the Raleses' bid in favor of the Bruce-designed highly leveraged recapitalization. Bruce valued the stub equity at $5 per share, but it never traded above $4, and it was $2 at the time of the
Forbes
article. The newly issued high-yield debt also quickly traded down, causing those investors to lose money, too. Worse, 640 longtime Interco employees at two Florsheim shoes factories were fired from their jobs when Interco management decided to sell the facilities to raise money to try to service the new debt.

One of those who lost his job was Edwin Bohl. He was fifty-eight years old and had worked at the shoe factory for thirty-seven years. He had joined the company after graduating from high school. Over time, he rose to the level of supervisor. He lost his $19,000-a-year job two weeks before Christmas 1988. "The minute we came back from lunch," Bohl remembered, "they called us supervisors together.... The man read us the papers and said there were no jobs held for anybody.... They told us they had to close the plant because of the restructuring.... They had to raise money.... They told [us] it was not because of the quality. We were rated the top in quality and cost.... We had no idea this would happen." He opted for the lesser of the two evils Interco offered. In exchange for having Interco continue to pay his health insurance, he received a reduced pension. "We thought this would be the best time of our life," his wife said. "Now he doesn't know when he's going to get a day off. You either take a poor retirement and have your insurance, or have your retirement and pay for high insurance." Bohl took a job at a local Western Auto store. He was paid $4 an hour. At the time, Bruce was making "in the vicinity of $6 million annually," the
New York Times
reported. Perella was making around $5 million.

THE ALLIED AND
Federated bankruptcies in January 1990 were the culmination of four months of rumors and financial distress for Campeau and his team. At the very least, there is no question that Bruce's architecture of the two deals proved way too complex for his client to execute successfully. Some people also charged that Bruce caused Campeau to overpay for Federated by $500 million. At the dinner celebrating the completion of the Federated deal, Campeau told the bankers and lawyers assembled at Le Cygne, a fancy East Side restaurant, "I'd like to thank all of you for your help. I couldn't have done this without you." Then he turned to Bruce and said, half joking, "Bruce, you cost me an extra $500 million," by encouraging Campeau to increase his winning, final bid to $73.50 per share, from $68. "The idea," Bruce later countered, "was to get the deal done."

But his nemeses at
Forbes
would have none of Bruce's justifications. "Wasserstein knowingly failed to stop his client from paying more than Wasserstein knew the company was worth," its reporters wrote two weeks after the bankruptcy filing. "Bid 'em up, Bruce." Meanwhile, in the bankruptcy proceeding, highly skilled, well-paid lawyers came to the conclusion that Bruce had orchestrated a "fraudulent conveyance" on the Allied Stores "estate" by encouraging Campeau to sell Brooks Brothers and Ann Taylor--two Allied assets--and then advising him to use all of the proceeds and a bit more ($693 million in total) to repay loans that Campeau had taken out from the Bank of Montreal and Bank Paribas as the equity for the Federated deal.

Even though he once eagerly took the credit for Campeau's successes--"It was like playing three-dimensional chess," Bruce told the
Times
in 1988--after the companies filed for bankruptcy protection, he sought to shift the blame for the fiasco away from himself and onto others. He now told
BusinessWeek
his post-First Boston arrangement with Campeau prevented him from orchestrating asset sales or refinancings. "The financing was not done on a timely basis" by First Boston, he told the magazine. "The asset values are there." But Campeau blamed Bruce. "Campeau is said to have raged through his Toronto headquarters like Lear on the heath, naming Wasserstein as the author of all his woes," the
New York Times Magazine
reported. In this forum, too, Bruce sought to deflect blame. "Robert Campeau failed to do three things," he said, "any one of which could have saved him. He did not float a new junk-bond issue when he could. He did not mortgage his properties, although Citicorp offered him one. And he did not sell assets. Anyway, I haven't been his adviser for a year and a half."

"People invent a simple, convenient fiction to account for our involvement in these deals," he told the
Times,
before articulating one of the inexplicable truisms of M&A advice. "Running something is not the job of investment bankers. Our job is to give people the options, to help them understand the risks and the rewards of what they're doing. But we don't make the ultimate decisions."

There was no question of the scheme's brilliance. The combination of Bruce's ideas and First Boston's balance sheet had enabled an unknown Canadian real estate developer to get control of the largest collection of retail stores ever assembled under one roof. And as far as could be determined, Campeau had put up virtually none of the money himself but still had control. But it was too clever by half, as they say. When all was said and done, the consensus seemed to be that if Campeau had only bought and run Allied, the deal could possibly have worked with enough time. While Campeau paid a full price for Allied, he did not overpay. He also received full prices in return for both Brooks Brothers and Ann Taylor. The problem developed when Campeau, with Bruce at his side, decided to reach for Federated. The bidding war with Macy's caused Campeau to overpay for sure. The two companies were never fully integrated to take advantage of the synergies on which the deal was based. When the economy slowed and they were stuffed to the gills with debt, the companies never had a chance.

But the true malfeasance came when Campeau took the proceeds of the Brooks Brothers and Ann Taylor asset sales and, instead of paying down the Allied debt, used the money as his equity to buy Federated. Thus, Campeau robbed the Allied estate to buy another overleveraged retail chain. This became the basis of a claim of "fraudulent conveyance" asserted by the Allied bondholders. This claim was sufficiently well documented and proven that, as part of the Allied-Federated plan of reorganization, the Allied bondholders received some $225 million of value beyond what they would otherwise have been entitled to. First Boston also made a multimillion-dollar contribution to the bankruptcy estate, as part of the plan of reorganization, in order to end the litigation that resulted from Bruce's advice.