The last tycoons: the secret history of Lazard Frères & Co (112 page)

In early December 2001, Bruce met with the partners in Paris and told them, "Okay, now I'm the boss." This went over poorly. Braggiotti, for one, considered Bruce's contract a "change of control" of the firm and therefore demanded a retention contract, or, he said, he would leave. He also convinced Ralli and Guiony that the three of them were better off joining forces--whether that meant leaving or staying. Braggiotti had one meeting with Ralli at UBS and one meeting with him at Deutsche Bank. But these were just tactics to force Bruce's hand. At that moment, Braggiotti had no intention of leaving Lazard. Ralli would have left but got most of what he wanted to stay. Bruce had blinked. He agreed contractually to cede all power in France to Ralli and all power in the rest of Europe (outside the U.K.) to Braggiotti, superseding what was in the new operating agreement. Guiony cut a new deal and remained head of M&A in France. For three years, Bruce was not allowed in France or the rest of Europe. Braggiotti and Ralli could open offices, close offices, take on clients or not, and hire or fire professionals. Bruce was powerless. "He had no choice," one European partner said. "He couldn't announce in December, or whenever it was, that he was joining Lazard and the same day announce he had lost Europe. So he had no choice. He had to do it." From time to time thereafter, Bruce would try to direct events outside his sphere of influence in the United States and the U.K., but Braggiotti and Ralli all but ignored him. Braggiotti did make one concession to Bruce: when he complained about the "hold" music on the phones in the Milan office, Braggiotti agreed to change it.

ON JANUARY 3,
Bruce took over as head of Lazard and announced his new management team, which effectively kept most of the existing senior managers in place and reflected his intention to delegate authority across geographies. But it also reflected the success of the Europeans' gambit weeks before. Braggiotti was named head of Europe outside of France and the U.K.; Ralli was promoted to head of France; Marcus Agius, then fifty-five, remained head of the U.K.; and Ken Jacobs, then forty-three, was promoted to head of the United States. All were named deputy chairmen of Lazard, a move that reflected Bruce's penchant for handing out highfalutin titles. All reported to Bruce and were to "act as a team to run the firm." Bruno Roger, then sixty-eight, was named chairman of Lazard Paris after Bruce expressed interest in having him as an adviser. The title also saved Roger from further public humiliation.

The
New York Times
reported that as of Bruce's arrival and "according to Lazard calculations," the firm was worth $3.8 billion, right in line with the "Pearson price." Bruce announced that "despite the recession," Lazard intended to hire twelve new partners in the United States in the first six months of 2002 and a "limited" number of new partners in France and the U.K. and was "launching a major expansion" in the rest of continental Europe under Braggiotti's direction. Bruce's contrarian view was that the severe downturn on Wall Street was the perfect time to be hiring bankers, just as others were firing them and compensation had fallen precipitously. He wasn't wrong. He had already spoken to seven of his former colleagues about coming to Lazard, among them Chuck Ward, then back at First Boston, and Jeff Rosen, then at DKW. The
Wall Street Journal
reported that he told them that a 1 percent ownership stake in Lazard was worth $38 million, a value consistent with the $3.8 billion valuation, and, according to Bruce, was consistent with other prices paid for stakes in Lazard, including his own. Bruce told the
Journal
that the new financial supermarkets, such as Citigroup and JPMorgan Chase, were the "new fandangos" and said that he believed "good advice is the new, new thing."

The new year not only brought the announcement of Bruce's "new" management team but also revealed to all the partners the complexity of the deal Michel had cut with Bruce. A summary of the 116-page "Third Amended and Restated Operating Agreement of Lazard LLC, Dated as of January 1, 2002" bluntly stated the changes: "BW will take over from MDW as Chairman of the Executive Committee, will take on the positions of Head of Lazard (for an initial five-year term) and CEO of Lazard and will assume all of the powers of MDW and the Executive Committee. In these positions, BW will have all the powers with respect to Lazard LLC, subject to the approval rights of the Lazard Board described below." As for Michel, "MDW will become the non-executive Chairman of Lazard and Chairman of the Lazard Board. MDW will hold these positions until the earlier of his death, adjudicated incompetence or voluntary withdrawal or the date on which the MDW Group ceases to hold a Class B-1 Profit Percentage. The position of Chairman of Lazard will cease to exist after MDW ceases to hold this position."

While not then publicly revealed, the new Lazard board of directors consisted of Bruce and the four people who reported directly to him--Agius, Braggiotti, Jacobs, and Ralli--and Michel and his five close allies, Francois Voss, Didier Pfeiffer, Bruno Roger, Antoine Bernheim, and Alain Merieux, the CEO of bio Merieux. By a majority vote, which Michel felt confident he could then easily obtain, the Lazard board had the right to approve, among other powers, a material acquisition of, merger with, or joint venture with another investment banking firm; the appointment or reappointment of Bruce; the removal of Bruce, only for cause (as "narrowly defined"); and the appointment or removal of a board chairman other than Michel.

As far as the day-to-day operations of the firm, though, it was clear Bruce had all the power. He alone could appoint or remove, with or without cause, all "Heads of House, Senior Managers and Global Heads." He could appoint or remove any managing director he wished "at any time with or without cause," with the notable, and interesting, exception of the managing directors in Paris, "where the existing system for nomination and removal of Managing Directors will be continued" (reflecting, no doubt, the deal he had to cut with Ralli and Braggiotti and longstanding practice). Bruce alone had the approval right over all other appointments at the firm and, of course, was given the sole right to determine the compensation of managing directors and the "aggregate compensation" of other employees of the houses, and retained the right "to determine the individual compensation of any particular employee of a House." For the working partners, Bruce would have the right to set and change at any time their Class A-1 profit percentage, their interest in the annual profits and losses of the firm. For the nonworking, limited partners and also for the so-called capitalists--Michel and the other founding families, plus Eurazeo, among others--their share of the annual profits and losses plus their share of the goodwill interests worked pretty much the same as that for the working partners except that the percentages were firmly set and not alterable by Bruce. The working partners were to get about 58 percent of Lazard's profits and the limited partners and the capitalists were to get 42 percent of the profits, although this split was subject to change, through dilution, as Bruce hired new partners.

Quite simply, the depth and breadth of Bruce's control of the firm were not only unprecedented for Lazard; they were unprecedented for almost any financial institution. His deal for a minority stake with full management control confirmed what many Lazard professionals had feared--that he stole the firm from Michel. Michel's deal with Bruce appeared to violate one of the cardinal rules of takeovers: never sell operational control of a company without being sure to fetch a "control premium," or an above-market price that attempts to value what selling management control is worth. But that is exactly what Michel did: in a decision rich with irony, he sold near-absolute control of Lazard--a firm worth roughly $4 billion--to Bruce for $30 million. What's more, the $30 million Bruce invested, it could be argued, came from the $75 million or so he saved by not paying state and local taxes in New York on his $625 million windfall from the sale of his former firm. In effect, it had not cost Bruce a dime to take control of Lazard.

Indeed for many Lazard partners, the January 1, 2002, documents conjured up a sense of another contract of adhesion forced down their gullets. Just as in 2000, the execution copies of contracts and "acknowledgment" forms started flying around the globe, with very little time to review them and no opportunity to negotiate. Scott Hoffman admonished the managing directors to sign the forms, without fail, by January 31, 2002, or "you will lose all the A-2 goodwill that has been allocated to you." Worse, the 2002 documents contained none of the vital schedules and annexes that were in the 2000 merger documents. The Lazard managing directors would no longer know, for instance, who was on the Lazard board of directors or how their fellow managing directors were to be paid. They also would not be given a copy of the crucial "BW Employment Agreement" that contained the details of Bruce's financial deal with Michel. Hoffman responded when asked for the addenda, "I have not included the schedules and annexes as they are not available." One longtime partner had his goodwill percentage diluted by 5.5 percent and his profit percentage diluted by 10.6 percent as a result of Bruce's appointment--all without his approval, consent, or ability to prevent or challenge the new arrangement. Another partner had his goodwill percentage diluted by 5.8 percent and his profit percentage diluted by 27.2 percent, again without notification or consent.

Such dilution was permitted by the third amended agreement. One infuriated longtime partner sent around a note to his colleagues: "In thinking about the end game, it occurred to me that Lazard is a corporation, a Delaware corporation, even though we call it a partnership, and that in corporate law, as I remember it, controlling shareholders have a duty not to self deal in a way that they profit to the harm of the minority." Even though Hoffman had warned the managing directors to sign their documents by January 31, 2002, or "forfeit all of your goodwill interest," and wrote that, "unfortunately, there cannot be any exceptions," the bickering between many of them and the firm went on through at least the end of March. These partners, smart men all, were struggling mightily to receive from Hoffman, Bruce's new consigliere, whatever tiny shreds of information they could to allow them to make an informed decision. Requests came into Hoffman for more information. Hoffman, as instructed, stuck to his guns and stonewalled. The changes were adopted and a new veil of secrecy descended on the house of Lazard.

KIM FENNEBRESQUE'S CONCERNS
aside, Bruce clearly thought there were still Great Men available. Soon after taking over, he went into recruiting overdrive, ignoring the fact that other firms were madly cutting excess bankers to reduce costs. Hiring new bankers would, of course, further reduce Lazard's profitability, but Bruce did not care about that. He was determined to build Lazard's long-term equity value at the cost of its short-term profitability. Michel made the mistake of thinking that the short-term incentives he gave Bruce--an increasing percentage of higher profits--would be a bigger driver of his behavior than the 8 percent ownership he had. Instead, Bruce was determined to make Lazard relevant again by finding the next generation of Great Men; only, it turns out, the ones he ended up recruiting to Lazard bore an uncanny resemblance to his longtime band of banking brothers.

One week after taking over Lazard, Bruce recruited six bankers from DKW. Five of them--Neal Lerner, Michael Gottschalk, Douglas Taylor, Steve Campbell, and Justin Milberg--had resigned, and Bruce rewarded them with fat, guaranteed pay packages. No firm was doing such things in January 2002, let alone one that had been on the brink of financial disaster the entire previous year. He also reportedly paid this group a total of $10 million to get them out of their existing DKW contracts. Campbell reportedly was to be paid $3 million per year plus "several million dollars in additional compensation" plus between 0.5 and 1 percent of the Lazard equity. The other bankers were to receive compensation packages of several million dollars per year plus equity. They were then sent on "gardening leave" and did not start at the firm until April. The sixth DKW banker, and the most senior--Jeff Rosen--was still negotiating with Bruce, as his existing pay package at DKW, where he was a vice chairman and head of investment banking in continental Europe, was more complicated. Those negotiations lasted but a few days longer. On January 14, Rosen, a founder of Wasserstein Perella, announced he, too, was joining Bruce at Lazard. The same day, Bruce also announced he was
rehiring
Dave Tashjian, the former head of capital markets who had been fired by Loomis two months before and remained a consultant to the firm. Tashjian had once worked at Wasserstein Perella, too, as the head high-yield trader. Ironically, had Loomis not fired him, Tashjian would have been at the firm when the goodwill points were distributed and would have fared far better than he did in his negotiations with the firm in mid-January. Alasdair Nisbet, also from DKW, was hired as managing director in London.