The last tycoons: the secret history of Lazard Frères & Co (116 page)

People were left scratching their heads by the high price Bruce agreed to pay for the magazine, which some considered oceanfront property. "It's really weird," one private-equity investor commented. "I don't understand why he is doing it. This may be an interesting hobby but it is not an investment." Mark Edmiston, an investment banker specializing in media deals, thought Bruce's purchase of
New York
was symptomatic of what he perceives to be a growing phenomenon in the magazine business. "A lot of them are big ego trips," he said. "You know, you get to own a magazine about your friends and neighbors, and be the king of your universe. This is a little bit of what we call the
New York
magazine syndrome...meaning I don't think Bruce Wasserstein bought
New York
magazine to get richer.... Obviously, the price of the magazine is not justified by the facts."

The conventional wisdom on this point seems to be that even though Henry Kravis couldn't make
New York
work as a financial enterprise, Bruce believed that by focusing on more upscale stories about business and fashion, the magazine would be able to benefit from the improving metropolitan economy. He also intended to revamp the magazine's ineffectual Web site. "At best, the magazine is the embodiment of New York, a very exciting city," he told the
New York Times.
"All you have to do is be a good mirror of this city."

A question even more fundamental than whether Bruce overpaid for this one magazine is why the CEO of a Wall Street firm is permitted to make deals for his own private account, at his own personal and separate buyout shop, when he is running a twenty-five-hundred-person regulated securities firm. With a staff of about thirty in three offices (New York, Los Angeles, and Palo Alto), Wasserstein & Co. manages "approximately $2.0 billion of private equity and other assets" for individuals and institutions beyond just Bruce Wasserstein. The firm has been quite active in the past few years. Wasserstein & Co. bought the company that owns the Harry & David direct-mail fancy-food operation (a planned IPO is on hold) and Sportcraft, the maker of foosball and Ping-Pong tables. Along with Centre Partners, a buyout fund affiliated with Lazard, Wasserstein & Co. also owns American Seafoods, the largest harvester and at-sea processor of pollack and hake and the largest processor of catfish in the United States. In November 2006, one of Wasserstein & Co.'s portfolio companies announced the acquisition, for $530 million, of Penton Media, Inc., a portfolio of fifty trade magazines, eighty trade shows, and an array of online media sites.

Bruce is the firm's chairman, its principal owner, and its main beneficiary. His carefully crafted biography at the Wasserstein & Co. Web site makes no mention of his role at Lazard. Michel, who allowed Bruce a luxury no other Wall Street CEO would ever even contemplate, let alone be permitted by any self-respecting board of directors, said he didn't care whether Bruce had his own buyout firm as long as it didn't detract from his running Lazard. The third amended and restated operating agreement required Bruce to get Michel's "written consent" if he "desires to make available to Wasserstein & Co., Inc., any corporate opportunity of Lazard or any of its subsidiaries that arises from a relationship of Lazard or any of its subsidiaries or affiliates" other than any relationship Bruce may have had with Lazard prior to November 15, 2001. Of course, what is not clear is what is meant by "any corporate opportunity." Can Wasserstein & Co. look at an investment or buyout that Lazard is also looking at, or that one of Lazard's funds is looking at? And this document, of course, says nothing about why he is permitted this conflicting dual role. Bruce even permitted Lazard managing director John Chachas, with
his
own investment company, Sand Springs Holdings, to be one of the lead investors in the February 2005 $8.5 million acquisition of Gump's, the famous San Francisco department store. And he permitted the superstar Gary Parr to be a meaningful investor in the February 2006 buyout of Fox-Pitt, Kelton, an investment banking
competitor
of Lazard's, from the insurance giant Swiss Re. The question is, why?

Others have wondered about this, too. Although the
New York
magazine purchase appears to have been made through a company that controls his family trusts--by an entity called New York Magazine Holdings--for some reason the vice chairman of Wasserstein & Co., Anup Bagaria, helped to negotiate the deal and is the CEO of New York Magazine Holdings. "Mr. Wasserstein has stated that he wants to take the magazine up-market and increase its business reporting," the
New York Observer
editorialized. "But how can he avoid the conflict between
New York
's coverage of corporate America and the city's high-profile C.E.O.'s and investment bankers, and the fact that he runs an investment-banking firm that does business with dozens of companies as well as dozens of investment and commercial banks?...What will happen the next time there's a $20 million M. and A. fee on the table for Lazard, and
New York
is about to cover the comings and goings of the corporate C.E.O. whose company is paying the fee?" The question of Bruce's objectivity as a publisher is even more interesting considering that the
American Lawyer
, the
Daily Deal,
and
New York
aggressively cover the M&A business (indeed that is
all
the
Daily Deal
covers). One of Bruce's "friends" suggested the
New York
purchase was about ego and social influence. "I think that Bruce was surprised by how little cachet there has been in owning
American Lawyer
and the
Deal,"
he said. "This purchase should fix that."

Only time will tell whether Bruce, the former journalist who is on the Board of Visitors of the Columbia University Graduate School of Journalism, commits the cardinal sin of journalism, imposing prior restraints on his reporters who dare tack too close to windward. And yet an overt act may not even be necessary to have the desired chilling effect, as Great Men work in a landscape of great subtlety and nuance. In her reporting on Bruce's tactical victory for
New York,
Yvette Kantrow, who writes a media column for the
Daily Deal,
allowed how, "just to be clear, Media Maneuvers has absolutely no inside information on any of this, and if we did, we probably wouldn't say. Which is the point. As fun as this collision of dealmaking and the media is, this will be one Media Maneuver you won't read about here." Exactly.

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.'"