The last tycoons: the secret history of Lazard Frères & Co (117 page)

Michel and Bruce were locked in a tense stalemate. Outsiders began to wonder whether Lazard would be Wasserstein's Waterloo. Would Michel jettison him as he had all the others? It was now obvious to the world that Michel was nearly impossible to work for and to work with.

And it was equally clear that his Chinese water torture had already commenced its insufferable dripping on Bruce's forehead, as evidenced by the start of a well-orchestrated press campaign against him. In February 2004, British newspapers began to report the growing rift between the two men. In addition to all the new partners hired, Michel was upset with Bruce because of the new London headquarters building, the inexplicable purchase of Panmure Gordon, a venerable London broking firm (sold a little more than a year later at a small profit), and the establishment of a European private-equity business based in London at a time when other Wall Street firms were jettisoning their captive private-equity units (this has since been disbanded after all the partners who were recruited left). Relations between the two were said to be "cordial" but "not warm, let alone intimate." In truth, they were no longer speaking.

The
New York Post
reported the dispute a few days later. "Bruce has done a decent job by motivating people, building the firm's brand and leading by example," one Lazard banker said. "But he's wrecking the balance sheet and spending the shareholders' money, and it's not clear what the long-term future is for the firm." A columnist at
Bloomberg.com
wondered how Michel could have expected otherwise from Bruce. He described their argument as "absurd." "If you hire a brash, aggressive Wall Street banker, there's not much point in turning squeamish when he starts acting like a brash, aggressive Wall Street banker," Matthew Lynn wrote. "It's in his blood. He's only delivering what he has always delivered, and what he has always promised.... Wasserstein's path at Lazard may well be troubling for the older bankers, and for its complex network of shareholders. The dividends they used to rely on may be drying up. But the foundations of the firm are being rebuilt. It's being dragged into the modern financial world, where working bankers expect to make at least as much money as their shareholders. That must be the right thing to do." He also predicted, in February 2004, that the likely solution for both sides would be a face-saving IPO. "Don't expect either Wasserstein or David-Weill to leave quietly," he concluded. "But any row will accelerate a public offering of Lazard. Wasserstein needs to solidify his control of the firm. And the older shareholders need to be given a dignified, and lucrative, exit route. Only an IPO can achieve that."

In March 2004, Michel dismissed talk of a war between him and Bruce and told the
Financial Times
, "Mr. Wasserstein is head of Lazard on a five-year contract and we hope he will return it to a money-making position as he expects to this year," and added, comfortingly, "There is no war between us." He also said, though--in classic Michel fashion--that Bruce had enjoyed "some successes but had not yet become a success." He said that the "firm's improved position"--particularly in the States and Italy--had come at a "high cost," and "by definition it is not satisfactory to lose money after expenses, nor can it continue forever." The
Financial Times
editorialized that the "ungentlemanly tussle" between Michel and Bruce "raises questions over what investment bankers really do to justify the money they are paid."

This rather straightforward warning shot from Michel came a day before the scheduled board meetings to approve the $3.2 billion merger between two of Lazard's cascade of holding companies, Eurazeo and Rue Imperiale, which had been announced in November 2003. The merger was the final step in a four-year process designed to simplify Lazard's byzantine ownership structure and came about chiefly as a result of the ongoing efforts of Jon Wood at UBS, the activist shareholder. After the merger with Rue Imperiale, Eurazeo would become, essentially, a large publicly traded private-equity fund. Together, Michel and the onetime Lazard suitor Credit Agricole would control 54 percent of the voting rights of Eurazeo.

Michel had a huge influence on Patrick Sayer, the forty-seven-year-old Eurazeo CEO. He had handpicked the "hyperkinetic" Sayer to be CEO in 2001 after he presided over the withering away of Lazard's media and telecom business in New York, following the burst of the telecom bubble and Rattner's departure to form Quadrangle. Sayer was in a particularly difficult position. On the one hand, he was a creation of Michel's and existed, in this context anyway, solely as long as the Sun King wished. On the other hand, he was the CEO of a publicly traded company, which, even in France, meant he must occasionally pay some homage to his public shareholders, who controlled 61 percent of the ownership and 46 percent of the vote. Although the merger diluted its ownership stake to 8.9 percent of all shares outstanding, from 11 percent, UBS still controlled 4.2 million shares and was the largest single public shareholder. Inasmuch as its minority stake in Lazard was a huge percentage of Eurazeo's portfolio, Sayer had to be mindful--on behalf of all shareholders--of its lack of liquidity and the lack of dividends. Indeed, the puny--1 percent--return that Eurazeo had received on its Lazard investment in 2003 had pushed down its share price. Some analysts believed that for Eurazeo to be perceived as a "serious player" in private equity, the firm had no choice but to sell its stake in Lazard.

In an effort to play to his public audience, Sayer said, on occasion, that he would sell the Lazard stake if appropriate. Few believed it would be that simple. In his first "message" to Eurazeo shareholders as the chairman of its supervisory board, Michel wrote: "I am gratified by the relationship of complete trust which exists between myself and the Executive Board, in particular, its chairman, Patrick Sayer. Indeed, when the proposal to simplify our corporate structure"--the merger between Eurazeo and Rue Imperiale--"was presented to the Executive Board, it immediately elicited their full and enthusiastic support, together with a recommendation that it should be implemented as quickly as possible." For his part, Sayer added some fuel on March 8 when he told the
Daily Telegraph,
"If Lazard goes back to delivering the kind of profits it has in the past, it might be a good idea to hold on to the stake. If and when there is a liquidity event, which is something Eurazeo will have a say in, then we will have to look at it." He declined to answer when asked whether his comments meant he was unhappy with Lazard's performance.

THE DISPUTE
--it was quickly turning into a civil war--between the shareholders of Lazard and its management, while unfathomable prior to Michel's decision to cede power to Bruce, is certainly not without precedent. Private, family-owned companies often face generational clashes, as do public companies, as evidenced by the raucous fight between the large pension fund shareholders of Disney and the Disney board of directors about whether to keep Michael Eisner as CEO. What's extraordinary in this instance is that Michel did this to himself by cutting a secret deal with Bruce, without his partners' input and ignoring their voluble warnings. In an effort to salve these open wounds, Michael Castellano, Lazard's CFO, wrote a memo to the nonworking partner shareholders on March 12 suggesting that perhaps they had overlooked some accounting benefits in 2003--to the tune of $47 million--as a result of a positive currency translation that ended up in their illiquid capital accounts. In addition, he reminded them that they had also received $22 million in cash, or a total of $69 million in both cash and noncash benefits. He added they may have "overlooked" an illiquid $41 million currency translation in 2002 as well, along with $20 million of cash, or $61 million that year. "Because we have not highlighted this translation gain in 2002 or 2003, it is possible that [nonworking partners] may not have focused on the total benefits and proceeds they received," Castellano wrote.

The appeal fell flat, since these shareholders correctly pointed out that their illiquid capital accounts were frozen unless they sold their equity stakes in Lazard or died. "Lazard management is currently leading an investment policy which we will judge in 2006," Michel told the
Wall Street Journal.
He said, in a separate interview, that the Castellano letters were just "window dressing" and a complete fabrication since he received no dividends whatsoever from the firm in 2002, 2003, and 2004, only a small amount of contractual interest on his capital (all of which formed the basis for Michel's amusing comment that he could no longer afford to buy art because he was "so poor"). The same day that Castellano sent his letter, Greenhill & Co., the small advisory boutique founded in 1996 by Robert Greenhill, had filed an IPO registration statement with the SEC that valued his firm at around $500 million. This was a watershed event, and not lost on anyone at Lazard, least of all Bruce Wasserstein. In the wake of the recent myriad of Wall Street scandals, boutique firms offering impartial, independent advice had once again been garnering an increasing share of corporate advisory business.

The dispute between Bruce and Michel carried on into the spring. On April 3, after the contents of Castellano's March 12 letter were leaked to the press, Patrick Sayer told the
Financial Times
that "we have been told that this year the bank will be back to profit after all the working partner costs. We would be happy to keep an investment which has been very attractive in the past." Michel added that "all votes on issues such as the renewal of Bruce Wasserstein's contract as head of Lazard or a transformation of the Lazard business must be taken by the majority of the Lazard board." And here he pointed out that Bruce had nominated five of the board members, Eurazeo could nominate two, and "I, Michel David-Weill, have the right to name four representatives."

Despite his promises to Michel, Bruce kept on hiring in 2004. After all, if one of the legendary Great Men offered you the once-in-a-lifetime shot to remake one of the most storied franchises in all of investment banking history, complete with a huge guaranteed compensation and an equity stake for when the firm gets sold, how could you ever turn that down? In April, Bruce recruited William Lewis, forty-seven, as co-chair of investment banking. Lewis, who ranked thirteenth on the
Fortune
list of Most Powerful Black Executives (his new partner Vernon Jordan ranked ninth), spent his entire twenty-four-year investment banking career at Morgan Stanley, where he became the first black partner and achieved that milestone in seven years, faster than any other person in the firm's history. Lewis had been co-head of Morgan Stanley's global banking group.

The Lewis appointment, which should have been huge news, curiously received only the slightest publicity--the
Wall Street Journal
failed to mention it, to say nothing of Bruce's
Daily Deal--
and was another unkind cut in the long-simmering feud between Wasserstein and Perella (Perella had just been appointed head of the department to which Lewis belonged). But it revealed plenty about just how dictatorial and absolute Bruce's reign at Lazard had become. When the internal press release went around inside Lazard announcing Lewis's arrival, partners discovered that the e-mail had been marked in such a way as to prevent its being printed out or forwarded to others.

On May 5 Sayer told the Eurazeo shareholders at the annual meeting that there was a definite disagreement between Lazard's management and its shareholders about Bruce's strategy of paying large contracts for new partners in the face of a market slowdown. Speaking to the shareholders, he said, "There were differences over the timing of a return to profit." And, he added, Bruce's "investment strategy" would not be tolerated for much longer. The hostilities between Michel and Bruce surfaced again a week later, despite Michel's earlier statement that "there is no war between us," when arch letters between the two men were sent to the firm's partners, each in a separate interoffice envelope. The two envelopes were stapled together. The letters appeared, in this fashion, on a Friday afternoon. By the next morning, their contents were in the
Financial Times.

The background for this particular spat was the once-a-year meeting of the "Members of Lazard LLC" scheduled for June 3, 2004, at 30 Rockefeller Plaza, the sole purpose of which was to have the members approve the Lazard LLC consolidated financial statements for the year ended December 31, 2003. On May 11, Michel wrote, "According to the financial statements, the net income allocable to members in 2003 was down 13 per cent and covered only some 60% of distributions. As a result the firm had a financial loss of about $150 million in 2003. A loss of this magnitude may impair the value of Lazard's goodwill. Unfortunately, the financial statements that are being submitted to the General Meeting of Members do not show this loss. Therefore, the financial statements for 2003 cannot, in my opinion, be approved." Michel had also sent around a notice for the general meeting.

On May 14, Bruce issued a sharp rebuke to Michel's notice and to his letter. "With regard to the notice and/or letter that you may have received," he wrote, "1. The notice is moot. Just like last year, no meeting will be held, as working partners with a profit and loss percentage have unanimously given me their proxy not to attend the meeting. Therefore this approach is rejected. 2. The letter is wrong. Our audited financials, prepared in accordance with US GAAP"--generally accepted accounting principles--"show a profit before distributions. Our core operating businesses were profitable by any measure. 3. The letter omitted to state that the 'capitalists' actually received distributions and allocated increases to their capital accounts that exceeded any costs." The letter continued by urging those with further questions to speak with Mike Castellano and exhorted the recipients of Michel's letter to treat it "with grace, humor and tolerance."