The last tycoons: the secret history of Lazard Frères & Co (118 page)

Some observers believed the civil war had already started, and the public release of these letters was but the latest evidence. One astute Lazard veteran observed, "This is Michel's greatest nightmare. Michel, who fancies himself a person of enormous style and standing, has clearly handed over the keys to the ape-man and he's horrified. He got snookered. And he was cornered. As soon as it was handed over, he went from being"--and here he adopted a rich-guy, French accent--"the head of the mysterious three houses of Lazard, the scion, to being a guy who got duped by this guy from Brooklyn. I think there is a deep hurt and humiliation and shame because Michel is very invested in his family, his friends. His pride is hugely wounded."

Michel didn't know better than to make this deal with Bruce because of "muscle memory," this observer continued.

People become creatures of habit, of an environment, and of a position. And when circumstances change, their muscles don't automatically adjust to the new reality. Or to think about it another way: if the lights go on in a darkened room, your eyes don't automatically adjust to the fact that the lights are on, or the lights are off. He was able for so long, because of the structural power he held, to manipulate people and have people ultimately bend to his will. And I don't think he really understood that it all wasn't coming from his personality and his charm. It came from his power.... Michel confused his effectiveness, which came from a whole host of factors that were independent of his own strength, and didn't realize that Bruce was going to ultimately use every resource he was handed.

The
Economist
deemed it all "a poisonous mix" and wondered whether "Mr. Wasserstein is more interested in pushing Lazard up the league tables in preparation for a sale than in stable, long-term profits for the bank from loyal clients. Some shareholders might not want to see a sale. The problem is that Mr. Wasserstein's contract does not expire until the end of 2006. That leaves a lot of time for fighting."

Slowly, Bruce started to reveal his hand. In its May 24, 2004, issue,
Investment Dealers' Digest
said that in the wake of Greenhill's very successful $87.5 million IPO on May 5--the first of a Wall Street firm since Goldman Sachs went public in 1999--Lazard had started interviewing underwriters for its IPO and had begun drafting a registration statement.

Although it was late to the IPO story, the
Financial Times
appeared to be emerging as the combatants' favorite boxing ring. First, in May 2004, came the release of the curt letters regarding the firm's accounting statements; then, on June 16, followed the leak--obviously from the Bruce camp--that Lazard was being "besieged" by bankers from other Wall Street firms pitching for the IPO of Lazard, which valued the firm at more than $3 billion. The pretext for these pitches was of course Greenhill's successful IPO. The
subtext
, though, reflected the tactics of the Wasserstein mind. It's as if he and Michel were engaging in a global, three-dimensional chess match. "Tactics are universal," he told an interviewer in 1998.

Bruce knew the Lazard shareholders had been griping about illiquidity and lack of dividends. He knew that Eurazeo alone among the shareholders had a fiduciary responsibility with regard to its 20 percent stake in Lazard and that Eurazeo's pain would ratchet up exponentially as Bruce continued to "invest" in the business and not pay dividends. He knew that the well-compensated working partners were increasingly loyal to him but now had equity in the firm that they would want to have the opportunity to sell. He knew that, at seventy-one, Michel would have less and less energy to think about once again re-creating the firm if Bruce's contract were not renewed. He knew that Michel was increasingly unhappy about his unfettered spending. And he knew that Michel had no heirs interested in running the firm. In this context, even though Michel actually had a veto over an IPO--such a move had to be approved by a majority of the Lazard board, including a specific positive vote by Michel, Bruce, and one of the Eurazeo board members--the IPO solution began to look more and more attractive, even to Michel. And what better way for Bruce to orchestrate that outcome than to leak to the
Financial Times
the very private fact that Goldman Sachs, Morgan Stanley, Citigroup, UBS, and Lehman Brothers had had meetings with Bruce and his team to offer their views on how an IPO would be structured and at what valuation?

Rich Silverman, the Lazard spokesman, had no comment on the IPO stories. Three
unnamed
sources within the firm cooperated further. From a "senior member": "We are listening and evaluating." Another indicated the information was "valuable," and a third said, "We do expect significantly improved performance over the next 12-24 months so I doubt we would do it now but it is a topic for debate." Another added: "If he doesn't come up with a plan within the next year or so, there could be an exodus of bankers. It's a question of realization."

The fact that the
Financial Times
and the
Wall Street Journal,
the next day, would give such prominent coverage to a story about bankers simply coming to talk about the
possibility
of Lazard going public--something that happens literally all the time, with no fanfare whatsoever--spoke volumes about the enduring interest of the financial press in the Lazard machinations. "An IPO could...solve one of the biggest problems for Lazard head Bruce Wasserstein," the
Journal
wrote, "by giving him the wherewithal to pay a new cadre of big-name banking talent and soothe a group of agitated retired partners.... But a public offering could also renew the rancorous fight in the firm's executive suite, while threatening the austere, private identity that Lazard so vigorously promotes." The truth was that Bruce had started having discussions about the possibility of a Lazard IPO with the longtime Goldman partner and FOB Tom Tuft, who organized a team to begin analyzing the many complexities that such an offering would entail.

In the pre-Bruce days of Lazard, Michel would have definitively snuffed out the mere thought of entertaining an IPO--let alone promoting it in such an obvious and public way--well before it had reached the stage of bankers making presentations. When asked by the
New York Times
in 1998 if he would ever consider an IPO, Michel answered firmly, "I will never do it"--this after Steve had floated the idea. This time, though, Michel knew all about the meetings Bruce had with the Wall Street firms. The
Financial Times
editorial on the subject conveyed wisdom: "Even if Lazard does one day plump for an IPO, however, Mr. Wasserstein's dealmaking reputation could be a two-edged sword. It might make Lazard a more palatable investment, assuming he and his senior lieutenants are tied in. But the last people who bought an investment bank from him are still licking their wounds."

The
Financial Times
articles were followed a week later by an article in
Le Monde,
the respected French daily, which essentially tossed a bucket of tepid water on the IPO idea. The article--an obvious plant by the French interests in Lazard--said that in the previous week Bruce and Michel had actually done something they had not done in almost two years: had a convivial conversation. Indeed, their differences were so profound at this point that in addition to not speaking, Michel had decided not to renew Bruce's contract at the end of 2006. By mid-2004, the matter of succession, supposedly solved by the hiring of Bruce, had returned to the forefront. But according to the newspaper, the two men "put aside" their "long-standing differences over the firm's strategy" and agreed to study a potential IPO, the consensus value of which, the paper said, was between $3.5 billion and $4.1 billion. This valuation range was still materially below the $4.8 billion at which Eurazeo carried its Lazard investment on its books. Nevertheless, "the two men agreed that the listing was not urgent" and that "Wasserstein could face a tough challenge persuading Lazard's board to endorse the plan." Still, Bruce told Michel, an IPO of Lazard might be "the best way to solve their problems." Orchestrating the IPO of his own investment bank and then being the CEO of a public company were two of the only professional accomplishments that had consistently eluded Bruce in his long career. Bruce would be unlikely to give up this goal easily. "He yearns to be an industrialist and being sole chairman of Lazard would do that for him," said a former partner of his. "As it stands, he is still not part of the cultural or economic establishment."

He realized, of course, that Michel could snuff out his dream unilaterally at any moment. Tactical Bruce needed to win Michel over, and he realized after the
Le Monde
article that the French were lining up against him. He decided to appoint a special envoy to undertake a diplomatic mission to see if he could begin to bring Michel around to his thinking about the IPO. His choices were limited, though. He needed an American who had both longevity at the firm and Michel's trust. Here Bruce was brilliant. He picked for the assignment Steve Golub, the longtime partner who had been CFO of the firm during Rattner's brief reign and who had returned to deal making solely when Loomis took over from Steve. Along with Rattner, Golub had led the firm's brief period of glasnost in the late 1990s. He had also found Mike Castellano, the firm's first full-time CFO.

On the night before the June 2004 Lazard board meeting in Paris, Bruce asked Golub to come with him to Paris and deliver the presentation, even though he had had no role in its preparation. Thus began Golub's secret three-month mission to prove to Michel that the firm could develop a credible business plan around which an IPO could be achieved. From the outset, Bruce had been told by the underwriters to stick as closely to the Greenhill business model as practicable. As a result, he and Golub quickly concluded that as a public company, Lazard would have only the M&A and asset management businesses. The less profitable capital markets and private-equity businesses would be retained in a separate entity to be owned by the working partners and would not be sold to the public.

Golub then had to craft a business plan around M&A and asset management that was both believable and achievable. This meant figuring out how much cost could quickly be cut from these businesses to increase their profitability. Then he needed to convince Michel of its efficacy. "When we first started out, he saw there was no chance of it happening," Golub explained. "But the real key was getting him comfortable that there was a business plan to be executed that could deliver the value to the capitalists, that it wasn't just some pie-in-the-sky stuff."

When Lazard chopped ten of its nonpartner bankers in London in July 2004 as part of what it declared to be a routine weeding out of ineffective professionals, some observers viewed the unusual timing of the move (most Wall Street firms cut bankers after year-end bonuses are paid) as a cost-cutting effort consistent with a desire to improve profitability as a prelude to an IPO. But another prerequisite for an IPO was three years of audited financial statements, which, given the fundamental disagreement between Michel and Bruce about what those financial statements actually said, may have been the biggest obstacle of all. "Not good," snapped Jeffrey Sonnenfeld, the associate dean of the Yale School of Management, when asked about the prospect of Lazard solving its accounting problems. But Golub, the former SEC accountant, said the accounting dispute was just a red herring and was as simple as the difference between partnership accounting and corporate accounting--and, he said, both were accurate ways to look at the Lazard situation.

In the late summer doldrums of August 2004, the
Wall Street Journal
broke the unconfirmed news that Lazard had selected Goldman Sachs to lead an IPO. Goldman, of course, was the world's most highly respected investment bank and had just completed the successful offering of Greenhill. Still, the matter was far from decided. "No firm decision has been made on selling shares to the public...and Lazard also may be using talk of an IPO to flush out a takeover offer from a large commercial bank," the
Journal
reported. The paper suggested that a "base price" of $2 billion for Lazard had been established. As the story developed quickly over the following weeks,
BusinessWeek
reported that Michel would give his consent to Bruce to proceed with the IPO only if Bruce agreed to buy the combined 36 percent of Lazard owned by Michel and Eurazeo and the other shareholders based on the so-called Pearson price of $3.785 billion. The article added, though, that other Wall Street bankers valued Lazard closer to $3 billion, well below the Pearson price and well below the price at which Bruce sold a 3 percent stake in the firm, in the fall of 2002, to Intesa, the Italian bank. Both Eurazeo (which benchmarked at the Pearson price) and Intesa would be facing a meaningful write-down if Lazard went public at anywhere near the $3 billion level. Meanwhile, for Bruce to buy the 36 percent stake in Lazard at the Pearson price would cost the firm around $1.4 billion. Raising either sum, given the net losses the firm had been generating since Bruce took over, seemed like a monumental task in a still-shaky IPO market.

"David-Weill is one of the wiliest and most successful negotiators and financial intriguers in the world," Roy Smith, the New York University professor, told
Bloomberg News.
"Either Wasserstein meets his terms, or the IPO's put off."
Bloomberg
further reported that rather than buy the entire 36 percent stake, Bruce just had to buy Michel's 9 percent stake. Even if this were true, Bruce would still have to come up with around $375 million.

Regardless of the valuations being bandied about, the situation was "crazy," according to one partner, because "there is no turnaround plan in place" to return the firm to profitability--the ultimate determinant of the enterprise's value. He also noted that in addition to all the pricey contracts with the new hires, Lazard now had satellite offices all over the place--twenty-nine different investment banking offices worldwide, at last count--an expensive new building in London, and costs spiraling out of control. "It's a mess," he said. "And I still don't see a way out." Francois Voss, a Lazard board member, told some Lazard bankers that the losses in 2004 were running higher than those of 2003 and that he saw no profits for Lazard anywhere on the horizon. One partner said that Goldman Sachs, the IPO's lead underwriter, insisted that Lazard cut at least $60 million in operating expenses prior to launching the IPO.