The last tycoons: the secret history of Lazard Frères & Co (120 page)

As if all this squabbling weren't enough, Michel found a way to make it even worse. After a Eurazeo board meeting in Paris on October 21, he sent Bruce a message: "After having consulted with my partners who represent the majority of the Lazard board, we have decided not to oppose your I.P.O. project subject to your undertaking to resign from Lazard in case the I.P.O. is not completed before June 30, 2005." For Michel, the matter had become quite simple. He did not want to be part of a public Lazard. Nor did he want to be the one opposing Bruce's effort to take the firm public. That would make him the bad guy. "If I just say no, Wasserstein would have failed, but I would not have been able to come back with another solution," Michel explained, "because he would've said to everybody in the firm, 'Look, there was a perfectly good solution. Most of you were for it. This fellow is impossible. We all know he's impossible, but he proved it in spades. He is destroying the firm.' So what position does it leave me in?"

If Bruce succeeded in taking Lazard public, all Michel wanted was his money and a graceful exit. If the IPO failed, he wanted all vestiges of the failure removed, especially Bruce, whose contract he had already decided not to renew. For the first time, Michel put a fixed price on the stock to be sold and made achieving that price an inviolate condition of the IPO occurring. He told Bruce that Lazard had to buy the stock owned by the nonworking partners "with a strict, nonnegotiable total consideration in cash" of $1.616 billion, some $365 million higher than the $1.25 billion sum that had previously been bandied about. Since Michel and the other capitalists owned 36 percent of Lazard, the implied valuation for the whole firm was nearly $4.5 billion--some $1 billion higher than the value put on the firm by Bruce and the underwriters. This major discrepancy--selling stock at a price far below what you were paying someone else for the same stock--would add yet another degree of difficulty to Bruce's planned IPO.

Jean-Claude Haas explained Michel's logic for why it had to happen this way. "Michel tried to find a successor," he said. "As you know, failed with Rattner. Failed with his son-in-law. Failed with Loomis. And hired--put it like that--Bruce, and I think that two things happened. First of all, Bruce wanted to have control of the firm. In order to get control of the firm, he had to get rid of the historical partners one way or another. And the only legal way he had to get rid of them was to buy them out. Same thing with Eurazeo. How could he raise the money necessary to buy those guys who are not naturally sellers? The only way he could have chosen to buy them was to put on the table an irresistible sum of money." And that is exactly what Bruce did. The premium Michel et al. received would be described as the price he had to pay to get Michel's controlling stake in the firm and have him go away once and for all. And since public investors would be paying the price, who cared?

Should the IPO fail, Michel told Bruce, he maintained a "strong belief in the future of Lazard as a private firm fully dedicated to serving our clients." In that case, he wrote, he would not return as CEO, preferring instead that the firm's management be left with the "very credible and capable candidates within the senior partners group," out of which a leader would be found. He added that were the firm to remain private, he had no interest in selling but would not oppose a future "liquidity event proposed by the partners." In an interview following the Eurazeo board meeting, Michel told the
Financial Times
he was now "satisfied that enough of the partners support the IPO plan for me not to oppose it. Either we go public and I will not disapprove, but will leave, or we stay private and need a management that believes in that choice." He reiterated he would not return to run the firm in that case because "I have no will to come back and manage the firm myself. I don't believe in comebacks, they are generally brief and unhappy."

After Bruce had scraped himself off the ceiling and regained his composure--for Michel's conditions were clearly unacceptable and making them public was even worse--he replied to Michel's e-mail with one of his own. "I was very pleased to learn of your decision not to oppose an IPO on the financial terms we had previously agreed," he wrote, before proceeding to shred the conditions. "As you know, a decision to commence an underwriting will only be made under the then prevailing market conditions and will only be done if it is then in the best interests of the firm and its partners." Bruce deflected Michel's ultimatum requiring him to resign by reminding him of his "iron clad" contract. "Of course, as you know, I will continue as head of Lazard until Dec. 31, 2006, as you and I agreed almost three years ago." He added, "As we discussed, if there is no I.P.O. or an I.P.O. is inadvisable, we will all then decide what is the best plan in the interests of the firm and all its partners." June 30, 2005, was eight months away, which may have seemed like sufficient time to accomplish the IPO given that the lawyers had been drafting the requisite documents for months and were just awaiting board approval to file them with the SEC, and to begin the IPO process.

CHAPTER
21

"THE END OF A DYNASTY"

B
ut the matter was not that simple. Pricing an IPO, at least in the traditional, non-Google way, is a complex pas de deux between issuer, lead underwriters, and the institutional investors they persuade to buy the offering. The basic construct is for the Wall Street underwriter to buy stock at an agreed price from the corporate issuer and then immediately turn around and resell the stock to the preassembled, eager buyers. There is a split second at the end--when the actual stock is sold by the issuer and then purchased by the underwriter--where the underwriter and the issuer are adversaries and all the months of glad-handing and laughter evaporate. The issuer wants to sell its stock at the highest possible price, and the underwriter wants to buy it at the lowest possible price, knowing full well, of course, that it will turn around and sell it a split second later to the lined-up institutional and retail investors. But by fixing a precise deadline by which the IPO must be accomplished, the calculus of this arcane drama shifts decisively in favor of the underwriter and its investing clients. The holdup value of a fixed deadline would be enormous, a "poisoned chalice," some have said. The underwriter, no matter how chummy it had been with the issuer before, would figure out a way to stall the offering until the deadline loomed large, knowing the issuer would lose all leverage with the underwriter once the deadline passed and the deal did not happen. "Everyone then knew this was a stress sell," said one Lazard banker. "It was damaging."

Bruce was way too smart to allow the underwriters that kind of leverage. And so when Michel introduced the idea of the June 30 deadline, he and Golub went into overdrive to get him to relent and change his mind. Bruce wondered if he was dealing with a "Frenchman who was prepared to destroy his company and lose millions of dollars rather than cede control of it," one person close to him said, or would Michel blink? "In the end," Bruce's friend said, "he bet that David-Weill would blink."

First, Bruce continued his negotiations with the dissidents, who were becoming fewer in number daily as he succeeded in buying their support. Were these bribes? "Absolutely," the French partner Jean-Claude Haas responded. "But Wasserstein had the money to bribe them because he was head of the bank. Michel couldn't have done it. Michel didn't have the means to bribe them." Said an ally of Bruce's: "He was stacking the deck." Bruce was willing to relent on some of the more offensive terms for the dissidents. They didn't have to agree to stay for three years; rather, they could sign a nonbinding statement indicating a
willingness
to stay for two. They would also be exempted from the salary cuts. For instance, the star banker Gary Parr, who had a four-year, $36 million deal, agreed to support the IPO only after his contract was not impaired.

Golub, meanwhile, was working overtime trying to convince Michel to reverse his decision about the June 30 deadline. He worked closely with Haas to help convince Michel of his error. He also got Tuft, the Goldman partner, to sit down with Michel and get him comfortable with the idea that Goldman thought the deal would be a success, especially if the false deadline was removed. Golub was helped immeasurably in his tasks by improving market conditions for M&A and IPOs, which began to make more credible for Michel the business plan Golub created. In short order, the spinning began, and Michel's conditions seemed to melt away. "The conditions are not seen as that important," one Lazard source told the
Times
of London. "What is important is that David-Weill has agreed in principle to an IPO and that an agreement has been reached on a price for the capitalists' stakes." Some Eurazeo directors--in particular those representing Credit Agricole--claimed Michel's comments about Bruce having to resign were made in "a personal capacity" and had not been endorsed by the Eurazeo board. Eurazeo itself released a statement confirming that its board had "authorized the pursuit of these negotiations" that could lead to the IPO, from which, if successful, Eurazeo would receive "a 100 per cent cash payment of $784 million," a huge development in its desire to transform itself into an active, independent private-equity fund.

Then came articles that reported the working partners were growing restless and angry. They had had enough of the disagreements between Michel and Bruce, which were beginning to hurt business. There were also reports that Bruce was close to reaching an agreement with a state-owned French savings bank, Caisse d'Epargne, to act as an "anchor tenant" for the IPO by buying a 5-10 percent stake in Lazard at the IPO price. In exchange, the bank would get a Lazard board seat and additional support for its joint venture between Lazard and CDC Ixis, Caisse d'Epargne's investment banking affiliate. Once again, Bruce had found a way to seduce a foreign bank; he also scored a public relations coup in his tug-of-war with Michel by getting a member of the French establishment to support
him.

Momentum was building for the offering. Michel then told the
Financial Times
that he was "just trying to do what is best for the firm: to have it unified without me on a public project or unified with me on a private project." He added, with a breath of conciliation, that he
liked
Bruce. "In fact, I have a great deal of admiration for Bruce Wasserstein's intelligence and his dynamism," he said. "I actually like him, that is the funny part. The real problem is that we have a different conception of the future of Lazard. His conception is for it to become a public company, governed by the rules and duties pertaining to that status, while I am very attached to the concept of a private firm of partners at the service of clients." He said these "irreconcilable conceptions" were tearing the firm apart. "The gossip is like being asked 'Are you divorcing?' every day," he continued. "I am sure it is not good." But since he stood to reap hundreds of millions of dollars from a successful IPO, he took the opportunity to remark upon the firm's resilience. "If you look at the press coverage, you have to be impressed that the aura of the place is very great," he said. "It has carried us through tough times and may well carry us through to a public offering." Personally, he allowed that the potential sale of his birthright was "heartbreaking" and said, "I've lived every day for 45 years thinking, worrying and being elated by the successes of this firm," and then warned Bruce, "We could simply say 'no,' of course, which we have the right to do."

In the end, Michel's pragmatism overpowered whatever remaining shred of sentimentality he had for Lazard. The succession wars--which started in 1992 when Michel unilaterally brought Edouard Stern to Lazard and had come close to ripping the firm apart on any number of occasions during the ensuing twelve years--had reached their apex. Michel simply could not suit up for another battle. He was seventy-two. He was the father of four daughters who knew better than to pursue a role at the patriarchal Lazard. He had tried a procession of bright, ambitious men at the helm, but since Michel was unwilling to cede power to them, they quickly grew frustrated and left or melted down, or both. Braggiotti, it turned out, was not an appealing alternative, since he would not give Michel what he wanted, either. He had tried selling the firm, but when his preferred suitor, Credit Agricole, unexpectedly balked, he thwarted the entire sale process. He finally consummated his decades-long infatuation with Bruce, only to find the affair one-sided. It turned out Bruce had no love for Michel; the younger man's passion was only for fulfilling his massive ambitions. Michel was simply a means to an end.

Michel's desperation had thrown him into the arms of the one person with the tactical ability and unrequited desire to outmaneuver him. The war was over. Of course, Michel could stop Bruce at any moment. All he had to do was vote no. But he couldn't do it. Even though he recognized his mistake in choosing Bruce. Even though he wanted the firm to remain private. Even though new leaders were available. Even though he was rich enough already.
Huis clos.
He had no exit, making the ultimate capitulation inevitable. Fortunately for Michel, he was "blessed with the psychological trait that I have no regrets."

On December 3, the
Wall Street Journal
reported that a compromise between the two men was imminent. Golub and Bruce had succeeded in negotiating a deal with Haas and Michel. In exchange for "undetermined concessions" by Bruce, Michel would relax the artificial June deadline. Finally, the two bucking rams signed their peace accord, however shaky, on December 6. In a joint statement issued simultaneously in Paris, London, and New York to the firm's partners, Michel green-lighted Bruce's pet project, at a price. "If the IPO or the buyout of the historical partners were not to be completed by the end of 2005, Lazard would continue as a private firm," the statement read. "In that case or in the event Mr. Wasserstein abandons the project earlier, over the ensuing three-month period we would work together with our partners and the Lazard Board to evaluate all strategic and governance alternatives that are in the best interests of the Firm and its partners. Mr. Wasserstein's current employment agreement would expire at the end of that three-month period. If during that three-month period Mr. Wasserstein and Mr. David-Weill so desire, they would negotiate a new employment agreement subject to the approval of the Lazard Board. We look forward to a continued vibrant future for Lazard. Whether public or private, Lazard will continue to provide outstanding advice and support to its clients."