The last tycoons: the secret history of Lazard Frères & Co (126 page)

The Lazard stock traded flat--at $25 per share--for the first twenty minutes or so, and then actually traded up, to a high of $25.24, just before 10:00 a.m. The stock then returned to $25 a share until around 11:45 a.m., and then it went downhill. LAZ ended the day at $24 a share, off $1, or 4 percent, on volume of just under thirty-five million shares. "When you see it trading near the offer price like that it means the underwriters are supporting the stock," Steve Rattner told
Bloomberg
that first day. "You normally want to see it go up 10 percent." Added a trader about the $24 closing price: "That's where the demand is."
Bloomberg
pointed out that Lazard became the first IPO of an investment bank in some time to fall on its first day of trading--both Greenhill (up 17 percent) and Goldman (up 33 percent) rose on their first day of trading--and became one of only a dozen large IPOs since 1987 to do so. Some observers of the IPO market noted that Goldman could not afford to let the Lazard deal fail. "It's too high-profile of a deal," commented a trader at Cantor Fitzgerald. "It is disappointing. I am sure that they didn't anticipate that type of downward price movement." Renaissance Capital, which provides independent research on newly public companies, wrote in a May 5 report about the Lazard IPO that "it seems every last penny was squeezed out of the initial investors" and that "we believe the primary causes of the poor reception [for the IPO] were the company's convoluted corporate structure and the valuation premium on the original deal. We still believe the current valuation is too high, particularly with the mixed trading in investment banking stocks."
Red Herring
called the Lazard IPO a "belly flop" and added: "The moral of this story boils down to what Wall Street is all about: Look out for No. 1."
Financial News,
in London, applauded Bruce's tenacity in getting the deal done in the face of the many obstacles Michel laid in his path. "However," it concluded, "a deal that is so transparently designed purely to wrestle control of the firm from chairman Michel David-Weill for the individual enrichment of Wasserstein and his key cohorts at the expense of shareholders has no place in the public equity markets."

Over that first weekend after the IPO,
Barron's
, one of the bibles of Wall Street, roundly criticized the deal under the headline "King's Ransom for Lazard" with a caricature of Bruce striking a particularly Napoleonic pose. "There are numerous negatives associated with the Lazard deal," the magazine stated. "The company has the dubious distinction of being one of the few financial firms ever to come public with a massively negative book value and junk-grade bond ratings from two major credit-rating agencies. Other drawbacks include Lazard's home in Bermuda, whose laws provide less protection to public shareholders than those in the U.S." The article went on to catalog the flaws of the deal and its high price tag nonetheless. "The Lazard IPO shapes up as a great deal for Wasserstein, former Lazard partners and current managing directors,"
Barron's
concluded. "But other investors probably should stay away. There are far better Street franchises available at much better prices, including Goldman, Lehman, Bear Stearns and even embattled Morgan Stanley." For his part, Goldman's Tuft said the Lazard IPO proved to be a tough sell, at least initially: there were too many hedge funds looking to short the stock or that got into the deal looking for a short-term pop, and when that didn't happen, they dumped the stock in the market.

Per the Wall Street settlement rules, even though Lazard received its nearly $2 billion in proceeds on the night of May 4, the firm did not have to pay the money it owed to Michel, Eurazeo, et al. until May 10. On that day, via wire transfers, the money flowed. Michel received a little bit more than $328 million. He also had a small interest in two trusts that he set up--Louisiana Corp. and Sociedad Recovia--that together received $70 million. A trust named after the first initials of his four daughters--B.C.N.A.--received $1.1 million. Michel's sister, Eliane, received $99.4 million. Eurazeo, in which both Michel and his sister were large shareholders, received $784 million, by far the largest chunk of the proceeds. Eurazeo's stock increased some 37 percent in the year after Lazard filed the original S-1 and now has a market value of close to EU5.5 billion. Antoine Bernheim, the eighty-year-old Lazard Paris consigliere and eminence grise of French deal making whose parents died at Auschwitz, got $64.3 million. Jean Guyot, a few years older than Bernheim, the former associate of Jean Monnet and the man behind the merger of the carmakers Peugeot and Citroen, received $61.2 million.

Some of Andre Meyer's descendants also got windfalls. Philippe Meyer, Andre's son, who had recently retired as a physics professor in Paris and who never sold the Lazard stock his father had bequeathed him, received $18 million directly and another $57.4 million through the "PM" trust. Philippe's son, Vincent, received around $43.6 million. Andre's other grandchildren, the Gerschels, got nothing.

WHILE IN THE
aftermath of the IPO, champagne corks could be heard popping from Paris to New York, where Bruce threw a large private party for his partners at the Four Seasons restaurant to celebrate, Lazard's bankers down at the headquarters of Goldman Sachs, at 55 Broad Street, were left with a terrible hangover. As Lazard's stock dropped on the first day of trading, Goldman fulfilled its obligation to make a market for investors, eventually accumulating the unheard-of short-term position in Lazard's stock of more than 10 percent. "Goldman obviously went way out on a limb to protect the Lazard offering," observed John Coffee, a well-known securities law professor at Columbia University. "Very, very rarely do underwriters do enough to become 10 percent holders." During the ten days or so after the IPO, Goldman continued, in vain, to make a market in the Lazard stock as the price continued to fall, causing Goldman to suffer a loss estimated to have exceeded $15 million. Goldman also made a fee of about $25 million for agreeing to be lead underwriter. The Goldman partner Ken Wilson said his firm's financial support for his former firm "left us with a little bit of a black eye." Luis Rinaldini suggested that another part of Goldman's metaphorical face suffered, too. "Bruce got his $25 and Goldman is licking its wounds from paying to help support a stock that is $21," he said on May 23. "Goldman has the slightly more bloody nose than Lazard." A Goldman spokesman countered, "It is our obligation as a market maker to step up to the plate for our clients." The
New York Times
financial columnist Andrew Ross Sorkin likened Goldman's defense of its support for Lazard to a "doctor who botched a brain surgery but bragged about his skill in stitching the patient back together." Tuft had obviously hoped for better but insisted that Goldman did the right thing for both its client--Lazard--and for its reputation as a leading underwriter of IPOs. "I was just very gratified that we were able to take what could have been a very difficult, terrible situation, if it didn't get public, and to really make this a public company and to make it a better firm," he said. "And I think it is a better firm." As for the decision to act as a backstop for the IPO in the marketplace, Tuft said, "The trading decisions were made because we wanted to stand up and support the stock, and we probably supported it a little too long in retrospect. Because the selling kept coming in and we expected the selling to dry up, and it didn't dry up, and when you look back at it, you see that the short interest expanded, and basically there was a whole group of people coming in shorting it."

The broken IPO and Goldman's trading losses did nothing but further bolster Bruce's reputation as a too-clever-by-half self-interested wheeler-dealer. And the bad news kept coming. The same day the IPO started trading came word that Lazard's capital markets business--now part of the separated company and wholly owned by the firm's working partners--had become the target of a federal probe by the U.S. attorney in Massachusetts into whether executives in that business lavished inappropriate gifts and gratuities on traders at Fidelity Investments, the behemoth mutual fund company. This was in addition to the SEC's investigation into the matter. The U.S. attorney Michael Sullivan in Boston impaneled a grand jury to investigate reports that Wall Street firms, including Lazard, had offered "sex and drugs" to the Fidelity traders to try to win their lucrative trading business. One published report told of a wild bachelor party--including the requisite antics of a stripper and of dwarf tossing--for a Fidelity trader, held in South Beach, in Miami, with transportation on a private jet and a private yacht, all paid for by Wall Street. Lazard disclosed both that Sullivan's office had asked it for information and that several employees in the capital markets business had resigned, including Greg Rice, the partner in charge of the firm's equities desk.

Ironically, within days of the news that it was the target of a federal probe, Fidelity filed a report with the SEC announcing that it owned 5.5 million Lazard shares, or 5.5 percent of the firm. A few weeks later, JPMorgan Chase announced it was the beneficial owner of 5.8 million shares of Lazard, which made it then the largest single outside shareholder of the firm. Other institutions piled into the Lazard offering as well, including T. Rowe Price, Morgan Stanley, Prudential, and Jennison Associates.

As serious as the federal probe was, its likely consequences for Lazard--the newly public company--were immaterial. A far larger problem, though, emerged on May 30 when word started to trickle out of Lazard in Paris that the rainmaker Gerardo Braggiotti, then fifty-three, had submitted his letter of resignation because Bruce failed to follow through on his supposed written pledge that he would expand Braggiotti's authority, to include running all of Lazard's European operations, in return for Braggiotti's long-withheld support for the IPO. Braggiotti submitted his resignation after a number of French bankers--among them said to be both Bruno Roger and Georges Ralli--opposed his new appointment. One Lazard banker in Europe thought that naming Braggiotti to the European post "would give him almost unlimited power in Europe and reduce Bruce's own role." Said Bruce: "Gerardo is a really talented guy, but I'm obviously not going to go and put him in charge of the French."

Braggiotti had almost single-handedly made Lazard the number-one M&A adviser in Italy, and his current fiefdom--Europe outside of France and England--generated 20 percent of Lazard's M&A revenue in 2004. "The loss of Mr. Braggiotti would be highly embarrassing for Lazard so soon after the IPO last month," the
Financial Times
wrote. Even worse for Bruce than losing one of the firm's top bankers was that he had not only promised Braggiotti the promotion but also agreed to pay him in cash for his stock (unlike almost every other Lazard managing director) and allowed him not to sign a noncompete agreement. If he quit Lazard, Braggiotti would not only walk away with all his cash but also be able to set up--or join--a rival firm after a six-week "notice" period. The clock began ticking May 30; the notice period would end on July 11. At this same time, Michael Gottschalk, one of the partners Bruce brought with him in early 2002 from DKW, announced he was leaving Lazard to join its rival Rothschild in New York. Then the partner George Brokaw announced his departure for Perry Capital, a New York hedge fund. And then partner Eytan Tigay, who had taken the laboring oar internally on the S-1 filings, left to join Robert Agostinelli at the Rhone Group. Speculation soon emerged that Braggiotti would return to his former firm, Mediobanca, causing the Italian bank's stock to rise 4 percent on the news.

But on June 8, in his first public comments about his new feud with Bruce, Braggiotti told
Bloomberg
in Milan that he had just returned from meeting with Bruce in New York the day before. "I presented my resignation and it's being discussed," he said. "I am going on holiday, not to Mediobanca." Braggiotti added that there was a meeting of the new Lazard board--its first--on June 14 where the matter would be discussed. "Let's leave them to make any announcements," he said. A New York headhunter told
Crain's New York Business
about Lazard: "This firm is held together with Scotch tape and chewing gum."

After the June 14 board meeting, Lazard announced a major reorganization of its European operations. In a press release, Bruce said the European reorganization "confirms the emergence of a new generation of talented leaders, who, along with their U.S. counterparts, are the future of Lazard." Left unsaid was the fact that Lazard in Paris was having one of its worst years in more than a decade, having slipped to sixteenth among French merger advisers. As recently as 2000, Lazard had a 40 percent market share in France.

Also noticeably absent from the new structure was Braggiotti. Lazard announced not only that Braggiotti had resigned, effective July 15, but also that his departure would not cause a "material adverse effect" on the firm's "overall 2005 financial results." The firm added, cryptically: "Lazard has reiterated to Mr. Braggiotti that it has complied with, and will continue to comply with, the agreement that Lazard and Mr. Braggiotti had signed, and Lazard and Mr. Braggiotti are in discussions concerning their relationship." After he sold his Lazard shares in the IPO and resigned, Braggiotti opened G. B. Partners, his own Milan-based boutique advisory firm. At the end of November, he announced that he was buying, for EU100 million, Banca Leonardo, a small Milan-based bank founded in 1999.