These were smart bets, for that is precisely what occurred. For about EU300 million, over time Bollore accumulated a 31 percent stake in Rue Imperiale, which indirectly owned a right to 15.8 percent of Lazard's profits. But as it turned out, several years before Bollore made his investments in Rue Imperiale, Jon Wood, an even cleverer Englishman responsible for proprietary trading at Union Bank of Switzerland, had the very same idea to buy into the publicly traded Lazard holding companies. "Michel David-Weill and his cronies have held back corporate France for years," Wood said. "They really are awful, egotistical people who wouldn't give money to a person to buy a loaf of bread." As a result, UBS, which had kept quiet about its Lazard investments until Bollore came along, owned significant percentages of three of the Lazard holding companies as well. Wood said Bollore was "a very interesting character and he certainly supports the concept behind what we're trying to do." Wood began pressing Michel very hard behind the scenes to do something to streamline the structure, by either merging some of the companies or buying back stock. He was on a crusade. "We have a mission, some might say, to see all of the anomalies you have in Europe just disappear, with shareholders getting a fair price," Wood told Forbes.
For his part, Bollore started buying shares in Eurafrance, another holding company, to complement the ones he already owned in Rue Imperiale. Feeling besieged, Michel invited Bollore to Sous-le-Vent and told him to sell his position immediately as it was a bad investment. More than a little piqued, Michel also added ten years to a voting agreement between himself and the founding four families of Lazard through Societe Civile Haussmann Percier, another, private holding company. "I'm not impressed by agreements," Bollore said. "You can break an agreement." Rather than being intimidated by Michel, Bollore sensed additional opportunity and bought more shares in Rue Imperiale. He remarked that he was determined to "break up the Lazard empire and sell the parts to the highest bidder."
Michel met with some of the institutional investors during the summer of 2000. "He was unhelpful and incredibly arrogant," one who was there told Forbes in September 2000. "He lit up a humongous cigar and puffed it in our faces for half an hour. He really dismissed us as totally unimportant--and we had been large shareholders in his companies for years." Michel also wrote a personal letter to Marcel Ospel, the chairman of UBS, complaining about Wood and asking him to rein in the trader. Ospel declined to heed Michel's suggestion. Sophie L'Helias, a well-known French shareholder activist with clients that owned shares in the Lazard holding companies, put it bluntly to Forbes: "The empire is not being ruled justly or fairly. David-Weill and his henchmen use holding companies to enrich the partners at the expense of the shareholders."
By November 2000, Michel, under pressure to resolve the Bollore matter, summoned him again, this time to a breakfast in Paris. "He was not very happy," Bollore said of the meeting with Michel. "The fact that I could dare buy those shares was unbelievable to him." At the breakfast, Michel discussed with Bollore a plan to have Eurafrance merge with Azeo, yet another Lazard holding company, to create Eurazeo (as happened). Michel's view of the breakfast, which he attended at Bernheim's suggestion, was that "Bollore bought shares, which was his right obviously. He bought quite a few shares and had no contact, while doing so, with me or the management of Rue Imperiale."
Having taken the measure of Bollore, and realizing his own weak position, Michel called in his friends from the French establishment to help him resolve the matter. First, Eurafrance offered to buy out Azeo at EU90 a share, almost double the price Azeo had been trading for a year earlier. Second, Michel contacted the mammoth French bank Credit Agricole, with which Lazard, through Edouard Stern, had established CALFP, the derivatives joint venture. In an act some described as "greenmail," at Michel's urging, Credit Agricole bought the Rue Imperiale stake from Bollore, at the end of November 2000, for EU595 million, a profit for the raider of nearly EU290 million in eighteen months. By getting rid of Bollore, "Michel has pulled off a remarkable coup," his partner Adrian Evans confessed. Others praised Bollore's moxie. "A genius is someone who knows how to seize opportunity," Bernheim said of his client. Added Bollore himself: "Let's say that no one had ever dared to behave so rudely to David-Weill until I came along." For his part, Wood, who had criticized the proposed valuation of the Eurafrance and Azeo merger, agreed to a truce with Michel after Michel agreed to have Eurafrance buy back some of its own shares in an effort to boost its share price. But UBS did not participate in the Credit Agricole deal and reportedly was quite upset to have been abandoned by Bollore.
"UBS now finds itself somewhat alone for going into battle because Michel David-Weill no longer has the pressure to simplify the structure," said one research analyst. Nevertheless, courtesy of Michel and Lazard, Wood and UBS had a pleasant Christmas bonus in 2000 of a gain of more than EU250 million, representing, incredibly, one-third of UBS's pretax quarterly profits. "It is not often that investment banks give each other presents, but this is a nice bonus from Lazard," said one UBS observer. Added Wood: "Michel is only getting what he's been giving to other people for the past thirty or forty years." He continued, "We had to pinch ourselves. We couldn't believe how easy it was to knock Michel off his perch," and then in disgust he added, "I must admit that Michel is a very sad individual. He's very chippy. He's arrogant. He's dishonest. He's everything that is bad about French commerce. He's awful, just awful. He's thrown away a wonderful opportunity. It's ironic that Lazard, which had always given advice on how to look after all shareholders, now wouldn't do it." Wood has since left UBS to start his own hedge fund.
Ironically, just as Michel appeared to be tightening his iron grip on Lazard by casting out his internal opponents, the Bollore-UBS gambit had shown just how vulnerable he and his carefully constructed empire were to outside attack. In truth, back down at ground level, Lazard--the investment bank--was still struggling in the aftermath of Steve's decision to relinquish the job of running New York. In September 1999, he became a vice chairman of the firm but also had one foot out the door. At the same moment, one of his chief allies throughout his two-year reign, Damon Mezzacappa, decided to make good on his sotto voce pledge to retire from the firm. On September 7, Lazard announced that Mezzacappa would retire at year end and turn over the reins of the New York capital markets group to David Tashjian, who had been head of Lazard's small high yield debt department. Tashjian would also become co-head, along with the Brit Jeremy Sillem, of the firm's worldwide capital markets effort. On some level, Mezzacappa believed, Michel blamed him for the scandal in the municipal finance business. "Michel kind of wanted me to take a hit, if someone had to go," he said. "I think Michel felt he was under some pressure. I think guys like Ken Wilson and Jerry Rosenfeld were pointing fingers at me, not directly because they wouldn't do that, but behind my back. And I was definitely on the defensive."
What further compounded Mezzacappa's political problems in the firm was the disclosure of the magnitude of his side deal with Michel, as part of Steve's campaign for clarity. In his last few years at the firm, Mezzacappa was making more than $12 million a year. To their astonishment, his partners discovered, his contract with Michel also called for him to continue to get the 3 percent partnership share for another three years, and if it was not extended beyond those three years, he would then automatically receive a 2 percent partnership share for five more years, after which his partnership share would be reduced by 0.5 percent per year for four more years. Mezzacappa had struck an unheard-of twelve-year deal with Michel. He was also to get a salary equal to that of other top managing directors, plus 2 percent of the override of the Corporate Partners fund. The extent of Mezzacappa's compensation agreement with Michel stunned his partners, many of whom thought, at best, he was making $6 million a year. Ira Harris, for one, was appalled. "When Ira found out about the Damon stuff, he went absolutely insane," said one partner. Another summed up his reaction upon reading the disclosure about Damon: "Damon was a fucking ganef. Damon was grabbing with both hands
and both feet from everyone he could. He was just grabbing with both hands from everybody because he's a fucking ganef."
For his part, Mezzacappa explained, "What happened when all this transparency took place is that someone figured it out and went to Michel. And Michel, instead of saying, 'I organized that,' he didn't. He blamed it on me. And then one guy--Harlan Batrus--he resented it enormously because he thought I was stealing from him, which wasn't true at all because the money wasn't coming out of his profit pool at all. I really resented the fact that Michel didn't stand up. He let me take the blame for that. Now, of all the guys in capital markets, the only one who had a problem was Harlan, but Michel, instead of saying, 'I made this deal with Damon, it's not coming out of your profit pool,' didn't do that. He just sort of shrugged his shoulders." The final straw for Mezzacappa was, of course, his public support for Steve, which after the events of November 1998 became a liability with Michel. "My star had fallen somewhat," he conceded.
BY OCTOBER 1999, with the outlines still very sketchy of just how the firms were to be merged, Michel issued an unprecedented invitation to Lazard's two hundred top bankers worldwide to attend a retreat, near his Long Island estate, to discuss the firm's future. On the agenda for the meeting, which was held at a Nassau County conference center, was not only an update of the pending merger but also the important matter of just how Lazard, the small advisory firm, was going to compete in a financial world dominated by global behemoths with many products to offer clients. In the wake of the creation of Citigroup, from the merger of Citibank and Travelers, major consolidation was rocking Wall Street with the announcements of the combinations of Chase and J. P. Morgan, Credit Suisse First Boston and DLJ, and UBS and Paine Webber. In the face of these deals, Michel had always been consistent and stoic. "The more our clients turn to the big houses with large bureaucracies where the principal business is trading and raising capital, the more they are going to want an independent financial adviser," he told Bloomberg Magazine. Up for discussion as well was the perennial matter of who would one day succeed Michel. To help answer that question, the four likely internal candidates made presentations: Loomis, head of New York; David Verey, head of London; Bruno Roger, head of Paris; and Gerardo Braggiotti, head of the rest of Europe. But as usual, Michel decided to postpone any decisions.
The day concluded with champagne and dinner at Viking's Cove, Michel's three-story, 180-foot-long, brick Victorian mansion overlooking about seven hundred feet of Long Island Sound frontage, in the incorporated village of Lattingtown, near Locust Valley. Just off Peacock Lane, Viking's Cove sits on just more than twelve acres, with an assessed valuation of around $90 million inclusive of the land, and has been described as "so sumptuous that a Matisse hangs over a coatrack in the hall." (Michel is now selling the Matisse.) For a time, Michel allowed his assistant, Annik, to live in an apartment above the carriage house. He bought the home in October 1979 for $275,000.
Even as he had been constitutionally unable to maturely address the question of who would be his successor, Michel knew that without any Great Men to replace all the talented bankers who had left after Felix, Lazard would quickly become marginalized and risked no longer being relevant. "The idea of a small, private firm is very attractive to people," said one partner. "The only reason not to come to Lazard is because of the baggage." And there was plenty of baggage. The firm was trying to attract new partners in one of the most challenging recruiting environments ever. Not only were many bankers seduced by the seemingly limitless wealth of the Internet, but also the big Wall Street firms were able to offer huge pay packages, laden with restricted stock and options--something the private Lazard could not do. But it was at this juncture that Lazard, chiefly at Loomis's recommendation, began to violate the sanctity of its historical compact with its partners: for the first time, the firm started to hand out to newly hired partners both fixed-dollar-amount contracts, instead of simply a salary plus a profit percentage, and a percentage of their individual revenues. At Loomis's suggestion, in July 1999, Lazard hired Barry Ridings and Terry Savage from Deutsche Bank to resurrect Lazard's formerly world-class business of advising companies going through a financial restructuring or bankruptcy. The restructuring business at Lazard had lain dormant in the mid-to late 1990s after the retirement of David Supino following Michel's questionable decision to wind down the effort in the early 1990s. Ridings and Savage were given lucrative contracts that promised them a percentage of the restructuring revenues plus a percentage of the firm's profits. This was a new paradigm for Lazard's M&A bankers, for the first time driving a wedge between individual and collective interests. Still, the recruitment of Ridings and Savage proved brilliant, as Lazard was once again in a position to capture a large chunk of the lucrative restructuring business that followed in the wake of the bursting of the Internet and telecommunications bubbles. The firm also hired Paul Haigney and Robert Goodman from Wasserstein Perella & Co. to work, respectively, in the Internet and insurance sectors.
But the hire that made the biggest splash in 1999 was that of Vernon Jordan, the lawyer and ultimate Washington insider. "With so many senior people leaving, he was seen as one of the few who could get CEOs on the phone," one Lazard executive said. When Loomis approached Jordan about coming to Lazard, the idea was for Jordan, a principal figure in the Clinton-Lewinsky scandal and the ultimate FOB, to use his "platinum Rolodex" and vast corporate connections--at the time he served on ten corporate boards--to return Lazard to prominence with corporate CEOs during one of the most active M&A markets in history. The fact that Jordan had no investment banking experience was irrelevant to the decision to hire him. Jordan was the ultimate door opener, and that was what Michel and Loomis wanted him to do at Lazard. Loomis explained that, investment banking experience or not, "by virtue of how he is," Jordan would be a senior partner. "Vernon Jordan epitomizes the people we are looking for," Michel said in December 1999. "We want people who are strong individuals. That's the way this firm functions." At the time, he was the only black managing director at the firm. "But I don't walk into Lazard every day saying I'm going to be the only black fellow on my floor," he told the New York Times. "I walk into Lazard every day saying I've got a job to do."
Lazard desperately needed Jordan's help to restore morale in the wake of the numerous departures. "For the first two or three days, he was calling in associates and making them feel proud to be here," Loomis said of Jordan. "He will be as important at influencing the firm internally as he will be in getting new business." His positive attitude was infectious, even around the jaded confines of Lazard. Curiously, though, Michel and Loomis refused to share with their partners the details of the lucrative contract that Michel himself negotiated with Jordan, an infuriating reminder of the secretive ancien regime prior to the Rattner era. "This special treatment of Jordan was a huge symbol that they are returning to their old ways of doing business," a former, unnamed partner told the Washington Post in January 2000. Jordan, too, was mum. "Did you come all the way here in the cold to talk about rumor and innuendo?" he asked the Post reporter who had traveled to his corner office on the sixty-second floor of 30 Rock. "You know what I told [the gossip columnist] Lloyd Grove when he asked me, when I was hired, how much I was making? I said, 'It's none of your damn business.'" Indeed, the firm intentionally left the specifics of Jordan's compensation off the internal list disclosing all partner compensation for fear that the other partners and the press, if the information was leaked, would make a big deal of it. Which is of course exactly what happened anyway. Jordan, then sixty-four, reportedly signed a five-year contract for $5 million a year (a Lazard insider said he got $4 million a year), plus a 0.5 percent slug of the firm's profits and a generous housing allowance toward "an expensive suite" at the Regency Hotel, at 540 Park Avenue, where he spent four nights a week before returning to his principal home, Washington, for the weekend.
PERHAPS, GIVEN HIS unique stature, Jordan was a special case. But there was simply no getting around that
, for the first time, a Lazard partner had a contract that paid him regardless of how the partnership itself performed. Some partners were left befuddled. At the very moment the merger of the three houses was supposed to herald a new beginning for the firm, things were looking a lot like deja vu all over again.
The first order of business for Lazard in the new millennium was the long-awaited realization of Michel's "dynastic" ambition of the reunification of the three houses. The three firms had grown materially in partners (to 140), employees (to 2,745), and profits (to $500 million worldwide), but the interaction among professionals of the three houses on deals was surprisingly limited. There were no established rules for interaction and no financial incentive to interact. Cross-border advisory assignments, which should have been celebrated for playing to the firm's strengths, were instead an opportunity for political infighting over the allocation of fees. Lazard Partners, Michel's 1984 creation, established a framework for what would lead, some sixteen years later, to the combination of the firms. But it wasn't until 1997 that Michel took a first, tentative step toward actual unification by instituting a new bonus pool comprising 30 percent of each of the three houses' profits to be allocated based on cross-border interaction. At the same time, he also was able to combine the London and New York asset management businesses. Paris's asset management business was left on its own. Soon thereafter, Lazard cobbled together its capital markets businesses in New York and in London into a "global" effort. Then, of course, Michel started to refer divinely to the three houses as the Holy Trinity. Momentum for the merger accelerated into the late 1990s, only to be sidetracked in November 1998 by Steve's "democratic" vision, which proved far too radical for the hegemonic Michel.
The last tycoons: the secret history of Lazard Frères & Co Page 67
