PROFESSIONALLY, TOO, WASSERSTEIN Perella began to change. The firm's M&A advisory business had all but dried up, so Bruce focused on trying to resurrect the firm's struggling $1.1 billion LBO fund, which had in it $120 million of the firm's partners' own money. True, early on, Bruce had some signal successes, but the fund lost its $14 million investment in KDI, a swimming pool manufacturer, when the company filed for bankruptcy. Bruce's huge $350 million investment in a British supermarket group, Gateway, was a total loss after the renamed company, Isosceles, went bust. "He did this," a former partner told Vanity Fair, "against the advice of all the other partners in the room...all of whom subsequently left the firm." Its $100 million investment in Wickes, a home-building and auto-parts manufacturer, also ended up poorly. IMAX, the giant-screen movie theater chain, floundered. Another disaster was the $80 million or so Bruce lost in Red Ant, an independent record label, which he started from scratch, sold to Alliance Entertainment, and then bought back after Alliance filed for bankruptcy.
Someone who knows Bruce said that his tenure managing the Wasserstein Perella merchant banking fund shows his questionable ability as a fiduciary. "History has shown that when Bruce has been given a charter, he'll abuse it to whatever degree he can," he said. "He'll cross over fiduciary boundaries. He won't cross over legal boundaries." In a Nietzschean way, this makes sense. "Bruce on the investment side has what I would describe as smart man's disease," a former colleague said. "He can never believe he's wrong. And in this business you need to say, 'OK, I'm wrong,' and cut your losses...but he would continue to make larger and larger bets to prove he was right."
An even bigger problem loomed, though, with his longtime partner, Perella. Perella had long resented the rumors that Bruce had been bad-mouthing him behind his back in the corridors of power at First Boston and that somehow he had been forced to take a backseat to his more ambitious partner. Occasionally, he voiced these resentments. In the January 1990 New York Times Magazine article about the firm, Perella told the reporter that he was growing increasingly concerned that he was being "overshadowed" by Bruce and was being painted with the same brush of blame. He had his many accomplishments, too. "All of a sudden I read that I'm the sidekick," he said. "All of a sudden I'm Gabby Hayes. Look, I built that business up from nothing, from absolute scratch, by myself." Perella, said to be "mercurial" and more than a little bit odd, had repeatedly given serious thought to quitting the firm over the years, starting around December 1989. In 1992, his wife, Amy, was diagnosed with Hodgkin's disease (from which she recovered), and this development caused Perella to reflect on how he wanted to spend his time.
No doubt compounding his concern were the firm's ongoing problems: a precipitous drop to twentieth in the 1992 rankings of M&A advisers for completed deals; the demand by Gary Parr, the firm's insurance banker, for more money; and the biggest looming threat of all, the right held by Nomura to demand repayment of its $100 million investment sometime after 1995. There was a growing and serious concern that Wasserstein Perella could not repay the money if asked.
Finally, on July 23, 1993, Perella announced he would quit Wasserstein Perella on September 1, ending a nearly twenty-year relationship with Bruce that spanned all of Cravath, First Boston, their own firm, the highest highs, and the lowest lows. He had fulfilled his original five-year commitment to the firm, and that was it. "If you think I'm bitter," one of Bruce's former partners said. "I mean, he was even more bitter."
Meanwhile, after three years living with Ash, Bruce summarily announced to her that their relationship was over. Their separation was "brutal," Vanity Fair reported, with her clothes being packed up and moved out of Fifth Avenue and East Hampton. (She later married Peter Ezersky, who helped Steve Rattner start the Quadrangle Group.) Bruce had met, and fallen in love with, Claude Becker, a tall, dark-haired beauty fifteen years his junior. She was a successful producer at CBS News. They were married in 1995. "Claude is very charming, and very funny," one of their friends told Vanity Fair. "She knows that Bruce is socially awkward and makes jokes about how she has to go around cleaning up his 'little messes.'" They moved to their current duplex, at 927 Fifth Avenue, after unsuccessful attempts to buy apartments at both 834 Fifth and 2 East Sixty-seventh Street.
CHAPTER 20
CIVIL WAR
Needless to say, Bruce's approach to deal making could not have been more antithetical to that espoused and practiced by Lazard. Yet thanks to an unlikely confluence of events that could only have happened to Bruce Wasserstein, here he was, as of January 2002, in charge of Lazard and its second-largest individual shareholder.
Bruce wasted no time putting his imprint on the firm. Even before he technically took over--January 1, 2002--he was making authoritarian pronouncements: not only did he want the focus to be on clients, but he also insisted that working partners, such as Bruno Roger, relinquish their positions on the boards of the publicly traded Lazard holding companies. He wanted the partners to consciously choose between him and Michel.
He utterly dismissed the renewed assault on Lazard from Jon Wood at UBS. "I don't care about it," he told a British newspaper two days after his appointment. "If they owned all these companies together they would have only 40% of a company that has no power other than to block a sale. Even if they had 100% it wouldn't matter because I now have the blocking power within Lazard." Wood said of Bruce, "He's so pompous, he couldn't even bring himself to talk to me." As for the historic Lazard internecine warfare, Bruce declared: "The politics are over at Lazard. There is no point to them. The only point would be if anyone wanted to convince me they should make more money, and I'm not receptive to that approach." If partners choose to continue politicking? "They can leave," he said.
Bruce also addressed head-on the criticism that as a banker he was well past his expiration date. "Anyone who says that doesn't know very much about it," he said. "I worked on the Time Warner/AOL merger, the UBS/PaineWebber deal and the Morgan Stanley/Dean Witter merger. It's a sour grapes type of thing. In this business, youth is not an asset, since our principal product is advice." Of course, his former colleagues say he had nothing to do with the Time Warner-AOL deal, which in any case was considered a massive failure, and that Phil Purcell, the former CEO of Morgan Stanley, purposefully excluded Bruce from the negotiations when he sold Dean Witter, of which he was then the CEO, to Morgan Stanley. That deal is also considered to have worked out poorly and, in any event, cost Purcell his job as head of Morgan Stanley in 2005. As for his time at Dresdner and Allianz, after explaining that legally he was precluded from saying anything about it, he said, "What's that French song? Je ne regrette rien." After a round of press interviews in London, Bruce flew to New York to meet with the partners there and to announce that he had selected Ken Jacobs to run the North American business. "He introduces himself, and he says essentially that 'mediocrity is not going to be tolerated,'" one partner there recalled. "'We're going to do really well, and we've got a lot of rebuilding to do.' And he turns and says, 'Ken's in charge. He's my representative in New York.'" For the first year, Bruce ran the firm from London.
Right around Thanksgiving 2001 and in keeping with Adrian Evans's earlier statement, Lazard followed through on its promise to distribute actual equity ownership in the firm to its 147 partners worldwide. When Loomis and Michel had first negotiated the distribution of the goodwill points to partners during the late summer of 2001, the idea was that a partner with a 1 percent profit percentage would receive around 0.7 percent of the goodwill. But that was just an idea. When the goodwill points were actually distributed by Michel at the end of 2001, a partner with a 1 percent profit percentage actually received 0.44 percent of the goodwill. The balance of the working partners' goodwill was held in reserve for Bruce to use to hire new partners. "It was deflating," Ken Jacobs said of the last-minute change to the equity distribution plan. "But it wasn't destroyed. It was to be expected."
The distribution of the goodwill points, or equity, became incredibly important to r
etaining partners at the end of 2001. "It was a big deal because I don't think anybody would have stayed for Bruce if the points hadn't been distributed," Jacobs explained. "Let me put it this way: I'm positive it wouldn't have been successful if the points hadn't been distributed." The firm-wide pretax profits in 2001--some $145 million--were down two-thirds from the previous year. So even a partner such as Jacobs, who had negotiated an increase in his profit points in 2001--to 1.7 percent from 1.375 percent in 2000--received much less compensation in 2001 ($2.5 million) than he did in 2000 (close to $6 million). The goodwill points proved to be a tonic of sorts for the huge decrease in compensation. At least now, once the equity points were vested (half in early 2002, the other half a year later), the partners could potentially look forward to a payday if the firm was ever sold or went public.
A number of partners also received "top-ups" in cash in 2001, beyond what their actual percentage points would have given them, which further reduced the overall size of the compensation pool. "That was the collapse of the old compensation system," Jacobs explained. "People had lost complete confidence with the system as a result of that. That's why, when Bruce came, he just totally scrapped it. It was pay for performance now, that's what we call it." For the first time in the firm's history, longstanding partners no longer knew what their pay was likely to be from one year to the next. Michel's entire compensation system was junked. New partners joining the firm received multiyear contracts with compensation guarantees. Old partners were paid based solely on their annual production. No longer would there be even a perception of a partnership.
Lazard had overnight become just like every other firm on Wall Street, at least when it came to compensation. Furthermore, for the first time in some fifty years, one Lazard partner would no longer know what another partner made. The previous system was imperfect, too, since until Rattner pushed for complete disclosure the actual amounts paid to individual partners could never be certain--but at least one had a good directional sense of how one stacked up. No more. Bruce scrapped the whole thing. All compensation would be set at his total discretion; no one else would know what deals he cut.
The fallout was immediate, with the most acute pain felt by the two partners whose departures had been announced before Bruce's arrival--Loomis and Tashjian. Loomis had promised Tashjian a generous severance package as part of his departure, but it was a package based on the old system of profit points. The problem was--people were quickly figuring out--that despite Michel having given Bruce between 4 and 7 percent of the partnership profits, Bruce was likely to trash the short-term profitability of the firm in order to rebuild the depleted partnership ranks and to have a chance of creating long-term equity value. It was the exact same formula he had used at Wasserstein Perella, where the firm made very little money--some have said it was within days of not being able to meet payroll when it was sold--but Bruce was still able to create a tremendous amount of equity value.
When Tashjian figured out that his severance package was not going to be worth very much, if anything, he called up Loomis and yelled at him for deceiving him. But the truth was Loomis had no idea what Tashjian was talking about. Nobody had told the increasingly invisible Loomis, either, that the old compensation system had been scrapped and profit points no longer had value. Now Loomis was upset because his own newly revised severance arrangement with Michel was also based on a profit that would no longer exist. After Loomis calmed Tashjian down, he called Michel at Sous-le-Vent. Loomis was not happy. He wondered why no one had told him the compensation system had changed. He went to bat for Tashjian and won for the man he had recently fired a better deal. Then he told Michel what he wanted: a nonnegotiable onetime cash payment based on the average of the past two years' profits times his average profit points. This worked out to be around $5 million. Within days, Michel had faxed to Loomis a signed agreement giving him exactly what he asked for.
More problems loomed, though. "The problem with Lazard is that it has always had a great-man strategy," the former Lazard partner Kim Fennebresque told the New York Observer (Fennebresque had also been Bruce's partner at First Boston):
Because they don't offer capital; what they really offer is the advice of great men. They have always had an extraordinary stable of such men. With Felix at the top, Steve Rattner, Ken Wilson, Ira Harris--the list goes on and on. They have been able to sell themselves and their position in the commercial world, as well as the quality of their advice. When you lose all the great men, it becomes a problem. Bruce is a great man, a man of insuperable intellect, and he is extraordinarily commercial. But the problem is Wall Street has changed. If any man can bring back the great-man strategy at Lazard, it is Bruce--but the question is, are there any great men left out there? Because in the end, there really is nothing else to offer at Lazard than the intellectual capital of the partners themselves.
Needless to say, many Lazard partners found Fennebresque's comments objectionable, but in truth, his insights were on the mark.
Within weeks of these articles Bruce had to confront his first case of serious dissension in the ranks. Three of Lazard's leading bankers in Europe--Gerardo Braggiotti, Georges Ralli, and Jean-Jacques Guiony--were again threatening to leave, this time for senior positions with either UBS Warburg or Deutsche Bank. They were said to be unhappy with the swath of power Michel ceded to Bruce. They were furious at Michel for doing it. They were also irritated with the firm's failure to recalibrate the profit distribution between New York and Europe. They thought Bruce was rude. Braggiotti, at least, was probably disheartened that Michel had turned to Bruce instead of him. For Ralli, then fifty-three, this was easily his third or fourth threat to quit in a year.
Complicating matters significantly was that earlier in 2001, Michel had promised Ralli the opportunity to run the Paris office, and Michel's close ally Bruno Roger would have to be pushed aside to make that happen. When Bruce came in, he summarily dumped Roger, who now felt that he had been "publicly humiliated," and in Paris there was nothing worse than public humiliation. Jean-Claude Haas said Michel was "unhappy" about the way Bruno was treated, and "even people who detested Bruno were shocked." Roger was angry now with Ralli, Michel, and Bruce. Ralli was angry with Roger, Michel, and Bruce. While Ralli felt that people had grown tired of Roger, for Bruce to come along and publicly humiliate him was an attack on the honor of Lazard Paris. Haas told Adrian Evans that the possibility of Ralli leaving "is a disaster."
Braggiotti, then forty-nine, joined Lazard in 1998 from Italy's Mediobanca, where he worked for seventeen years, lastly as deputy chief executive officer. While at Lazard, he was the dominant M&A banker in Italy, completing twenty-two deals, with 60 percent market share, in 2001 alone. He was said to have the best Rolodex in Italy. He advised Pirelli on its EU7 billion takeover of Telecom Italia despite Pirelli being an investor in Mediobanca. He also advised Italenergia on its EU5 billion takeover of Montedison.
Bruce could not afford the loss of Braggiotti, Guiony, or Ralli, especially so soon after his own coronation. On behalf of the three men, Ralli presented a list of demands to his older partner Gilles Etrillard. Etrillard passed the list on to Evans. They wanted, among other things, for Paris to be governed by Parisians (not by Bruce).
In early December 2001, Bruce met with the partners in Paris and told them, "Okay, now I'm the boss." This went over poorly. Braggiotti, for one, considered Bruce's contract a "change of control" of the firm and therefore demanded a retention contract, or, he said, he would leave. He also convinced Ralli and Guiony that the three of them were better off joining forces--whether that meant leaving or staying. Braggiotti had one meeting with Ralli at UBS and one meeting with him at Deutsche Bank. But these were just tactics to force Bruce's hand. At that moment, Braggiotti had no intention of leaving Lazard. Ralli would have left but got most of what he wanted to stay. Bruce had blinked. He agreed contractually to cede all power in France to Ralli and all power in the rest of Europe (outside the U.K.) to Braggiotti, superseding wh
at was in the new operating agreement. Guiony cut a new deal and remained head of M&A in France. For three years, Bruce was not allowed in France or the rest of Europe. Braggiotti and Ralli could open offices, close offices, take on clients or not, and hire or fire professionals. Bruce was powerless. "He had no choice," one European partner said. "He couldn't announce in December, or whenever it was, that he was joining Lazard and the same day announce he had lost Europe. So he had no choice. He had to do it." From time to time thereafter, Bruce would try to direct events outside his sphere of influence in the United States and the U.K., but Braggiotti and Ralli all but ignored him. Braggiotti did make one concession to Bruce: when he complained about the "hold" music on the phones in the Milan office, Braggiotti agreed to change it.
ON JANUARY 3, Bruce took over as head of Lazard and announced his new management team, which effectively kept most of the existing senior managers in place and reflected his intention to delegate authority across geographies. But it also reflected the success of the Europeans' gambit weeks before. Braggiotti was named head of Europe outside of France and the U.K.; Ralli was promoted to head of France; Marcus Agius, then fifty-five, remained head of the U.K.; and Ken Jacobs, then forty-three, was promoted to head of the United States. All were named deputy chairmen of Lazard, a move that reflected Bruce's penchant for handing out highfalutin titles. All reported to Bruce and were to "act as a team to run the firm." Bruno Roger, then sixty-eight, was named chairman of Lazard Paris after Bruce expressed interest in having him as an adviser. The title also saved Roger from further public humiliation.
The New York Times reported that as of Bruce's arrival and "according to Lazard calculations," the firm was worth $3.8 billion, right in line with the "Pearson price." Bruce announced that "despite the recession," Lazard intended to hire twelve new partners in the United States in the first six months of 2002 and a "limited" number of new partners in France and the U.K. and was "launching a major expansion" in the rest of continental Europe under Braggiotti's direction. Bruce's contrarian view was that the severe downturn on Wall Street was the perfect time to be hiring bankers, just as others were firing them and compensation had fallen precipitously. He wasn't wrong. He had already spoken to seven of his former colleagues about coming to Lazard, among them Chuck Ward, then back at First Boston, and Jeff Rosen, then at DKW. The Wall Street Journal reported that he told them that a 1 percent ownership stake in Lazard was worth $38 million, a value consistent with the $3.8 billion valuation, and, according to Bruce, was consistent with other prices paid for stakes in Lazard, including his own. Bruce told the Journal that the new financial supermarkets, such as Citigroup and JPMorgan Chase, were the "new fandangos" and said that he believed "good advice is the new, new thing."
The last tycoons: the secret history of Lazard Frères & Co Page 80
