The last tycoons: the secret history of Lazard Frères & Co

by William D. Cohan

  The fact that the vast majority of the money raised would be used to pay out existing shareholders and not be put into the company was the kind of "use of proceeds" that makes investors cringe. A "top New York banker" said that although institutional investors would likely buy the IPO because of Bruce's previous success selling Wasserstein Perella to Dresdner Bank, the public would be financing the buyout of Michel and his French partners. "The public is going to be along for the ride," he said. Some Lazard partners worried that the public filing of the IPO documents would show that the firm's vaunted M&A business was subsidized by the highly profitable restructuring and asset management businesses. Others worried that the proceeds from the offering would not be divided equitably among the historical partners.

  Still, Michel had not yet blessed the IPO--far from it--despite Bruce's tactic of making it seem inevitable. "There are several issues--one is pride and ego and whatever," a former Lazard partner told the Observer. "Michel brought Bruce into the firm and expected to get some deference and respect, and got none. Michel has nothing to gain from an IPO. Michel's stake would be worth a lot of money, but he's interested in things other than money."

  Meanwhile, Bruce kept the screws turning. Jeff Rosen, a deputy chairman and another staunch Bruce loyalist, sent a memo around to the firm's partners giving them until noon on October 4--a Monday--to sign a revised fifteen-page agreement endorsing the IPO filing and Bruce at the helm of the company with a new board of directors. Bruce wanted to get the Lazard board to approve the filing on Tuesday and then file the registration statement with the SEC on Wednesday. One longtime partner said he believed the partners who readily signed were the ones least confident of their ability to test the market for their services at other firms. Added another: "People fearful for their jobs and Bruce's boys will sign, but the core guys that bring in a lot of the revenues are not signing."

  The dissidents--said to include Gary Parr, Gerardo Braggiotti, and the two heads of the restructuring group--accounted for a quarter of Lazard's total revenue and half of its advisory revenue. Their complaints continued to be about wanting to reduce Bruce's absolute authority and a concern that the firm's equity had not been fairly distributed. Others believed that once again--for the third time in four years--the Lazard partners were being presented with a contract of adhesion with no room for negotiation. "We are not going to sign under duress," one partner told the Financial Times. "The papers are very complex and some of us haven't even had time to read them all. This is a people business and the people need to be behind the plan. You don't have the consensus here, at least not yet." Of course, Bruce made clear that those who failed to sign the document would be forced to leave the firm. For his part, Michel said that while he was not for the IPO, as long as he got cashed out at the valuation he wanted and the firm's working partners "were happy" with the plan, he would not block the filing of the registration documents.

  As Bruce's artificial deadline approached, the intensity of the backroom dealing ratcheted up, too. There were any number of complaints, from those about Bruce's "bullying tactics" to the belief of the old-time working partners that many of the partners Bruce brought in not only were underperforming but also had been paid far more than they and received more of the equity. None of the partners were happy with the lockup provisions that prevented them selling their stock for as long as five years. Partners had to agree to stay at the firm for three years and essentially give Bruce power of attorney over their shares and the creation of the company's bylaws. Not signing up for the IPO not only doomed your Lazard career but also meant that you could not sell stock for eight years. And because Bruce had given out more than 100 percent of the equity, nobody below partner received any, a shocking and extraordinarily demoralizing injustice.

  There were also concerns that if Lazard became a public company, its culture and ethos would be forever changed. "I would completely agree with that," one former senior partner said. "I think the whole thing Wasserstein is up to is completely barking. Presumably he thinks he's going to make money from it but I think it is absolutely mad." And then there remained the fear that Bruce the dictator was just a younger version of Michel the dictator. "We're paying Michel out at a premium, and we're not getting the same," one Lazard professional observed. "All we're doing is saving Bruce's job." There was also the stark fact that if the 202 working partners didn't support Bruce, they might as well acknowledge that Michel would return to run the firm--and many considered that an even worse fate. Throughout the summer, Michel had been trying to figure out whether there was an internal alternative to Bruce, someone of stature who could run the firm. Would, say, some combination of Gary Parr in the States and Gerardo Braggiotti in Europe work? Or maybe just Braggiotti alone? This might fly, assuming, of course, he could figure out a way to get Bruce to leave before his contract ended in December 2006.

  Braggiotti and Michel regularly discussed the possibility of Braggiotti replacing Bruce. And Braggiotti told Michel he could do it. His only requirement would be that Michel agree to many of the same governance terms that Bruce already had: Michel had to leave him alone and accept that he would receive no dividends for five years. After five years, they would reassess the firm's performance and go from there. Braggiotti refused to appease Michel by telling him he would again have a meaningful role in the firm or that the dividends would start flowing. Like Bruce, he knew the firm needed to be reengineered. The only good news for Michel in the Braggiotti scenario was that Lazard would remain a private partnership. One partner who was knowledgeable about their discussions said of Michel, "He was shocked and not very excited" by the Braggiotti alternative. "Michel doesn't need money. He's inherited Lazard and has contributed to its destruction. I think Michel should have been happy to see Lazard back doing what it should be." But he rejected the Braggiotti plan.

  The four-hour October 5 board meeting in Paris, in an atmosphere of "serene ambience," did not go according to Bruce's plan. Michel told the board that "floating a company like Lazard is a move not to be taken lightly, which requires a significant amount of reflection and discussion." He said this was not the right moment to list the firm. Bruno Roger took exception to this argument; he said the time had come for the inevitable. Bruce interrupted Michel and for forty-five minutes defended his plan. He also said he knew that some of the Europeans, led by Braggiotti, had problems with the amount of Bruce's power, the inequitable financial distributions, and the tax consequences of the IPO. Michel fully expected Braggiotti to speak up at this moment, to lead a counterrevolution in effect.

  But Braggiotti said nothing. "I remember being surprised that he was silent because I remember he told me, 'I will say something,'" Michel said. "Perhaps it's his nature. Some people love confrontation; others avoid it. Some people like to be on the outside looking in, taking shots from the outside. And it's no situation to announce that you are the would-be successor, especially with someone who has a contract until 2006." The moment passed. Braggiotti had become convinced his objections would not change the final vote. He also worried the Lazard board was utterly conflicted, chock-full as it was with both buyers and sellers. After lunch, the meeting reconvened, but the two board members from Eurazeo were now absent.

  Although in the end no vote was taken, Michel had accomplished his goal of not yet allowing the IPO documents to be filed, ostensibly because Bruce had not been able to win the support of the most productive partners in the firm. One Lazard banker observed of Michel's coalition: "They are all at a canonical age. It's the Vatican, not a business." Another person close to the dissidents told the Wall Street Journal about Bruce: "Now he has to consult the most profitable partners in the group rather than trying to strong-arm them into doing things the Wasserstein way. We have sent him back to the drawing board to come up with new proposals."

  After the setback, Bruce remained confident that ultimately he would win the support of the "heavy hitters" and the IPO would proceed. "Many of us are already rich as it is," one of the
dissidents said, "and the real question is, where does an IPO lead the bank in the future?" Another dissident said of the IPO, "For Bruce it's a great deal because he buys control of Lazard without putting up a penny."

  Bruce's relentless confidence caused Michel to remark, "Bruce seems very sure of himself. Maybe he will even get there eventually." Bruce reportedly agreed to reconsider some of the terms of the partner retention agreements and to begin to think about relinquishing some of his power. Still, "the firm is in a complete state of disarray," Kim Fennebresque told the New York Times. "Who wants to buy stock in a company where everybody is fighting with each other?" Taking a page from a humorous 2002 Charles Schwab advertisement, the Times likened Bruce's IPO march to "putting lipstick on a pig." "He successfully dressed up his firm, Wasserstein Perella & Company, before selling it to Dresdner Bank of Germany.... By the time the deal was completed and the lipstick had rubbed off--as Mr. Wasserstein and his bankers ran for the exits with their profits from the sale--Dresdner realized it was left with an overrated, underperforming boutique investment bank. Now, Mr. Wasserstein may be returning to the cosmetics counter."

  The Bruce forces publicly disputed the accounts of the board meeting, and specifically the notion that he did not have the support he needed to go forward. So they leaked to the press a copy of a letter Bruce wrote to the partners after the meeting. "We have informed the capitalists that we have support of the majority of partners," he wrote. "In fact, the deputy chairmen were able to present the near unanimous support of the working partners for the project. At this point we still need to reach an agreement with the capitalists and we hope to move forward over the next few weeks." But the Michel confidants disputed Bruce's view, claiming that the "senior partners at Lazard, who are big revenue earners, are still against this plan." Vernon Jordan, for one, was long opposed to the IPO plan. "I'm wedded to history," he told BusinessWeek.

  Indeed, once again, as with the dispute over the accounting of the firm's profitability, the two sides could not agree on the basic facts. They couldn't even agree on whether hey had agreed to have a follow-up board meeting on Monday, October 11. Bruce ultimately canceled that meeting when it became clear he was having trouble winning the support of the dissident partners, said to number around twenty. Indeed, Bruce spent the weekend trying to woo them. "It is less a charm offensive than a cash offensive," one of them said. Donald Marron, the former CEO of Paine Webber, said of Bruce, "He draws energy from the situations like the one at Lazard--with its complexities and internal struggles." But one French client of Lazard was increasingly turned off by the public disputes. "When you hire an investment bank, you want it to be like a femme de boudoir: quiet and secretive," he said. "Not like a common whore off the street."

  With the follow-up board meeting canceled, Michel, resigned to allowing the IPO documents to be filed soon, flew back to New York to see if the final details for the filing could be worked out between the intransigent few working partners and Bruce. He had decided not to oppose the filing if his conditions were met. But the signals still conflicted. Some partners said the filing was going "full steam ahead" and the lawyers and accountants were just putting the final touches on the complex documentation. Others, though, said the whole matter was, "one giant question mark." And the former Lazard Brothers chairman John Nott, whom Michel fired in December 1989, said, "As far as I'm concerned it's ferrets fighting in a sack." Gerardo Braggiotti emerged as the leading opponent of the filing. He was "opposed as a matter of principle," a friend said. The ongoing tug-of-war among the firm's leaders was starting to take its toll on the rank and file. "The people who are suffering are the partners," one said. "Here's this great firm and they're battling for control and we're caught in the middle."

  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"

  But 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."