The last tycoons: the secret history of Lazard Frères & Co (107 page)

Regardless, First Boston finished 1981 as the number-two adviser on M&A transactions worldwide, second only to Morgan Stanley, earning the firm huge bragging rights. Wasserstein and Perella, who by then were presiding over a thirty-six-member department, received identical seven-figure compensation packages and had identically sized corner offices on the forty-second floor of First Boston's midtown office tower on East Fifty-second Street. First Boston was the hot shop.

Bruce also began the time-honored Manhattan real estate and trophy-wife march of the nouveau riche. After the dissolution of his first marriage, he had been living at 240 East Eighty-second Street. He had become reacquainted with his
Michigan Daily
colleague Clarence Fanto, and the two of them would go barhopping on the Upper East Side. One night they went to a club together. "I spotted this tall, red-haired, rather very slim, willowy-looking woman across the room," Fanto said, "and I remember saying to Bruce, 'Oh, look at her. She's much too tall for me'--because I'm a very short guy. 'She's much too tall for me, but you might want to talk to her.' And Bruce was never shy about such things. As I recall, he went right over and spoke to her." Fanto left the club before Bruce, but Bruce called him later. "He sounded really excited and was thrilled to have met her, and it struck me that there had been an immediate connection there," he said. That night, Bruce got Chris Parrott's phone number. Their romance was swift. When he and Chris first married, they lived on East End Avenue. But as Bruce's wealth and family slowly started to grow, he moved up the East Side social ladder, too--first to 1087 Fifth Avenue and then to 1030 Fifth Avenue.

First Boston's M&A business continued to improve. In short order, Bruce advised Texaco on its controversial $10 billion acquisition of Getty Oil (breaking up a deal with Pennzoil), Cities Service on its $5 billion sale to Occidental Petroleum, and Marathon Oil on its $6.6 billion sale to U.S. Steel, eluding a hostile offer from Mobil Oil in the process. This unprecedented success landed Bruce a lengthy profile, "The Merger Maestro," in the May 1984 issue of
Esquire.
In the article Bruce made sure to point out to the reporter that he was the only investment banker to be involved in the four largest deals in American history to that time--a claim not even Felix could make in 1984. For the first time, the public got a rare and fawning glimpse of Bruce, in full. "Overweight and chronically rumpled, Bruce Wasserstein commands the same respect in a corporate boardroom as a general does before a major battle," the reporter, Paul Cowan, wrote. No doubt captivated by
Esquire
's attention and certain he could use the publicity to further his professional goals, Bruce let down his guard.

In case there was even the slightest shred of doubt left, Bruce showed Cowan that he had moved light-years away from the adolescent sympathy he once had for the common man. The men were discussing the fate of the thirty-five thousand residents of Findlay, Ohio, the home of Bruce's client Marathon Oil. Had it been successful in acquiring Marathon, Mobil had all but promised to close down Marathon's headquarters in Findlay. To "save" Marathon from Mobil, Bruce found U.S. Steel to buy the company. As part of the merger agreement, U.S. Steel agreed not to move "a substantial number of people" from Findlay. "Of course that is a good thing from the point of view of the town," Bruce said. "But from the corporate view there's no reason why one of the nation's leading oil companies should be located in Findlay rather than Houston." Would Bruce have supported a deal if it had meant moving people from Findlay? Cowan wondered. "Sure, I'd do that," he said, before letting out a nervous "whooping chuckle." "In fact, I think all those people should--" Bruce looked over to Cowan's tape recorder. "Oh, we're still on tape," Bruce continued. "Sorry. I believe in Findlay, Ohio. I really liked Findlay, Ohio." He whooped again.

IN RETROSPECT, BRUCE
may have been at the peak of his M&A skills in the Orwellian year of 1984. On January 4, Getty Oil and Pennzoil publicly announced a roughly $9 billion deal whereby Pennzoil would buy Getty for $112.50 per share. At 8:00 p.m. that night, Texaco hired Bruce and First Boston to see if Texaco could break up the Pennzoil deal and win Getty for itself. Having anticipated this moment for at least six months, Bruce went into deal mode--a round-the-clock series of negotiating and strategy sessions--and advised Texaco it had to act quickly and pay up if it wanted to defeat the competition. Texaco took Bruce's advice and agreed to pay Getty $125 a share, a price that, not surprisingly, won the support of Gordon Getty, the largest Getty shareholder, despite his having just agreed to a deal with Pennzoil. Texaco's price was later increased to $128 per share, or around $10 billion, to accommodate the wishes of the Getty Museum, the other large Getty shareholder.

The Texaco-Getty deal was the largest takeover in American corporate history. As part of the new deal, Texaco had agreed to indemnify Getty against any legal fallout from breaking up the Pennzoil-Getty deal. Bad idea. Almost immediately, Pennzoil sued Getty to unwind the Texaco-Getty deal on the grounds that Pennzoil and Getty had an agreed-upon deal, even if the two sides had not executed a fully negotiated merger agreement before making their public announcement. A huge legal battle ensued, resulting in a jury trial in Houston, Pennzoil's home turf. On November 19, 1985, in one of the most shocking moments in American corporate history, the jury ordered Texaco to pay Pennzoil $10.53 billion, one of the largest such jury awards. The judge in the case later raised the award to $11.1 billion to include accrued interest. The legal battle continued until the spring of 1987, when the Supreme Court ruled that Texaco had to post a bond of $11 billion for the award. Soon thereafter, Texaco filed for bankruptcy protection, one of the largest bankruptcies in corporate history.

Whether a deal such as that between Texaco and Getty worked out for the principals involved was of little concern to most M&A bankers (Bruce among them), who were in the business of dispensing advice, banking their fee, getting publicity, and moving on to the next deal. Why bankers get paid millions for this Teflon-coated advice remains a mystery. But deals
do
have consequences for the stakeholders involved--for the employees of the companies, for the debt and equity investors, and for the management. Why should the investment bankers be the only ones to walk away with pockets overflowing and nothing at all at risk if their advice proves to be woefully wrong? Of course, bankers talk all day long about how their reputations are sacrosanct and how dispensing bad advice will inevitably damage those reputations, crushing their ability to win new business in the future. Bruce has said this himself. "What I'd like to think of as the hallmark of a Bruce Wasserstein deal is that the client got good advice, whether that is saying they should not do a deal or that they should do it and pay a dollar more," he said in 1987. "In the long run, they will appreciate that." But Wasserstein is living proof that there are very few consequences, other than a little negative publicity here and there, for delivering poor advice. In fact, in Bruce's case, he became a billionaire.

As would eventually become all too clear, the Texaco deal was a harbinger of serious troubles to come for Bruce's reputation. But this would take some time to become apparent. Bruce was certainly well respected for his tactical brilliance and for the increasing amount of fees he was generating for his firm. In February 1986, he and Perella were named co-heads of investment banking at First Boston, a major promotion that put the two men in charge of all the firm's corporate relationships while keeping them in control of the M&A group.

But by the mid-1980s, the M&A fraternity would be thoroughly dislodged once again by the emergence of Michael Milken and his firm, Drexel Burnham Lambert. As has been well documented, Milken revolutionized corporate finance through the creation and use of high-yielding junk bonds. Not only did Drexel underwrite these bonds for corporations that could not get financing from more traditional sources--banks, insurance companies, and the public-equity markets--but also Milken pioneered the use of these securities to finance the huge financial ambitions of corporate raiders, like Carl Icahn and T. Boone Pickens, and of LBO firms, such as Kohlberg Kravis Roberts. Before long, the unknown firm of Drexel Lambert was both advising and financing these raiders and LBO firms in their acquisition sprees. Drexel was reaping
huge
fees as a result. Lazard's lackluster response to Milken was to have Felix protest loudly (and correctly) about his villainy and await his demise. Bruce and First Boston pioneered a different approach: together they decided to compete with Milken. It was a gutsy insurgent move that would later almost bankrupt First Boston and that certainly cost the firm its independence. Bruce, of course, walked away all but unscathed.

The unlikely conduit for Bruce's ambitions to compete with Milken was a man named Robert Campeau, an utterly obscure Canadian real estate entrepreneur in his early sixties. Although he had no discernible experience in retailing, Campeau was consumed by the idea of buying up the great names of American retailing and having them serve as anchor tenants in the American shopping malls he wanted to develop. In the early summer of 1986, with the help of the small investment banking division at Paine Webber, Campeau tried to reach a friendly deal to acquire Allied Stores Corporation, the United States' sixth-largest retailer at the time and the parent company for such admired stores as Ann Taylor, Brooks Brothers, Jordan Marsh, Bon Marche, and Stern's. Campeau was a minnow--with earnings of around $10 million--but like many a real estate developer he figured he could borrow the vast majority of the money he needed to buy the giant Allied, with earnings of around $300 million. He figured correctly. Thanks to Milken, the financing markets were heading into a period of excess. But by September 1986, Campeau had made little progress in his friendly pursuit of Allied and figured the time had come for both a hostile approach and a new M&A adviser with experience in hostile deals.

First Boston was hired. Bruce advised Campeau to launch a hostile tender offer at $66 a share for Allied, a 50 percent premium to where Allied had been trading two months before. But on October 24, Campeau dropped the tender offer and, on Bruce's advice, began to buy Allied shares in the open market at $67 per share. This brilliant tactic, known as a "street sweep," netted him 53 percent of the Allied stock in thirty minutes (and has since been forbidden by the SEC). He now had control of the company, thanks to Bruce and First Boston, which had agreed to make an unprecedented $1.8 billion bridge loan to Campeau to allow him to buy the Allied stock. (Campeau ended up using
only
$865 million of First Boston's money after Citibank stepped in and loaned him the balance.) Campeau and Allied signed a $3.6 billion merger agreement on Halloween. For tax reasons, Campeau needed to close the deal before the end of 1986, and to do so, he needed $300 million to invest as equity in the deal. But he did not have the money. In what became something of an infamous cliff-hanger, Campeau negotiated until December 31 to borrow another $150 million from Citibank that he could contribute as "equity" to the deal and the remaining $150 million from Edward DeBartolo, a San Francisco real estate developer who had first attempted to compete with Campeau for Allied.

The deal was done. Bruce had accomplished the unprecedented: enabling an obscure Canadian (with, it turned out, a history of mental illness and philandering) to buy, with none of his own money, a paragon of American retailing and saddle it with a huge amount of debt. Bruce had also introduced to the world of finance the idea of an M&A adviser using its own balance sheet to help a client win a deal--an idea, Bruce told the
Wall Street Journal,
that would "transform Wall Street." Bruce was quite pleased with himself and his Allied victory. "There was a swirl of controversy around this deal," he told
Institutional Investor
in June 1987. "Our competitors were passing around stories about all the difficulties we were having. But there
never
were any difficulties as regards the bridge loan. Things went according to plan."

Technically, as far as the narrow issue of First Boston recouping its huge loan, Bruce was correct. In March 1987, First Boston underwrote a successful $1.15 billion junk-bond financing for Campeau's Allied, the proceeds of which were used to pay off the First Boston bridge loan. Allied's successful refinancing of this loan was more or less the end of the good news for Allied Stores, with the denouement being the largest retail bankruptcy in history.

In the late summer of 1987, Campeau and Bruce began strategizing about having Campeau acquire the giant Cincinnati-based Federated Department Stores, parent company of Bloomingdale's, and merging it with Allied. This was another audacious idea, especially since Campeau had not yet made the Allied deal a success and did not have the money to buy Federated. But just as he did not have the money to buy Allied and he did it, by following a strategy mapped out by Bruce, on January 25, 1988, Campeau launched an all-cash $47-per-share bid for Federated, nearly a 50 percent premium to its trading price a month before. Campeau's bid for Federated set off an astonishing bidding war between the Canadian and Macy's, the icon of American retailing. On April Fools' Day 1988, Campeau won Federated with a bid of $73.50 a share in cash, for a total of $6.5 billion, most of which Campeau had once again borrowed, including another $2 billion bridge loan put up by First Boston and two unlikely small investment banks, Dillon Read and Paine Webber.