The last tycoons: the secret history of Lazard Frères & Co (113 page)

In February, Bruce was successful in recruiting Chuck Ward, the co-head of investment banking at First Boston, to Lazard as president. Ward, who had worked with Bruce at First Boston and then Wasserstein Perella (before returning to First Boston), got a pay package reported to be $7 million per year. Of these FOB hires, one Lazard banker wrote to a chat room: "With super rich contracts for the next few years and equity stakes in the company, what incentives do they have to do anything esp[ecially] since Lazard will most probably be sold within the next couple of years? Just sit back...get chilled...enjoy the expense accounts and wait for the acquiring firm to accelerate their guaranteed contracts. At best we cruise at current levels, but most probably the increased overhead and politics will mean tougher times."

Bruce's first unscripted challenge as the new head of Lazard came on the morning of February 28, when Michael Weinstock, Andrew Herenstein, and Chris Santana announced they were quitting the firm within hours to join Bruce's friend Steve Rattner at the Quadrangle Group, Steve's two-year-old private-equity firm. In October 2001, Weinstock and Herenstein, who had previously been Lazard's highly regarded distressed-debt research analysts, became the key professionals of Lazard's new Debt Recovery Fund. Weinstock and Herenstein not only had helped Lazard recruit outside investors but also were the ones primarily responsible for making the fund's investments in distressed securities. Santana was the fund's head of trading. By the time the trio split for Quadrangle, the fund had amassed some $280 million, most of which had come from outside investors. Lazard had spent $8 million on startup costs to get the fund going.

On the day Weinstock and Herenstein quit, Steve called Lazard and told the firm that the men had signed employment contracts with Quadrangle and would be starting a distressed fund at his firm. He also said that Lazard had "little choice but to transfer the Fund and its assets to Quadrangle where they could be managed by Weinstock and Herenstein." If Lazard chose not to do this, Steve reasoned, the fund's "partners would suffer severe harm, and the Fund would likely be destroyed." Bruce ignored Steve's threat. Instead, he decided to wind up the fund in an orderly manner. He also decided to sue Weinstock and Herenstein. Lawyers for Lazard alleged, among other things, that the two men violated the "fiduciary and contractual duties" they owed the fund, "and their failure to disclose their consideration of their possible departure is alleged to have been fraudulent." In August 2004, Judge Leo Strine, vice chancellor of the Delaware Court of Chancery, threw the case out (except for a small dispute over the taking of supposed confidential information). "What [Weinstock and Herenstein] are alleged to have done wrong is to have plotted their departure from the Fund in order to seek what they perceived as a better opportunity elsewhere, and to have executed their departure in a manner that made it difficult for Lazard to continue to run the Fund itself and that therefore gave Lazard an incentive to accede to the suggestion that the Fund be transferred to Quadrangle," Strine wrote. "Candidly, I find this argument rather astounding."

Strine blamed Lazard for not "adequately" planning for the potential departure of Weinstock and Herenstein, who were not under contract and were therefore, of course, free to leave at any time without notice, just as Lazard was free to fire the two at any time without notice. The count that Strine allowed to proceed--on the question of confidential information--was later settled. Bruce also sued Steve in Bermuda, but Lazard lost there as well. Lazard was required to pay the legal fees of Weinstock and Herenstein since the firm had indemnified them. Bruce paid some, but not all, of what Lazard owed Quadrangle. Michel said that had he still been in day-to-day control of Lazard, he would not have pursued the legal option. "I've never sued anybody," he said. Still, he was not at all pleased with the way the former Lazard professionals handled their swift departure. Michel said the high-yield group that Weinstock and Herenstein were part of made about $30 million annually for the firm. When the two men urged the firm to set up the distressed fund, and to close the high-yield department, the firm agreed. The $30 million in profits turned into $15 million of losses as the fund was being established. The expectation was, of course, that the fees and profits from the fund would more than make up for the loss of the $30 million. "And then within minutes of them being ready to do a fund, they left," Michel said. "I found that, at the very least, inelegant frankly. Inelegant. In my way, this is a very severe condemnation, because in life you have to try to act decently."

The first outside hire who had not previously worked with Bruce came in March, when Bruce hired George Bilicic, then thirty-eight, from Merrill Lynch, to run Lazard's utility banking effort. Bilicic had been at Merrill for sixteen months after years at one of Bruce's other alma maters, Cravath, Swaine & Moore. Bruce also hired Perk Hixon, then forty-three, as a managing director from First Boston. In November 2002, he hired three "senior media bankers" from Merrill as new Lazard partners. In sum, he hired twenty-four new partners in eleven months. "People are cheap at the moment," he told the
Financial Times.
Along with his recruiting drive, Wasserstein called his first global meeting of all 150 Lazard partners, many of whom had never before met. "No more politics," Wasserstein declared again. "From now on we focus on clients." Of course, by reassembling his brood, Bruce had made Lazard as political as ever, much to the fear and frustration of the longtime Lazard partners, who felt very much alienated by his unilateral moves and the fact that the new hires were rewarded with large contracts and a disproportionate amount of the equity.

An eerie new dynamic was emerging inside the firm: there were all these new partners with explicit loyalty to Bruce who had been hired without their "teams," and so, in order to get anything done, they had to figure out a way to maneuver around the old Lazard partners, who by and large had no particular affinity for Bruce, to get access to the very limited resources. At the same time, the old partners and the new ones, many of whom were generalists, had to figure out who was going to call on which clients, all without upsetting the new partners who were close to Bruce, the absolute monarch.

In addition to upsetting the working partners, Bruce's hiring spree was also annoying the capitalists, such as Michel, Bernheim, and Guyot, who were beginning to figure out that the large guaranteed pay contracts were likely to mean Lazard would be hard-pressed to make money in 2002, a fact that was a serious threat to their normal annual dividend stream and something that had never happened in the post-World War II era of the firm--yet another example of how Bruce had outfoxed Michel.

One day in mid-April, in the midst of Bruce's manic hiring, Adrian Evans, the much-admired ten-year Lazard partner in London who briefly took over as Lazard's chief operating officer after Loomis's resignation and before Bruce took over, went out for an early-evening jog in the environs of his Eaton Square home in London. When he got back from his run, he collapsed on the stairs, and with his wife watching, he announced, "I'm gone." Evans had died of a heart attack, at age sixty, leaving his wife, two daughters, and two stepsons. At his memorial service in London, Verey, the former head of Lazard in London, remembered Evans--often described by his colleagues as "Verey's brain"--as a man who had the ability to make everyone feel as if he was your best friend. Michel did not attend the memorial service.

Soon thereafter, Bruce held a meeting at Paris's Bristol Hotel for about seventy managing directors to discuss ways to improve cross-border marketing and deal flow. "Historically, people had talked about the business in New York or the business in Paris," Chuck Ward said. "They never really talked about the telecom business or the media business." Now, he said, "we have industry groups really talking to each other on a global basis." After the meeting at the Bristol, Michel invited his partners to his fabulous
maison particulier
on Rue Saint-Guillaume for dinner, wine, and sumptuous surroundings. "He's the only guy that will serve '61 Petrus at the bar," said longtime partner Al Garner.

Bruce, meanwhile, who was still living in London during 2002, was not making many friends there. In July, he fired six managing directors in London, out of twenty-two, a move that caused one London securities lawyer to tell the
Financial News,
"After this, no corporate financier, however senior, can feel totally secure." The six were given a week to vacate their offices. The firings may have been harsh, but one European Lazard banker applauded them. "Recent layoffs of MDs were necessary and will encourage young and ambitious VPs and associates to push their way up," he wrote to a blog. "Deal flow improving after a difficult first half. Overall the franchise remains strong and confidence is pretty high that the firm will recover." But another banker, in London, was not so sure. "Morale is pretty low," he wrote. "And people are waiting when their turn will come to be sacked...There is no improvement in the situation in London."

Wasserstein also moved quickly, some say too quickly--two weeks, start to finish--in the summer of 2002 to lease, for Lazard's European headquarters in London, a brand-new seventy-thousand-square-foot modernist building on Stratton Street in the West End. It was the largest real estate transaction in the West End of London in ten years. The
Daily Telegraph
described the Mayfair offices as "some of the plushest used by any investment bank in London." Word is that Bruce spent close to $25 million outfitting the new offices (but that was apparently not enough to keep the telephone system from malfunctioning in the summer of 2003). Lazard agreed to pay PS76 per square foot to lease the space for twenty years, or a total of about PS5.3 million a year in rent (more than $9 million), a far distance indeed from the Dickensian ideal set by Andre Meyer both at the spartan 44 Wall Street and at One Rockefeller Plaza and from his pledge that Lazard would never pay more than $7.75 per square foot for office space. The problem was that Lazard still had about five years left on the lease at its
old
office building, at 21 Moorfields, a nondescript and ratty monster in the City of London. As a result of Bruce's move, Lazard had much more space in London than it needed. (Some of the old space was finally subleased in 2005.) Bruce also ordered the long-overdue renovation of the sacred
La Maison
on the Boulevard Haussmann. "Instead of a dimly lit waiting room with worn couches, the building now features marble floors, tall white columns, recessed lighting and beige furniture,"
Bloomberg
reported. "Three blond female receptionists have replaced the aging male guards who used to greet visitors from behind a glass partition."

The combination of the pricey London lease, the aggressive recruiting effort, and the continued decline in the M&A business led to an almost immediate clash between Bruce and Michel over the way Bruce was running the firm. Michel knew--or certainly should have known--that Bruce intended to invest money in the hiring of new partners. What he may not have counted on, though, was how aggressively Bruce would do so, essentially by having the old partners and the capitalists pay for it. The leasing of the new London office was downright excessive in Michel's view. If nothing else, like Andre before him, Michel had always believed that the Lazard offices should be modest, if for no other reason than that clients would not get the impression that all of their fees were being spent on expensive furnishings. Profits should go into the partners' pockets, Michel believed, and then could be spent as they saw fit in multiple homes and priceless art collections. Michel subscribed to Descartes' dictum "He lives well who is well hidden." Bruce clearly felt money needed to be spent for elegant office space as well, especially when he could use the capitalists' money to pay for it all.

Not surprisingly, the two men fought over these money issues. "Michel was torn about that," one senior partner said.

On one hand, he desperately knew that the only way the U.S. or any part of the firm was going to come back was to hire. In fact, we should have done much more in Europe than we did, in retrospect. On the other hand, he didn't like the idea that we were spending any money to do it.... The discussions were very antagonistic almost from the beginning. And it wasn't only Michel; it was all the old historical capitalists. They couldn't understand the concept that one had to reinvest to rebuild the firm.... I also think Michel was too clever by half when he cut his deal with Bruce. I think fundamentally he thought that putting Bruce on the same system he, Michel, was on--that is, he'd make more money if the firm made more money--would motivate Bruce. But it didn't. What motivated Bruce was making the firm successful, not short-term profits.

To help pay for his spending spree, Bruce hit upon a formula that had worked brilliantly at Wasserstein Perella: that of selling a minority stake in the firm to a foreign investor. In September 2002, he did it at Lazard when he came to Milan for the first time and Braggiotti introduced him to IntesaBci, Italy's largest commercial bank and the successor of Banca Commerciale Italiana, Braggiotti's father's bank. In return for Intesa's $300 million investment, Lazard set up an investment banking joint venture in Italy--with Braggiotti as chairman--combining Intesa's capital with Lazard's investment banking business in the country. The deal had two parts. First, Bruce agreed to contribute the sixty Lazard employees working in Italy to the joint venture with Intesa, which agreed to pay Lazard $150 million--$100 million in equity and $50 million in the form of a subordinated note. Lazard retained 60 percent ownership in the operation and day-to-day management control. Intesa owned 40 percent of the venture. In the second part of the deal, Intesa also agreed to invest an
additional
$150 million into Lazard itself, in exchange for a note convertible into 3 percent of the firm's equity.