The last tycoons: the secret history of Lazard Frères & Co (119 page)

And so, at the end of September 2004, the firm began once again to cut expenses, this time by reducing nonprofessional costs globally, which resulted in the firing of back-office workers in New York, London, and Paris. The
New York Post
also reported that Bruce had drawn up lists of professionals to cut and had insisted that those partners that remained take pay cuts of between 30 and 40 percent to allow the firm's compensation expense to fit within industry norms of between 50 and 60 percent of revenues. Lazard's compensation expense was between 70 and 80 percent of revenues. Also as part of the IPO, the working partners were insisting on changes to the governance provisions of Bruce's contract, as many felt he had too much power. "We don't want to go from having a king to having a dictator," one partner told the
Financial Times
at the end of September. Bruce and Michel were opponents in an intense battle.

But like the Terminator, Bruce kept pushing forward with his vision. At the end of September, he asked the banks under consideration to help Goldman underwrite the IPO to agree not to hire any bankers from Lazard for a period of two years after the IPO. They agreed. Interestingly, Lehman Brothers was never seriously considered as a potential underwriter, which fueled the ongoing speculation that it was still thinking about buying Lazard outright. But others believed that the exact opposite was the case: that Fuld had determined the $3 billion valuation of Lazard to be so excessive that he could not condone his firm being involved in the underwriting that would require the firm's institutional clients to pay a price for the stock far above what he thought it was worth.

"Rumpled, ruthless, Bid 'Em Up Bruce is right where he likes to be, in the midst of a hurricane of speculation," the
New York Observer
wrote on September 20. On Friday, September 24, Bruce gave a presentation to the firm's partners about how the IPO would work. Lazard's M&A and asset management business would be grouped together in a new company, to be called Lazard Ltd., and taken public at an enterprise value of $3.2 billion, comprising $2.5 billion of equity value and $700 million of new debt. The bulk of the IPO proceeds plus the debt offering, or a total of about $1.25 billion, would be used to buy out the nonworking partners' stock at a fixed price. The idea was to get rid of Michel and the legacy owners so that Bruce "can stabilize an environment so the deal-oriented guys feel comfortable" and, ironically, leave Bruce with the kind of absolute authority over Lazard that Michel enjoyed before January 1, 2002.

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."