The last tycoons: the secret history of Lazard Frères & Co (125 page)

The Goldman Sachs partner Tom Tuft kicked off the New York lunch, as would be expected, by lauding his client Bruce Wasserstein. "Bruce Wasserstein joined Lazard three years ago to take on the unique challenge of transforming an underdeveloped franchise with a tremendous history," he said. Much to the surprise of many of the approximately 250 listeners in the audience (some of whom were Lazard partners hearing the road show presentation for the first time), Bruce spoke for most of the forty-eight-minute session.

But as highly anticipated as the meeting was, investment bankers are not actors. Bruce was certainly no Henry V leading his men into the Battle of Agincourt on Saint Crispin's Day. Rather, he covered the saturnine marketing material in an uninspired, droning monotone. His presentation was disjointed and didn't seem to stick to any particular script, which most executives at these types of meetings have the good sense to do. Bruce's message, though, was clear. "The threshold issue when you're thinking about Lazard is, is the M&A market attractive?" he said. "If the M&A business is attractive, Lazard is an attractive investment." He then launched into one of his favorite history lessons about the cycles in the M&A market from 1861 to the present. His presentation was clinical and unemotional. And maybe that is the way Goldman recommended he deliver it. But he conveyed no sense of Lazard's rich and nuanced history on this, the eve of the most momentous event in the firm's 157 years. True, like a neutron bomb, in one fell swoop he intended to eliminate all human traces of the firm's aristocratic ancestry by buying out Michel and his allies. But for a man who seemed so taken with the firm for so many years and who fashioned his own firm after Lazard, his lack of passion was noticeably distressing. Whereas Michel described the firm as "a state of mind vis-a-vis the world" and had a palpable love for it, Bruce merely spouted some investment banking pabulum.

"Lazard is a very special place," he droned. "We've focused on the added value part of the business. We're particularly prominent in complex deals, international deals, and deals that require a high level of fiduciary responsibility. We feel that's a growing part of the M&A market." Indeed, the closest he came to anything resembling passion for Lazard--at least with this crowd anyway--was when he mentioned offhandedly just how much cash the firm would be able to generate because its two business units, M&A and asset management, required virtually no capital to operate. "In fact, this company spigots cash," he said. "It spigots cash because unlike, say, our friends, say, at Lehman Brothers, who need the capital to support their derivative portfolio or whatever, we don't need that. So we use cash in our minds, cash is for buying back shares, dividends, possible adjacent acquisitions, if we found them, and perhaps paying back debt, although not particularly a priority. So that explains sort of our position."

He also sought to anticipate some investors' questions about the offering's most unusual aspects. As for the $200 million reduction in compensation needed to achieve the 57.5 percent goal promised in the prospectus, he explained that $100 million of the savings would come from ending the huge payments to Eig and Gullquist. "So that's over, gone, done, nonrecurring," he said. The other $100 million of cuts would have to come, he said, from bankers' compensation, assuming no growth in revenue. But, he pointed out, if overall revenue were to grow at 13 percent in 2005, no compensation cuts would be required to achieve the 57.5 percent target. "We think this year we're going to make zero cuts, whatever that implies," he said. "We'll be at 57.5 percent." Without addressing the controversial decision to incorporate in Bermuda, he did explain why the firm's tax rate appeared to be 28 percent, lower than that of most U.S. companies. "It's 28 percent because we're a full U.S. taxpayer but we've got half of our businesses overseas," he said. "When you blend the two you are at 28 percent." As for ensuring that talented bankers stayed at the firm long enough to help it achieve the results that Bruce had promised to investors, he had a prepared answer for that, too. "So we have all these valuable employees, how do we keep them?" he asked rhetorically. "What everyone signed up to is a system where if they leave, they can't sell or borrow on their shares for eight years. So a pretty draconian methodology. If they stay, they can sell or convert on an average of four years. By the way, there is also a ninety-day notice and a ninety-day noncompete. And again, everyone signed up for this kind of provision. So we think that that's very powerful."

As the lunch wound down and Bruce's presentation ended, there were surprisingly few questions from the audience, and none of them delved anywhere near the controversial topic of how the firm found itself in this position after 157 years of privacy.

BY ANY MEASURE,
the Lazard public offering was a historic event. Not only would it spell the end of the firm's enigmatic secrecy, but it would also be the largest IPO--by far--of a Wall Street firm since that of Goldman Sachs in 1999. Yet the Lazard deal was merely
anticipated--
not
much
anticipated, not
wildly
anticipated, just
anticipated--
by institutional investors. The tepidness of their response could be felt at the New York Palace. Investors' thinking was that at a
price,
the Lazard deal would begin to look interesting. The problem was that Bruce had made the deal intensely complex by having to solve so many problems at once. Accordingly, he appeared to scare off many retail investors, putting more leverage than usual into the hands of institutions. "The more complicated the structure, the lower the price that can be achieved," one institutional investor told Reuters about the Lazard IPO.

Compounding the self-imposed problems were the external ones. In April 2005, five of the six IPO pricings were either at or below the low end of the range put on the prospectus cover--investor demand was weakening. Meanwhile, the Lazard IPO also suffered from the roiling debt markets, where the recent downgrading of the debt of bellwether GM had caused yields to rise--just as Lazard needed to price the debt part of its offering. Moody's didn't help Lazard's cause when it rated the debt Lazard would be issuing as Ba1, below investment grade. And then Duff & Phelps, another rating agency, gave the Lazard debt an unsolicited and unexpected below investment grade rating as well, giving the debt offerings the whiff of a junk-bond offering--itself utterly ironic given all of Felix's railings against the junk-bond market. Pricing pressure on the debt put pricing pressure on the equity.

Two days before the deal was to price, the high-profile professional stock picker and ranter Jim Cramer urged investors to stay away. "How awful is this Lazard IPO deal?" he wondered on his Web site (as opposed to in his financial column in Bruce's
New York
).

I mean, has anyone looked at it?...This one's total hubris, especially in light of the downgrades of the real brokerages today. Sometimes I believe that Wall Street thinks we are the biggest bunch of morons. The more I read about this deal, the more I believe it's simply a very expensive buy-off of dissident partners and
nothing more than that....
Moreover, its prospectus is the most confusing document that anyone I know has ever seen. Total lack of transparency. Sometimes this business cries out for a ref to throw a flag and say, "Nope, you guys can't do this." But there are no zebras, just guys like me saying, "Please stay away from this." And we have no clout or voice compared with the Street itself, which allows virtually anything to come public. What a crime.

Such was the backdrop when Lazard's management met with its Goldman Sachs bankers on the night of May 4 to price the IPO. According to Ken Wilson, that night there was the not unexpected wrangling between lead underwriter and issuer. "It was a complicated deal and a very hard deal to get done," he said a few weeks afterward. "There was resistance to Bruce. He has a lot of baggage." Wilson said there was a "weak list of investors" for the Lazard IPO and a "weak book" of demand thanks to "a lot" of selling pressure from "hedge funds that shorted into the syndicate bid." In the end, the demand was at $23 per share, he said, below the low end of the range, which was $25. "But," Wilson said, "Bruce was adamant. He said he had a gun to his head and he had to have $25 per share." According to the
New York Times,
some Goldman bankers pushed to price the IPO at $22 per share because of "weak demand." In the end, Goldman capitulated to Bruce and priced the IPO at $25 a share.

Furthermore, Lazard and Goldman increased by 3.7 million shares the amount of stock sold at $25 per share in order to raise another $93 million. Lazard needed to raise this extra money from the equity market because Citigroup was unable to sell the corresponding amount of subordinated debt in the increasingly choppy debt markets. "Given the change in the debt market, we thought it prudent to reduce the debt, which was possible given the demand for the equity," said Lazard's spokesman, Rich Silverman. Added Ken Jacobs: "Goldman priced right through the static. And we got it done. All power to Goldman. To be frank, Goldman did a superb job on this transaction, and you don't usually give competitors a lot of credit." After the pricing had been negotiated on the evening of May 4, Lazard put out a press release announcing the deal. "Lazard is the leading global independent advisor and a premier global asset manager," Bruce said in the release. "For more than 150 years, Lazard has served its clients under changing economic conditions, and we look forward to this exciting new era. We made the decision to become a public company after careful deliberation and with the best interests of our clients, our people and our investors in mind." The equity offering raised $854.6 million in gross proceeds, and $811.9 million after underwriting fees.

In total, on the evening of May 4, Lazard raised $1.964 billion, with all but $61 million going right back out the door. Of course, the bulk of the money--$1.616 billion--went to Michel, Eurazeo, and the other capitalists. Steve Rattner lauded Bruce's accomplishment. "Bruce had all the cards," he told the
New York Times.
"He outmaneuvered Michel at every turn." At a Eurazeo shareholders' meeting that day, Michel told the crowd, "I was associated with Lazard for 45 years, and was its head, and very honored to be, for 25 years, so it's a major turning point." The night of the pricing, the deal teams from Goldman and Lazard celebrated with a dinner at Per Se, one of the finest and most expensive restaurants in New York City.

FOLLOWING A TIME-HONORED
tradition, at 9:30 the next morning, Bruce and a group of about seventeen FOBs appeared at the podium, high above the trading floor of the exchange and in front of a large banner with the word "LAZARD" on it. The group had assembled to ring the opening bell at the stock exchange and to watch the first trades of the Lazard stock. After the bell ringing, Bruce and Steve Golub went down to the floor of the exchange, specifically to the trading post of Banc of America Specialist, the specialist firm Lazard had selected, to watch the shares trade for the first time. What they witnessed was not pretty.

In theory, IPOs are carefully priced so that the demand for the newly traded stock slightly outstrips the supply. When that happens correctly, good things result. The price of the shares trades higher, and investors are happy. Underwriters are happy, too, because they do not have to put their own capital at risk supporting the stock--hence the idea of an underwriting--and they can exercise an option on something called the green shoe, an additional overallotment of 15 percent of the Lazard stock (in this case 5.1 million shares) that allowed them to buy at $25 a share, sell into a robust market at a higher price under the guise of "stabilizing the market," and thus increase their profits. If an IPO trades below its offer price, it is said to be "broken." When an IPO breaks, almost nobody is happy. The original buyers of the stock watch as its value drops, despite their best effort to determine the right price before buying. And if the IPO breaks, the underwriters obviously will not exercise the "green shoe" but instead are obligated to actually
underwrite
the offering by using their own capital to create support for the stock in the market. If someone wants to sell in those early days, the underwriters have to buy, which puts them in a position to lose a lot of money very quickly--something Wall Street firms try very hard to avoid. In the case of a broken IPO the only happy people are investors who sold the stock short--they bet correctly the price would fall--and those people, such as Michel, who sold their stock to Lazard for a price far higher than it turned out to be worth initially in the market.