The last tycoons: the secret history of Lazard Frères & Co (127 page)

He said he intended to use the bank as a platform to build a pan-European advisory, private-equity, and money management firm. After Leonardo's transformation, Braggiotti would be a formidable competitor to Lazard and Mediobanca. He planned to advise on mergers in Italy, France, and Germany. To accomplish this, he intended to hire about twenty M&A bankers across the continent.

Braggiotti began seeking EU500 million in new capital for the new Gruppo Banca Leonardo. He quickly announced his first investor: none other than Eurazeo, with a EU100 million commitment, for a 20 percent stake. "He was the deal maker at Mediobanca," Patrick Sayer explained. "He left Mediobanca and became the Italian deal maker at Lazard. I don't see why he wouldn't be able to replicate the same record at Leonardo."

An analyst in Paris told
Bloomberg
: "This would effectively be rebuilding the links between Michel David-Weill and Braggiotti." There was much competition across Europe from equity investors to get in on the Braggiotti deal. Even Felix thought Braggiotti was onto something big. "He's putting together a powerful machine," he told
Bloomberg.
In the summer of 2006, Banca Leonardo acquired a large minority stake in a French asset management company and also bought Toulouse Partners in France to jump-start an advisory practice right under Lazard's nose. Plans for Leonardo to open an office in London were being drawn up. Even Michel's longtime consigliere, Jean-Claude Haas, announced he was joining forces with Braggiotti.

For his part, Michel was well aware of the irony of his involvement in Braggiotti's firm. He was also well aware that his noncompete agreement with Lazard did not expire until the end of 2007 and that Eurazeo's investment raised a few eyebrows at Lazard. The
Financial Times
had even taken to referring to it as
Michel's
investment in Braggiotti's bank, not Eurazeo's. "Look, I'm sure they're not happy," he said of his former Lazard partners. "There have been phone calls, not to me, but to others, saying, 'Are you sure Michel knows what he's doing? Does he remember he has a noncompetition clause?'" He paused and took a deep drag on his Cuban cigar. As the smoke escaped from his mouth and swirled around him in the rarefied, sweet air of his warm Lazard office, a wry smile crept onto his impish face. "I do remember," he continued. "I'm not an officer of Eurazeo. I'm the chairman of the board. I will not be an officer of Braggiotti. I will not be on the board of his company. I'm as removed as can be."

ALMOST AS AN
afterthought to its June 14 board meeting, Lazard announced its financial results for the first quarter, ended March 31, 2005. Net revenue was $245 million, and net income was $31.3 million, or thirty-one cents a share. Compared with the first quarter of 2004, net revenue was up 21 percent, and net income nearly tripled. The consensus of the Wall Street analysts--who for the first time were covering the firm and publishing reports about it--was that Lazard would earn about twenty-five cents a share in the first quarter of 2005. Bruce had beaten the Street consensus by some 24 percent, but it was insufficient to counter the negative news about Braggiotti. After the stock rose ninety-five cents a share, to $23.10, on June 14, in anticipation of the earnings announcement, LAZ closed at $22.90, down twenty cents. The stock still had not closed above its $25 IPO price.

For Bruce, the IPO was not an anomalous event in the firm's history, but rather an inevitability. "For me, the IPO fits into the continuity of Lazard's history," he said. "What did we actually do? We reinforced the tradition of Lazard, which, for 150 years, has been giving its customers the best possible advice, relying on both sector specialists and locally grounded expertise." He said that Eurazeo's historical stake in Lazard made Lazard a quasi-public entity anyway, albeit accompanied by tremendous and ongoing confusion. "I am happier in the current configuration," he said, "and I have no doubt about Lazard's capacity to fulfill its obligations to the market and its investors." When asked if a sale of Lazard was in the offing, Bruce demurred. "No," he said. "We are an independent bank, and there is no reason why that should change."

ON AUGUST 10,
Lazard reported its financial results for the second quarter of 2005. The all-important metric of M&A net revenues was $182 million, up 35 percent from the second quarter of 2004. For the first six months of 2005, M&A net revenues were $304.3 million, up 46 percent from the same period the year before. As Bruce had promised, Lazard's revenues were surging along with the buoyant M&A market worldwide. Still, Lazard missed by one cent the Wall Street consensus of thirty-three cents a share in net income for the second quarter. Instead, the firm reported net income of $32 million, or thirty-two cents a share. On the investor conference call, which Bruce announced would occur only twice a year, he proclaimed himself satisfied with the firm's results. As to why Lazard had dropped to twelfth in the global M&A league tables to date for completed deals, from fourth in 2004, Bruce said many of Lazard's most important transactions are either private and therefore not included in the league tables or the advice to the client had been not to do a deal--and that does not show up in the league tables, either. But Brad Hintz, a securities industry analyst at Sanford C. Bernstein, said of Lazard, "The real challenge that they face is that their disclosed fee share of M&A has been actually declining since 2001.... If we look at market share, the numbers aren't as impressive." Still, critics aside, Bruce put his money where his mouth was. As the Lazard stock was hovering near the IPO price of $25 and at his first legal window of opportunity, at the end of August, he bought 119,500 additional Lazard shares in the market, at a cost to him of nearly $3 million. The bulk of the shares--106,000--were bought at precisely $25. Bruce now owned 11,394,534 Lazard shares, which made him by a factor of two Lazard's largest individual shareholder.

REFLECTING ON THE
denouement, Marianne Gerschel, Andre's granddaughter, said that "a certain phase in the history of Lazard" had now passed reminding her of "the famous remark of Hegel that 'the owl of Minerva takes flight at dusk'"--Hegel's view that wisdom comes only in hindsight.

On the last day of August 2005, Bernard Sainte-Marie, a thirty-two-year employee of Lazard in both London and Paris, announced his resignation in a bitter and ironic e-mail that he sent to
everyone
at the firm and then leaked instantly to the press. "I will be leaving Lazard effective tomorrow after more than 32 years with various firms of the Group around the world," he wrote.

I will be pursuing my career in the general unemployment line, as I am neither old enough or wealthy enough to retire. I wish myself every good fortune in the future. I am leaving on the high note of the IPO of Lazard with the knowledge (i) that I will be contributing to the stated intent of reducing the employment costs at Lazard by a total of more than $180 million per year and (ii) that I will not have to comply with the nondisparagement provisions contained in the agreement between Lazard and the "Historical Partners." I wish to congratulate the Head of Lazard for his success in selling the Lazard IPO to the investment public and to most (!) of Lazard's "Working Members." This will probably be judged in years to come not only as an even bolder act of financial wizardry than the sale of Wasserstein Perella, but also as a gesture of extraordinary altruism, since it was essentially done--from a cash point of view--for the benefit of the Historical Partners. I wish every success to the Lazard Working Members in their task of working down Lazard's mountain of debt and hopefully ultimately returning to a situation where the tangible book value attributable to their own (still indirect) interests in Lazard Ltd. will again be positive. Finally, let me say how gratifying it is, as the only direct descendant of the founding Lazard brothers currently employed in the Group, to sever ties with Lazard around the same time as my distant uncle Michel David-Weill who was the last family member (albeit not a direct descendant of the founding brothers) to run the firm.

Other longtime Lazard employees were equally bitter about how the firm had been transformed during the first years of the twenty-first century. "It's obscene what's going on here," said Annik Percival, Michel's longtime assistant in New York. "It's a very sad end to things and very predictable. I could do a character assassination, but I assume others have already done that." Percival had also been Andre's assistant until his death. "When Andre Meyer died, it was, for me, the end of an era," she continued. "The end of a dynasty. And I think the same thing is happening here now."

AFTERWORD

O
n the morning of November 9, 2005, Lazard reported blowout earnings of $51.7 million, or fifty-two cents a share, above the Wall Street consensus estimates of thirty-seven cents a share. Revenues for the first nine months of 2005 were up 57 percent from the same period in 2004. By any measure, Lazard's business model was working magnificently--just as Bruce had predicted it would. In the press release accompanying the earnings report, Bruce took a well-deserved victory lap. "It is now clear that we are effectively executing our plan," he said. "The Lazard franchise is vibrant, our professionals are enthusiastic and the outlook for our business remains positive. Our clients continue to value independent advice and our global strategy positions us to continue to take advantage of the strong M&A environment." Lazard's stock price reacted positively to the news, rocketing up nearly 15 percent on the day and closing at $29.60 per share.

Finally, after six months of Bruce being lambasted for mispricing the stock and for overengineering an immensely complex deal, the Lazard stock was now some 20 percent above the IPO price. As the mid-decade M&A boom continued, the stock hit its all-time high on December 6, 2006, of $49.28 per share, giving the firm a market capitalization of around $6 billion; Bruce's Lazard shares
alone
that day were worth some $560 million. This was less than a week after Lazard priced a $638 million secondary offering--at $45.42 per share--of its common stock, some $260 million of which went into the pockets of the Lazard partners, aside from Bruce, who chose not to sell any of his holdings. In 2005, Bruce also received total compensation from Lazard of $14.2 million, more than quadruple his $3 million in 2004, which made him--on a compensation-per-dollar-of-market-cap basis--the highest-paid CEO on Wall Street.

But he continued to struggle to gain the admiration of his peers. His most notorious nickname--Bid-'Em-Up Bruce--derived from his reputation, in the late 1980s, of advising his clients to pay more than rival bidders for the companies they desired. Bruce was said to deliver the "Dare to Be Great" speech to clients before final bids were due, not unlike how Robert Duvall's character in
Apocalypse Now
played Wagner's "Ride of the Valkyries" before heading off into battle. Bruce hates the nickname, and in fairness, whatever its relevance twenty years ago, it is no longer germane today. Nowadays, people refer to Bruce as the "Wizard," as in
The Wizard of Oz,
and he is not shy about cultivating the image of an inaccessible and powerful genius.