The Taking of Lazard
by Anthony Bianco
November 6, 2006
Bruce Wasserstein finally opens up on the remaking of the venerable M&A firm
Bruce Wasserstein is trying to be diplomatic—really he is—as he compares Lazard Ltd. (LAZ), the storied in vestment bank that he runs, with Wall Street giants like Goldman Sachs (GS), Merrill Lynch, and JPMorgan Chase (JPM). But tact does not come naturally to Wasserstein, the preeminent merger-and-acquisition tactician of the rough-and-tumble 1980s.
"People get upset if you deprecate anybody, and I don’t want to,” says Wasserstein, chairman and CEO of Lazard, which more or less invented M&A as an investment banking specialty during the 1960s and 1970s heyday of Felix Rohatyn. “But we’re sort of in a group by ourselves when it comes to the quality of the advice we provide. Quality is not the focus of a lot of our competitors because having lots of capital is their focus, or lending capital, or whatever it is."
Even the many enemies that Wasserstein has made in his three decades of M&A warring might concede that he is entitled at this point to boast a bit. Last year, he took the most audacious gamble of his career in committing to transform a bitterly divided Lazard into a public company. Failure could have meant professional ruin for Wasserstein, now 58, and might even have destroyed the House of Lazard, the last of Wall Street’s great private partnerships. Instead, Wasserstein emerged from Lazard’s initial public offering in May, 2005, with the largest stake in a company with a market cap that now exceeds $4 billion.
"Bruce took over a dying firm and totally reenergized it," says lawyer Martin A. Lipton, a founding partner of Wachtell, Lipton, Rosen & Katz and the dean emeritus of the M&A bar. "It unquestionably was his greatest deal."
The Brooklyn-born, Harvard-educated Wasserstein did much more than revive Lazard: He made it his. What long had been an investment bank molded in the image of the elite, inscrutable French families who controlled it for a century and a half is now the House That Bruce Rebuilt. "There was all this 62nd-floor intrigue going on for years," says senior banker Jim Millstein, referring to Lazard's executive floor in Manhattan's landmark GE Building. "The really big difference between now and when I started at the firm is that there is no question who is in charge: Bruce."
As a public company, Lazard is off to a fine start. For the first half of 2006, it posted a 72% jump in operating income, to $163 million, on a 28% gain in revenues, to $762 million. On Oct. 17, Merrill Lynch & Co. (MER) reacted to a recent decline in Lazard's transaction volume by cutting its third-quarter earnings estimate by 12%. However, analyst Guy Moskowski noted, "this downturn could simply imply a much better than expected 4Q as delayed transactions close." Since its debut at $25 a share, Lazard's stock soared as high as $49 and now trades at about $40 a share. This works out to a 60% gain over the IPO price, considerably better than the stocks of most of Lazard's larger rivals have fared over the past 18 months.
However, as a relatively pure play in M&A, Lazard is bound to suffer more than its full-service competitors when today's floodtide of mergers, acquisitions, divestitures, and restructurings recedes. It's only a question of when and how badly. Lazard has survived plenty of previous cyclical downturns in its 148 years, but never before has the firm entered one relying on an appreciating share price to inspire and unify its dealmakers. "Today, people are euphoric, but if the stock starts to suffer, a whole different dynamic will come into play," predicts the investment banking chief of a big Wall Street house.
The overarching uncertainty is whether Wasserstein will prove to be as Lazard's CEO what he long was reputed to be as a working banker: the biggest, baddest brain in the deal game. No one doubts Wasserstein's smarts, but his penchant for bold, attention-grabbing moves can backfire -- as did his decision a year ago to align Lazard with Carl C. Icahn in the buccaneering billionaire's quixotic campaign against Time Warner Inc.
What's more, despite Wasserstein's herculean efforts over the last five years, the new Lazard has yet to prove that it can do more than hold its own against the big banks. "Lazard's revenue line has grown as it's participated in the global M&A boom, but Bruce really hasn't done anything to fundamentally change Lazard's place in the world," says Steven Rattner, a former M&A banker and a top Lazard executive who left to found the private-equity firm Quadrangle Group in 2000.
EVEN IN PINSTRIPES, Wasserstein comes across less like a deal man than a college professor on Wall Street sabbatical. He speaks in a deep, impassive baritone, unspooling business analysis from his overstuffed cranium as portentously as Henry Kissinger dissecting a foreign policy issue. He is dismissive of sloppy thinking and can be brusque even with close associates, but he loses his temper only for dramatic effect. "I've certainly seen him act angry, but I always knew it was an act," says Alan C. Stephenson, a partner in the law firm Cravath, Swaine & Moore who has worked with Wasserstein on dozens of transactions since the late 1970s.
Wasserstein was an M&A banker of such domineering presence in the 1980s and 1990s that competitors stuck him with the nickname "Bid 'Em Up Bruce" for his supposed Svengali-like ability to induce clients to pay top dollar for acquisitions. And yet he runs Lazard with a surprisingly light touch from an enormous, art-filled office high atop the GE Building. "He always retains the string of authority, but he is reluctant to jerk it," says Jeffrey A. Rosen, a Lazard deputy chairman and longtime Wasserstein associate.
Many Lazard insiders say that Wasserstein's essential achievement -- the one that made the IPO possible -- was his repopulating of the investment bank's depleted senior ranks. Lazard now employs 127 managing directors in M&A and 43 in investment management, up from 85 and 19, respectively, in 2002. Wasserstein had to throw a lot of money around to attract top talent. But he also made Lazard a refuge for veteran dealmakers demoralized by the one-size-fits-all commercial imperatives and bureaucratic constraints of the big houses.
One of the most productive newcomers has been Garry W. Parr, who left a lofty perch at Morgan Stanley (MS) to join Lazard in 2003. Parr once co-headed Morgan's M&A department with William M. Lewis Jr., who quit Morgan and joined Lazard a year after Parr did. Parr, 49, and Lewis, 50, joined Lazard on the condition that they not have to manage anyone but their secretaries. "Lazard offers senior bankers the opportunity to focus on clients," says Parr, a financial-services specialist whose many big-ticket assignments include advising Bank One (JPM) on its $59 billion merger with JPMorgan Chase & Co.
That's because none of Lazard's dealmakers are allowed to be full-time administrators. "The key to Lazard is you have to be a player-coach," says Kenneth M. Jacobs, a deputy chairman who heads Lazard's North American banking effort. "You have to have clients and be involved in big transactions. Otherwise, you get no respect."
Wasserstein runs the investment banking side of Lazard through a single committee with 16 members that meets once a week in New York, with the firm's vital Paris and London offices participating through a videoconference linkup. "Goldman Sachs is a terrific organization, but we're like the polar opposite," Wasserstein told BusinessWeek in his first extensive interview since he joined Lazard in 2002. "We don't like committees, there are no 8 o'clock meetings, there aren't a lot of layers of structure. It's a client organization, basically. It's more like the structure of a law firm."
Although Wasserstein displays a nuanced understanding of issues of personnel and organizational structure, he doesn't circulate much within Lazard. This is one boss who wouldn't be caught dead in the hallway exchanging pleasantries or high-fives. He is rarely seen even in the partner's dining room, where the senior staff shares buffet meals around a big rectangular table seating 14.
Wasserstein spends a lot of time on the road, meeting with corporate executives and government officials and, in his words, "creating a portfolio of long-term relationships." He tracks all of Lazard's M&A assignments but rarely acts as lead banker and takes an active role in other people's deals only when asked to by a colleague. "Bruce is prepared to be helpful if you want his advice or want him to meet someone, but he does not interfere," says Frank A. "Terry" Savage, a banker who is Lazard's main contact with the hedge fund community.
Wasserstein spends much time alone in his office, pondering refinements in the strategic course he has set. Even as he departed radically from tradition in converting Lazard to public ownership, he maintained a business model of ancient Wall Street vintage. As before, Lazard minimizes activities that require putting capital at risk, including trading, underwriting, and merchant banking. Instead, it concentrates on M&A, with a sideline in investment management. This approach is at once ultraconservative and boldly contrarian, in that Lazard is proposing to live off advisory fees in an investment banking industry that makes most of its money wielding massive sums of capital for the house account.
Lazard's resurgence highlights an important countertrend: the proliferation of M&A boutiques such as Greenhill & Co. (GHL), Evercore Partners (EVR), and Perella Weinberg Partners. M&A specialist houses advised on 55% of the 20 biggest deals announced in 2005, nearly twice as many as in 2000, according to Thomson Financial (TOC).
Although Lazard is a fraction of the size of a Merrill Lynch or a Morgan Stanley, it is no boutique. With a banking staff of 907 deployed in 29 offices around the world, Lazard is solidly ensconced in the second tier of M&A departments. The $778 million in fees it pocketed in 2005 ranked it seventh worldwide, just behind Merrill ($882 million) and ahead of Lehman ($766 million), according to publicly disclosed data. Goldman, Sachs & Co. led the list at $1.9 billion. Greenhill & Co., the largest of the M&A boutiques, took in $142 million.
In a megamerger, a Lazard or a Greenhill typically is hired to complement the full-service houses, not supplant them. "The trend is toward multiple advisers, because what happens is the CFO says, 'I need Big Bank,' and the CEO says, 'Wait a minute, I actually need some advice...,"' Wasserstein says. "We're trying to offer service that is premium in terms of thoughtfulness, and not the golf outing, the salmon fishing, the seminar in Vegas, or whatever else people do."
Although Lazard's rivals scoff at Wasserstein's claims of superiority, the Lazard name still carries a certain cachet in corporate circles. Joel F. Gemunder, the CEO of Omnicare Inc. (OCR), already had completed 100 acquisitions in building his company into America's largest supplier of pharmaceuticals to nursing homes. But when Gemunder pressed a $1.8 billion hostile bid on NeighborCare Inc. (OCR)last year, he decided not to rely solely on Omnicare's usual investment bank, Lehman Brothers.
"I'd heard that Lazard was very astute in complex transactions," Gemunder says. "I also knew that this was a situation that would require some statesmanship, as well as the normal investment banking things."
Omnicare's acquisition of NeighborCare is one of a host of unusually difficult, contentious assignments that Lazard has completed as a public company. Its bankers delved so deeply into the horrific mess that was MCI Worldcom during its bankruptcy restructuring that they were "about as much in our management group as anyone actually in management," says Michael D. Capellas, MCI's former CEO. Wasserstein and team also helped the board of Hollinger International Inc. outwit its ingeniously conniving CEO, Conrad Black, and transform the scandal-ridden company into the Sun-Times Media Group Inc.
On the other hand, as CEO of Lazard, Wasserstein also made what probably was the biggest and certainly the most perplexing misstep of his career: siding with Icahn against Time Warner (TWX), the world's largest media company and a Wasserstein client of long standing.
Wasserstein began working with Time Inc. in the early 1980s and was a key adviser in its 1989 merger with Warner Communications. Over the past 15 years, Time Warner estimates that it has paid about $30 million in M&A advisory fees to Wasserstein. However, the payments trickled to a halt after Richard D. Parsons succeeded Gerald M. Levin as CEO in 2001. Although Parsons admires Wasserstein as a provocative thinker, other senior Time Warner executives consider him overbearing.
In the first half of 2005, Icahn laid out $1 billion to buy 1.5% of Time Warner's shares and began calling on Parsons to take various steps to boost the company's moribund stock. After a few months of agitating failed to move the stock or attract support from other big shareholders, Icahn turned to Wasserstein, apparently in hopes of adding intellectual heft to his arguments. He agreed to pay Lazard $5 million to produce a report on how best to boost Time Warner's market value, and promised $6.5 million more for every $1 that the company's stock rose above $18.
Virtually the entire senior brain trust of Lazard joined in compiling the report, with Wasserstein acting as a kind of senior editor. In February, Wasserstein took the stage in a crowded Manhattan hotel ballroom to personally present The Lazard Report, a 343-page argument for busting up Time Warner into four pieces. The tome landed on the Street with a thud. The fund managers at whom it was aimed found it so lacking in fresh, compelling ideas that Icahn sent up the white flag the very next day. (Icahn did not return calls seeking comment.)
Icahn quickly negotiated a ceasefire with Time Warner and has continued to add modestly to his stockholding as Parsons' dogged implementation of his own strategic plan finally has pushed the share price above $19.50. Lazard may be due another check from Icahn, but Wasserstein can cross Time Warner off his client list. "We're unlikely to hire Lazard in the future, but not because of any bad blood," Parsons says. "It's not personal, it's business. But in business you choose your relationships and your allies."
Wasserstein's comeuppance -- the "tarnishing of his mystique," as one foe puts its -- delighted many of the rivals whom he has bested over the years. "This was as embarrassing for Bruce as some of his victories were for his opponents," gloats a top executive at one of the big full-service firms.
But even Wasserstein's friends were left pondering the question, What was Bruce thinking? Why run the risk of appearing both disloyal and misguided by taking up the cause of a self-serving dissident who appeared to have so little chance of success? Wasserstein's basic explanation is that Time Warner brought out his inner activist. "I care about Time Warner, which is peculiar, but which is probably why we did this," he says. "It was some sense that I wanted to see change and felt frustrated about it."
This statement prompts a knowing chuckle from a Wasserstein pal who is himself a longtime M&A adviser. "I also think Bruce was pissed off because he hadn't gotten any business from Time Warner in a long time," he says. "Bruce isn't stupid. He knew he was taking a risk. I wouldn't have taken it myself, but I do admire the boldness of it."
Many of Wasserstein's colleagues also were averse to taking this risk. The issue was hotly debated within the senior ranks before Lazard accepted the Icahn assignment. "It was fully aired, so it was not as if Bruce didn't know all the pluses and minuses," Jacobs says. "In the end, it was his decision."
If there is a silver lining to the whole Time Warner debacle, it is that the partners who originally disagreed with Wasserstein appear to have closed ranks behind him. Even the strongest-willed Lazard bankers seem not merely to tolerate Wasserstein's authority but to welcome it as an antidote to the incessant infighting that long afflicted Lazard under its former chief partner, Michel David-Weill, and finally climaxed with the IPO.
David-Weill, now 74, is a charming, imperious Frenchman who had run Lazard since the mid-1970s and whose family had owned a controlling interest in it for four generations. Actually, the Lazard empire consisted of three separate investment banks controlled by the David-Weills in concert with various other investors: Lazard Frères & Co. in New York, Lazard Frères et Cie in Paris, and Lazard Brothers in London. All the Lazard houses were cut from the same haute banque cloth, but competed as much as they collaborated.
OVER THE YEARS, David-Weill had sabotaged several succession plans of his own devising, spreading disarray and discontent through the ranks. He did manage to combine the three Lazard houses under common ownership in 1999, but it was too little too late to bring harmony. By 2001, so many partners had quit and taken their clients with them that David-Weill tried to entice Lehman Brothers Inc. (LEH) into merging with Lazard.
After the terrorist attacks of September 11 closed off this possibility by forcing Lehman to vacate its Lower Manhattan headquarters, David-Weill turned -- or returned -- to Wasserstein. In the mid-1980s, Lazard's chief had tried to lure Wasserstein away from First Boston, where he ran M&A with Joseph Perella. Wasserstein declined the offer, but so admired Lazard that when he quit First Boston in 1988 with Perella to form Wasserstein Perella & Co. (WP), he declared that his ambition was to build "the Lazard of the 1990s."
WP was both far short of this lofty goal and well past its peak when Dresdner Bank acquired it in 2000 for $1.4 billion -- $600 million of which went to Wasserstein. He moved to London to take a senior position with the German bank, but his hopes of using its balance sheet to build a top-tier investment bank were soon dashed when Allianz Group acquired Dresdner itself.
Wasserstein was eager to return to Wall Street, but on his own terms. In late 2001, David-Weill signed a contract surrendering to him something he had never granted any previous would-be successor: full executive authority, with the title of "head" partner. As part of the deal, Wasserstein invested $30 million to share in the ownership of Lazard along with David-Weill and a tight-knit group of other, mostly Parisian investors collectively known as "the capitalists."
The new head partner lured scores of experienced M&A bankers away from other investment banks using tens of millions of dollars in profits that otherwise would have been paid out to David-Weill and his fellow owners. The capitalists vehemently objected to their sudden loss of income, ganging up on Wasserstein at board meetings. Their anger was exacerbated by frustration, Wasserstein's contract having rendered Lazard's board all but impotent on issues of budget and personnel.
"You'd go to a board meeting and it was entirely Michel's guys," Wasserstein recalls. "They'd say, 'We don't like hiring new people.' I'd say, 'Well, thank you very much."' (David-Weill did not respond to interview requests.)
Wasserstein's aggressiveness also discomfited many of the veteran bankers who remained at Lazard. "If you are a mediocre banker, you have no place here," the new head declared at his first staff meeting, stoking fears among the old guard of a wholesale purge of their ranks. In London and Paris, partners also worried that Wasserstein's heavy emphasis on cross-border and transatlantic teamwork was his way of subjugating the European offices to New York.
Wasserstein's ability to fire as he hired was limited by the side deals David-Weill had cut over the years with certain favored partners. This was most frustratingly the case at Lazard Asset Management (LAM), the money management arm. Wasserstein believed it desperately needed new leadership and stepped up investment in staff and new products, but the two executives who had founded the business in 1982 were locked into contracts entitling each man to 15% of LAM's profits through 2004. Disaster struck a year into Wasserstein's tenure when William A. von Mueffling, a budding hedge fund star, resigned in a huff. A half-dozen colleagues, $3 billion in assets, and half of LAM's profits left with him.
By 2004, a quickening of M&A activity was improving Lazard's financial outlook, and the firm's various factions were starting to coalesce around Wasserstein. Says Bruno Roger, a Paris-based banker who is one of Lazard's biggest producers: "I was completely convinced by Bruce that it was possible to transform Lazard and yet keep the things that had always made Lazard Lazard."
In his coolly calculating way, Wasserstein decided to force a showdown with David-Weill and his confreres. At a board meeting in June, 2004, he proposed transferring majority ownership from the capitalists to the working partners via an IPO. By most accounts, David-Weill initially was opposed to going public, as were many of the working bankers. They included Vernon E. Jordan Jr., the well-connected lawyer and former "first pal" to President Bill Clinton. "I'm wedded to history," says Jordan, who joined Lazard in 2000 after turning down a job offer from Goldman Sachs.
In the end, greed -- and Wasserstein's implacable arguments -- trumped sentiment. Wasserstein finally secured the assent of all but a few of Lazard's 175 managing directors by crafting the IPO to give them 62.4% ownership of a company with an initial market capitalization of $2.5 billion. (Wasserstein got the single biggest slice, amounting to 11.4% of Lazard and now worth $450 million.)
Similarly, he finally won over the capitalists by agreeing to pay them $1.5 billion -- a giant $900 million in excess of book value -- and by granting the board the right to fire him if the stock offering wasn't completed by the end of 2005. In coming to terms, Wasserstein and David-Weill rarely spoke with one another but negotiated mainly through Steven J. Golub, a longtime New York partner whom both men trusted implicitly.
Beating the deadline handily, Wasserstein brought Lazard through the ordeal of its reinvention without serious mishap except in Italy, which has long been a vital source of profit and prestige for Lazard. Gerardo Braggiotti, a Milan-based banker and one of Lazard's brightest stars, grudgingly went along with the IPO only to resign a few months later. Three of Lazard's other eight Italian partners followed their leader out the door.
The resulting loss of business was bad enough, but Braggiotti accused Wasserstein of reneging on a promise to promote him into the new position of CEO of Europe. In his first public comments on the matter, Wasserstein flatly denies it: "Gerardo is a really talented guy, but I'm obviously not going to go and put him in charge of the French."
For Wasserstein, the strain of transforming Lazard was exacerbated by the terminal illness of his younger sister, the famed playwright Wendy Wasserstein, who died of lymphoma in January at age 55. Bruce assumed responsibility for raising Wendy's only child, a 7-year-old daughter. Wasserstein has two young sons of his own with his wife, Claude, and also is father to three adult children by an earlier marriage.
The once-portly Wasserstein lost so much weight in recent months that rumors began circulating that he was gravely ill. "It's just silly," says Wasserstein, who adds that he began exercising with a personal trainer to shed the pounds he piled on after joining Lazard. "I'm exactly the same weight I was 10 years ago. I go through these cycles. I am trying to be fit."
About 45 minutes into an interview, Wasserstein jumps up and walks across his office to fetch an elaborate coffee-and-ice-cream concoction melting on a table. "My secretary gave it to me," he says, attacking the drink with a plastic spoon.
"Is it your birthday?" I ask.
"No, no, it's to fortify me for my first press interview," he says, a bit sheepishly. "Oh, the horrors!"
Despite its woes in Italy, Lazard has nearly doubled its share of global M&A since 2001, essentially regaining the competitive position it had in the 1990s. At the same time, LAM has come all the way back and then some under Ashish Bhutani, a former Wasserstein Perella executive who joined Lazard in 2003. Assets grew to $84 billion from $50 billion as Bhutani began recasting LAM's U. S.-centric marketing to draw new institutional clients in Britain, Germany, and Australia.
Future growth is likely to come much easier for Lazard in the vast, fragmented investment business than in the famously cutthroat M&A field. Lazard's meager underwriting and financing capabilities put it at a disadvantage in competing with the Goldmans and Citigroup (C)s for the very largest deals. Meanwhile, the M&A boutiques will chip away from below, working their own networks to land plum assignments that otherwise might have gone to Lazard.
LAZARD DOES HAVE some distinctive advantages. Its restructuring advisory unit is the largest and busiest on the Street, thanks to both its own prowess and the big banks' inability to act as bankruptcy advisers to corporations whose bonds they underwrite and trade. In an era of galloping globalization, it also helps enormously that Lazard is still seen in France and Britain as an indigenous firm, not as a Yankee interloper.
In Europe especially, Lazard is still making opportunistic, high-profile hires. Wasserstein just recruited Gerd Hausler, a German investment banker who has held high positions with the International Monetary Fund for the past five years. Hausler, 55, will work mainly as an adviser to governments, a banking specialty that Wasserstein considers ripe with opportunity.
At the same time, Lazard continues to methodically enlarge its M&A franchise by filling in the gaps in its industry coverage. It has prospered particularly in building a utilities practice from scratch and by parlaying its traditional strength in pharmaceuticals (Pfizer Inc. (PFE) is a longtime client) into a strong international position in biotech. In the past six weeks alone, Lazard advised Belgian pharma giant UCB on its $5.5 billion acquisition of Schwarz Pharma and represented Gilead Sciences in its $2.5 billion buyout of Myogen.
Lazard also has found clever ways to infiltrate the U.S. auto industry, long a bastion of Goldman and other full-service firms. Instead of going hard after General Motors Corp. (GM) and Ford Motor Co. (F), a handful of Lazard bankers concentrated on building relationships with auto parts suppliers and with the United Auto Workers -- an unconventional approach that has brought rich rewards over the last year.
Lazard advised the UAW on its $15 billion health-care settlement with GM and continues to counsel the union in its negotiations with Ford, Chrysler, and Delphi Corp. (DPHIQ) The investment bank also is lead adviser to Collins & Aikman, Tower Automotive (TWRAQ), and Meridian Automotive Systems as these large auto parts makers reorganize under the bankruptcy code. And when chassis and transmission parts maker Metaldyne needed help on its $1.2 billion sale to Asahi Tec Corp., CEO Timothy D. Leuliette's first call went to Lazard. "They know this town [Detroit] and are very engaged in auto parts," Leuliette says.
Jim Millstein, who co-heads Lazard's restructuring practice, decided in early September that it was time to start romancing Ford's top management. Vernon Jordan offered to call William Clay Ford Jr., who did not respond. When Ford announced on Sept. 5 that he was ceding his CEO position to Boeing Co.'s (BA) Alan R. Mulally, Jordan didn't feel so bad. Jordan, a current or former director of 15 corporations, once interviewed Mulally for an open directorship at Callaway Golf Co. (ELY) Says Jordan: "At some point I will pick up this phone and call Alan Mulally, and he will at least answer it."
Wasserstein also is trying to win more business in competition with bigger rivals by clarifying Lazard's amorphous management structure in Europe. In September, Wasserstein promoted Georges Ralli, 58, Lazard's Paris chief, to the new post of CEO of Lazard Europe, the job Braggiotti wanted. William Rucker, the 43-year-old head of Lazard London, was named deputy CEO for Europe. "The challenge is to try to run Europe as a European business without losing the advantage of national character," Ralli says.
Lazard's business model is as unforgiving as it is elemental, for an investment bank that traffics only in advice must unfailingly show itself to be smarter than its clients and its competitors alike. His Time Warner gaffe notwithstanding, Wasserstein is immodestly confident that he and his colleagues will meet this challenge. "I'm not saying that at Brand X there aren't smart people," Wasserstein says. "But we literally have multiples of the talent of other places."