It was April 1997, and Lazard Frères & Co. stood atop the banking world -- an undisputed global leader in corporate mergers and acquisition advice, its specialty. In a market dominated by ever bigger and more global enterprises, the small, secretive partnership had doggedly earned its place in the rarefied upper echelon of deal makers.
Yet for all its sense of triumph, Lazard had reached the end of the line. And no one knew it better, or felt it more palpably, than its chairman, Michel David-Weill, the great-grandson of one of the French émigrés who in 1848 founded Lazard as a store selling blankets, shovels and other goods in New Orleans. The problem was leadership, or the lack thereof -- and more precisely, the lack of a clear-cut successor to the imperious David-Weill, who had led the firm for two decades.
His efforts to cultivate an heir appeared inconsistent when not indifferent. In truth, though 64, he did not wish to relinquish, Lear-like, his authority to anyone. But his ability to hold together the firm’s famously fratricidal houses in New York, Paris and London was ebbing. And though he held the power, he did not drive the profits. That distinction belonged to a handful of bankers led by New York éminence grise and deal maker par excellence Felix Rohatyn, who would soon leave to become U.S. ambassador to France. And David-Weill’s effort to maintain a century and a half of family control had just come undone when his son-in-law, Edouard Stern, abruptly left the firm after feuding with him. (David-Weill’s four daughters had no interest in following him into banking.)
So it was that on a fateful spring day, David-Weill summoned his partners to a hastily convened meeting in a conference room in the firm’s shabby offices on the 60th floor of 30 Rockefeller Center to lay out his vision for the future of Lazard. With his signature Cuban cigar, an Hoyo de Monterrey Epicure No. 1, wedged between his fingers, David-Weill declared in his French-tinged English that he intended to merge with rival banking boutique Wasserstein, Perella & Co., led by the rough-and-tumble mergers impresario Bruce Wasserstein.
He explained to a restive audience the rationale for the deal, which had been cooked up in the preceding few weeks. It would, he said, expand Lazard’s client base, boost its ability to work in capital markets and solve the firm’s succession issue by bringing in Wasserstein, whose career at First Boston Corp. in the 1980s coincided with the explosion of corporate mergers and made him the Wall Street equivalent of a rock star.
Then David-Weill ceded the floor to his partners, who rose up, one after another, to object vehemently. Wasserstein, known as “Bid ‘em Up Bruce” for urging his clients to pay high prices in takeovers, wasn’t Lazard material, they argued. His mercurial manner would scare away clients, said partners who had worked on deals both with and against him. Others felt that the merger would dilute Lazard’s riches. Despite having advised on some of the biggest mergers of the day, Wasserstein Perella was not very profitable, people who were party to the talks at the time say, with low average fees and a money-losing capital markets business.
The most pointed comment came from the first partner to speak, Gerald Rosenfeld, a mergers specialist recruited by Rohatyn from Salomon Brothers, where he was CFO, in 1988. Rosenfeld, who would leave Lazard the following year and is now CEO of Rothschild North America, declines comment. But several partners in attendance confirm his remark:
“This is the dumbest fucking deal I have ever heard.”
The merger, lacking supporters, died.
Today Lazard, a firm that seems perpetually in crisis, is once again on the verge of a deal that could transform it utterly. The 157-year-old partnership plans to sell shares to the public in a transaction that could come as soon as this month and promises to remove David-Weill’s family from ownership and control of the firm.
The story of the intervening eight years is complicated and rife with bitter ironies, and the stakes now could hardly be higher for the firm or for the family that has controlled it from inception.
By late 2001 a string of senior rainmakers, including Kendrick Wilson III, Steven Rattner and J. Ira Harris, had departed and Lazard had slipped from its commanding banking position, prompting a desperate David-Weill once again to reach out to Wasserstein. This time Wasserstein was available, having just sold his firm to Germany’s Dresdner Bank for some $1.4 billion. David-Weill wooed him to become head of Lazard, with broad powers over all of its operations.
The pair have done little since but feud. Last year their disagreements burst into the public domain, electrifying Wall Street and leading to a standoff that Wasserstein hopes to resolve by paying $1.6 billion to buy David-Weill out of the partnership. Some of that he can borrow. But $1.1 billion will come from an IPO and the sale of convertible securities, which Wasserstein has been preparing for by engineering a painful restructuring, slashing Lazard’s cost base and instigating a wholesale cultural revamping. Net income last year was $247 million, down 56 percent from its peak in 2000, according to Lazard’s IPO prospectus. Annual revenues, at $1.27 billion, have remained essentially flat since 2001.
David-Weill has deep reservations about taking Lazard public. He worries that the pressure to meet stock market expectations might cause bankers to push clients into ill-fated deals, compromising the firm’s fabled integrity. Most of Lazard’s working partners have approved the IPO, according to the prospectus, but many share the concern about independence. Many also worry about compensation. Post-IPO their pay will be determined less by the deals they bring in and more by the firm’s stock performance, over which they have less direct control. But the working partners had little alternative to casting their lot with Wasserstein, who, informed sources say, told them their bonuses depended on their support. (Wasserstein and other working partners decline to comment, citing the IPO quiet period imposed by regulators.)
“I don’t think that is the way Michel David-Weill wanted things to go, but he did not have much choice,” says Franck Riboud, chief executive of Groupe Danone, a French food company where David-Weill is a director. “At the end of the day, Bruce Wasserstein was called in by Michel. It was his decision, and he must live with it.”
David-Weill dismisses the public controversy with a Gallic shrug. “If I have one drawback in life, it is that I don’t know what regret is -- and hardly remorse,” he told Institutional Investor in a rare interview late last year, before Lazard launched the IPO (see box).
Yet surely the current situation at Lazard must test even his insouciance. The IPO will send David-Weill and his family out into the cold. But if Wasserstein fails to take the firm public by year-end, he must leave it. In that case, power will revert to David-Weill, who will be back where he was eight years ago, only with many fewer partners and far worse prospects than in those fraught days.
Rob Cox is the U.S. editor of breakingviews.com, the international financial commentary service based in London.
