One of Wall Street’s most fascinating battles of ego in recent years ended with barely a whimper last month. The 157-year-old investment bank Lazard became a public company in an anticlimactic IPO that ended a two-year tussle for control of the partnership between master deal maker Bruce Wasserstein and Michel David-Weill, whose great-grandfather helped found the New Orleans dry-goods shop that evolved into the firm (Institutional Investor, April 2005).
The pair bickered almost from the day in 2001 when Wasserstein arrived at the storied firm and began spending heavily to recruit rainmakers with big bonuses and expand Lazard’s reach around the globe with new, and fancier, offices. The investments pushed the firm into the red and slowed the dividends that flowed to nonworking partners like David-Weill and his Parisian allies.
Lazard raised $855 million on May 5 by selling a third of the company to investors at $25 a share and raised an additional $950 million by issuing debt and convertible securities. With the proceeds, Lazard and Wasserstein bid adieu to David-Weill and his cohorts by acquiring their interests, equaling about another third, for $1.6 billion in cash, a big premium to the IPO price.
Although Wasserstein profited handsomely himself, converting an investment of about $30 million into some $300 million while gaining effective control of the firm, the deal has not been an unalloyed victory for him. Lazard’s shares dropped almost as soon as the underwriters, led by Goldman Sachs, let them out of the starting gate. As of June 6, Lazard stock was trading at about $21 a share. That happened despite Goldman’s efforts to prop up the price by buying back shares in the first days of trading; filings with the Securities and Exchange Commission reveal that Goldman lost $15 million in the process.
But the botched IPO didn’t just leave investors licking their wounds -- the firm is also dinged up. Lazard is in the process of whittling down its cost base by $100 million this year to bring its cost-to-income ratio closer to Wall Street standards.
To do this, Wasserstein has reduced the pay of many of the firm’s 185 managing directors, who were given slugs of stock before the IPO as recompense. A falling share price could hurt Wasserstein’s plans, forcing him to slow cost-cutting to avoid morale problems among his bankers. “This big cut in the compensation pie to create a profit at the bottom line means that the compensation levels are being artificially submerged,” says Samuel Hayes, a finance professor emeritus at Harvard Business School. “Like a rubber duck on top of a bathtub, you can push it down, but when you let go, it pops back up to the surface.”
There are already signs that internecine warfare might flare up again at Lazard. Earlier this month deputy chairman Gerardo Braggiotti resigned, insisting that Wasserstein had promised him he would be made head of European operations if he agreed to support the IPO plans. The promotion never happened.
Rob Cox is the U.S. editor of breakingviews.com, the international financial commentary service based in London.
