Behind the Lazard I.P.O.: Ego, Pride and Questions

Rumpled, ruthless, Bid ‘Em Up Bruce is right where he likes to be, in the midst of a hurricane of speculation.

When word leaked out in August that Goldman Sachs had been asked to explore an initial public offering of Lazard L.L.C., it sent Wasserstein watchers into overdrive. A Lazard I.P.O. would be the ultimate big deal, a career-topping, multibillion-dollar coming-out party for the elite private partnership that Bruce Wasserstein has headed since 2002.

It was also one more indication that investment banking was changing in ways that made Lazard and its practice of sending well-groomed alpha males to hold the hands of anxious chief executives somewhat out of time. It was evidence that political turmoil within the firm-most notably between Mr. Wasserstein and Lazard’s 71-year-old French chairman, Michel David-Weill-had reached an apex. And most importantly, it was a sign that 56-year-old Mr. Wasserstein was growing restless.

“Bruce is a deal junkie,” said William Cohan, a former Lazard vice president who is writing a book about the company. “It’s completely antithetical to the Lazard history, but it is what he does.”

“If they got an I.P.O. done, it would be a huge victory for Bruce,” added a former Lazard partner. “It’s what he wants, and it would leave him in control of the firm.”

Mr. Wasserstein, through a Lazard spokesperson, declined to comment, but his track record suggests that he was never one to be hampered by nostalgia. On the heels of his 1980′s deal-making heyday at First Boston, Mr. Wasserstein and his partner, Joseph Perella, launched the boutique banking shop Wasserstein Perella, which became (in)famous for its role in the R.J.R. Nabisco buyout. Mr. Perella left in 1993; Mr. Wasserstein went on to prove that he was skilled at cashing out at the top. Dresdner Bank bought Wasserstein Perella at the height of the 2000 market for $1.37 billion, netting Mr. Wasserstein a tidy $600 million profit. (In the words of one former Lazard employee, “He sold the Germans a bill of goods, for a lot of money.”) After the German giant Allianz took over Dresdner, there were the usual European-American wranglings over power and money. Mr. Wasserstein walked away, taking a fleet of top bankers with him to Lazard. (Many of them, including Mike Biondi, are some of Lazard’s mainstay dealmakers today.) Now, recovered from his $55 million purchase of New York magazine in December 2003, Mr. Wasserstein is on to the next-which might involve transforming the last, hallowed private partnership on Wall Street.

For as long as it has existed, Lazard commanded a special reputation for housing the brightest and the best and the best-paid. And, in a way, they had to. As other banks, the Citigroups and J.P. Morgans of the world, grew ever more gargantuan, they could offer one-stop shopping and plenty of capital to underwrite it all. Lazard, ultra-secretive and lacking a big balance sheet or armies of number-crunchers, had to rise above the fray.

“Their image was always one of dealing with C.E.O.’s and being brought in as ‘the trusted advisor,’ which is the designation that every investment banker aspires to,” said Ken Froewiss, a former Goldman Sachs and J.P. Morgan investment banker who now teaches at New York University’s Stern school. “The perception certainly was that, as opposed to other banks, where they might be scrambling around with large teams of juniors doing analytical work, Lazard was the firm of [Felix] Rohatyn, with people having one-on-one conversations with C.E.O.’s during times of change.”

Lazard was known for its merger advisory services: It advised Bank One on its $58.8 billion merger with J.P. Morgan Chase, for example, and currently appears sixth in the closely watched League tables for U.S. deals (up from ninth in 2003) and eighth worldwide. As M&A simmered down in recent years, the firm focused more on “high yield,” advising parties involved in bankruptcies like Worldcom and U.S. Airways.

“Their restructuring practice is involved in virtually every deal,” said a former Lazard analyst. “It’s a phenomenal name, and, of course, what that turns into is the network-they know all the investors, they know all the lawyers, they know where the bodies are buried. That was Lazard’s old M.O.-they knew everybody.”

“It always had this tradition of exceptional bankers who had exceptional relationships with their clients and wanted to be in a small, quirky, enigmatic, mysterious place that allowed them to benefit from these relationships,” said Mr. Cohan.

As a result, working at Lazard involved less of the face time and hierarchy common at the more soul-crushing investment banks, and the feeling was of being on the inside of an elite club.

“It was an incredible place to work,” said the former Lazard analyst. “It was probably the most entrepreneurial place you’ll ever come across. It was: ‘Here’s some rope-go make a lot of money or go hang yourself.’ Everyone who worked there got to do very interesting stuff. That was out of the norm-and that in itself was pretty rewarding. And then, of course, you got paid pretty well.

“If your group did well,” the former analyst continued, “you got paid. You didn’t have to worry about the branch down in South Dakota that lost money lending money to a tree farm, that you had to pay those folks.”

Pay was one of Mr. Wasserstein’s core principles. He wanted the best people, and he was willing to pour money all over them to keep them happy. Which is at the root of the epic battle raging between Mr. Wasserstein and Michel David-Weill.

After taking over Lazard, Mr. Wasserstein set out to corral star bankers from firms like Morgan Stanley and Credit Suisse. He brought in who was rumored to have been lured from Morgan Stanley by a multimillion-dollar four-year contract-not including stock. And there were many others.

On top of luring them with cash, there have been the generous bonuses paid to Lazard’s partners-bonuses that have been eating into the firm’s profits. Mr. David-Weill claims that Lazard lost $150 million in 2003, and Mr. Wasserstein says it had a profit of $250 million.

“By aggressively spending all this money to hire all these people, he paid a lot of money for a lot of people whose talent has yet to be proven in the marketplace. That’s why Lazard is now in a deficit position in terms of making money,” said Mr. Cohan, adding that some personnel investments have been worthwhile. “It’s a fact: Lazard isn’t making any money. Bruce is taking the position that it is making money. And these are accounting facts. Michel wouldn’t say it isn’t making money if it is.”

An I.P.O. of the company would relieve the tension by providing Mr. David-Weill with a graceful exit point-or by allowing Mr. Wasserstein to parachute into the sunset with a bag of gold chips. And it would stave off a coup, rumored to be brewing in the upper echelons of the firm.

But for a company such as Lazard, it would also involve tradeoffs, forcing it to open its books and its doors to nosy investors, and to answer to shareholders rather than merely an angry French patriarch. There would likely be a mass exodus of talent. Lazard would risk becoming- shudder -a bureaucracy. It would be a strange end to Mr. David-Weill’s family legacy. He opposed the idea.

“There are several issues-one is pride and ego and whatever,” said the former Lazard partner. “Michel brought Bruce into the firm and expected to get some deference and respect, and got none. Michel has nothing to gain from an I.P.O. Michel’s stake would be worth a lot of money, but he’s interested in things other than money.”

“Michel said recently that Bruce has had some successes, but he is not yet a success,” said Mr. Cohan. “I love that. I think the dispute between the two of them is sad, catastrophic-clearly not the way Michel would want to have it.”

There is a saying in French: The more things change, the more they stay the same.

Back in 2002, Mr. David-Weill hired Mr. Wasserstein, hoping to apply him like a salve to an ailing business that had burned through its share of heirs apparent, including his own son-in-law, Edouard Stern, and Steve Rattner, a partner who left Lazard in 2000. By the time Mr. Wasserstein arrived in the corner office in January 2002, Lazard was facing a drain of bankers and a brutal marketplace. As a result, Mr. David-Weill handed him an unprecedented contract giving him full control of the firm’s operations; the contract expires in 2006. Mr. David-Weill’s only leverage, through his influence with the board of directors, is indirect veto power over a sale or I.P.O. of the firm.

“I think the world of investment banking changed radically at the end of the 1990′s, with all the mergers among investment banks, and I think that Lazard suffered greatly, both in terms of talent drain, with Felix [Rohatyn] and [Steve] Rattner, and the whole Lazard diaspora taking place,” said Mr. Cohan. “When investment banks became institutions, with global brand names and global capabilities and infinitely sized balance sheets, Lazard suffered. It’s too big to be a boutique, and way too small to be a global, institutional, well-capitalized firm. That’s why Michel felt he needed to find someone like Bruce-and ultimately sell to someone like Bruce.”

Mr. Wasserstein’s scrappy Brooklyn roots and brash American ways seemed like a fitting complement to the European sophistication of Mr. David-Weill, whose Paris offices are said to resemble a Louis XIV salon and whose wife’s name appears in the finest social registers in Paris.

The Lazard lineage dates back to the 1840′s. Mr. David-Weill’s great-grandfather was one of the original founders of the company, which had its humble beginnings selling dry goods in New Orleans and later exporting gold in San Francisco. Young Michel attended the Lycée Français in New York, followed by the Institut d’Etudes Politiques in Paris, before joining the firm in his 20′s. He became a partner and, in 1977, took the reins of the company after Mr. Rohatyn declined the job. Mr. David-Weill held on tight until Mr. Wasserstein arrived on the scene in early 2002.

Despite the clash of egos playing out at the top, those in the industry say it might not be a terrible time to go public, although there is significant skepticism that Mr. Wasserstein will go through with it. Greenhill & Co, a pip-squeak of a firm, had a successful $87 million I.P.O. last May-although it pales in comparison to the $2 billion to $4 billion values bandied about in regard to Lazard. Then there was Goldman, which went public in 1999 to the tune of $3.7 billion.

“It probably would be a pretty good story, and now is the time to do it. The markets have been horrendous, but they look like they’re coming back,” said one analyst who covers the financial-services industry. “On the one hand, they would have a currency to pay their people, and more can participate in ownership of the firm. On the other hand, the brass ring at Goldman was always getting to be partner. It was like winning the New York State lottery. If you’re public, partner is less important.”

In the meantime, guessing what Bruce is up to will remain a part-time preoccupation for people fascinated by the Shakespearean antics of powerful men.

“I don’t know what he’s doing-if he’s there because he likes to work there, or if he’s trying to pretty it up and sell it to Credit Suisse or Deutsche Bank or something,” said the former Lazard analyst. “Which is sort of his whole M.O., right? Frankly, he may not be there to I.P.O. it. Or maybe he’s just there because he can make a boatload of money …. I guess he doesn’t need that, though.”