Barbarians at the gate: Wasserstein upsets the old guard at Lazard

Bid 'em up Bruce appears to have cut a deal with the chairman to float his investment bank. But the partners may have other thoughts, as Miranda McLachlan reports

Legendary Wall Street investment banker Bruce Wasserstein has pulled off many coups in his colourful career. But when the Lazard chief executive struck a deal last week with the merchant bank's chairman, Michel David-Weill, apparently paving the way for a $3bn (£1.7bn) flotation, it was seen as one of his greatest successes.

However, this agreement only papered over the cracks within the venerable bank. In the next few days, Mr Wasserstein has to sell the flotation plans to the working partners, who own nearly two-thirds of Lazard. It will take all of "Bid 'em up" Bruce's legendary skills to sell this deal.

Under the proposal, the capital partners, who own nearly a third of the shares, will be bought out with money raised through the flotation.

Mr Wasserstein's plans signal a potential turning point for the bank, whose complex ownership structure seems to have turned from a bonus to a millstone.

The firm was started by the three Lazard brothers in 1848 as Lazard Freres & Co in New Orleans. It moved to San Francisco during the gold rush a year later, shifted from dry goods into banking in the 1870s and 1880s, and developed operations in Paris, New York and London.

However, the group began to splinter into three along geographical lines, with a former incarnation of media group Pearson taking a major stake in the London operations in the early 20th century.

In 1984, Michel David-Weill, a descendant of the founding family, formed Lazard Partners, which owned stakes in the New York and Paris businesses and eventually bought back the London office from Pearson. The merged entity, formalised in 1997, now has 160 working partners with differing equity stakes, while Mr David-Weill and his associates are believed to hold more than half of the voting rights.

The new Lazard group has continued to focus on M&A and restructuring advice as well as its fund-management operations. However, doubts about the profitability of the group linger. Its focus on pure advisory work is in stark contrast to that of many of its investment banking peers, which have broadened their operations to provide other high fee-generating services such as debt financing. Goldman Sachs, for example, the last major investment bank to go public, has seen the share of its profits generated by pure advice fall from 32 per cent in 1999 to just 8 per cent today.

Another problem is that Mr Wasserstein made his reputation on big-ticket deals, and those have been far less common recently. Much of the work in the past couple of years has come from restructuring advice for companies, such as Parmalat, which are in trouble. But this type of work has been drying up. Some rival investment banks claim the Lazard chief has been prepared to take low fees simply to have the firm associated with high-profile deals.

Mr Wasserstein was appointed in 2002 by Mr David-Weill and the two strong personalities have been on a collision course ever since. At the heart of the conflict is Mr Wasserstein's estimated £50m expansion, with around 50 high-profile recruits being awarded guaranteed bonuses that are paid ahead of the capital partners' dividends.

The coup was carefully plotted, says one former senior Lazard executive. "Bruce has engineered a fantastic piece of political manoeuvring, in effect creating control of the com- pany for himself."

Mr Wasserstein "destabilised the existing power base of bankers and replaced them with new star bankers who report to him," he adds. The capital partners "are fed up because their income has been reduced".

But the chairman is unlikely to sell out without getting a good price for his direct 9 per cent stake and his indirect 15.8 per cent holding through his interest in investment firm Eurazeo, which has a stake valued at €720m. Some reports have suggested Mr David-Weill wants a price that would value the whole group at $4bn - well above market estimates.

Many hurdles must still be jumped, including getting the working partners' approval for a deal, settling on a buyout figure and then working out the structure of a potential float.

The meeting of working partners due in the next few days is unlikely to go smoothly. Many of the older partners are upset with their likely share of the spoils from a flotation, because some of Mr Wasserstein'srecruits, who were lured with equity stakes, will get a larger slice even though they have not been around as long. The old guard are also dissatisfied because they have enjoyed significant influence in the past.

One source close to the deal says there are "still many stars that have to be lined up correctly" before a float can go ahead. "You've got two larger- than-life personalities at the head of the group." The deal is described by the source as "semi-combustible".

The chairman and chief executive have also been at odds over Lazard's performance. Mr Wasserstein estimated Lazard's 2003 profit at just under$250m but Mr David-Weill argues that the group actually made a $150m loss once payments to partners were taken into account.

While the group is performing well in New York and Paris, in London it has been a different story, according to Lazard sources. Up to four directors and a couple of partners are believed to be heading out the door as a result of its poor performance.

The UK figures are unlikely to be helped by a landmark property deal entered into in 2002, in which Lazard rented 130,000 square feet of office space in Mayfair for a steep £70 per sq ft. The bank has also suffered from the loss of several UK fund managers.

Lazard has advised on just under $60bn worth of deals in the US this year, largely thanks to its involvement in the $55bn Bank One sale to JP Morgan Chase, according to US research group SNL Financial. This compares with $16.4bn worth of US deals last year, the largest of which was Manulife's $11bn acquisition of John Hancock Financial, and just $305m in 2002.

Lazard ranked as the sixth- biggest M&A financial adviser in the US between 1997 and 2004. It has $72bn of assets under management globally, but it is 80th in a ranking of top US asset managers, with $54bn under management there.

It is still not clear which parts of the group would be floated if the plan goes ahead, although it is believed the advisory and asset management operations would be included.

The director of SNL's financial institutions group, David Kungl, says that if the bank floated, "it would be a complex deal - whether it was carved up or sold as a whole".

Mr Kungl says he is surprised by talk of a flotation. "Lazard has been making headway in the advisory game but I would have thought they would want to build on their initial success first - but Mr Wasserstein is a man of action." He says a case could also be made for beefing up Lazard's successful fund management side with an acquisition before the group goes to the market.

Some rival bankers question whether the bank is merely being dressed up for a potential sale. Others think that is unlikely. "I'm not sure there are any buyers, even though there are always rumours that Lehman Brothers are looking," says one former senior Lazard executive. "It's a difficult busi- ness to have as a listed company," he adds, pointing to the volatile nature of advisory work.

A flotation prospectus will, no doubt, provide insight into how Lazard is performing. But first, the legendary Wall Street deal broker needs to convince his working partners of the need for change. Mr Kungl predicts it won't be easy. "Sparks will fly," he says, "but will Lazard float?"

KING OF THE MEGA-MERGERS: THE DEALS ACCORDING TO BRUCE

"Bid 'em up" Bruce Wasserstein is synonymous with the image of the brash, tough-talking Wall Street deal-maker.

The larger-than-life Mr Wasserstein, 56, who has more than 1,000 deals under his belt, has been associated with some of the most high-profile corporate takeovers of the past couple of decades.

Deals include the merger of Time and Warner Brothers (and its subsequent tie-up with America Online), Dean Witter's merger with Morgan Stanley, General Foods amalgamating with Kraft, the Beecham-SmithKline merger and the purchase of RJR Nabisco by the private equity firm KKR, then the world's largest buyout.

Mr Wasserstein entered broking in 1977 when he joined First Boston after abandoning a career as an attorney. He later became chairman and chief executive of his own investment bank, Wasserstein Perella & Co, before selling it to Dresdner Bank for $1.37bn in 2000 at the height of the stock market boom. The merchant bank thus created still bears his name - Dresdner Kleinwort Wasserstein.

If the chief executive of Lazard succeeds in getting it to market, the float will make the multi-millionaire another tidy fortune. Since he joined the bank in 2002, Mr Wasserstein has not been afraid of upsetting the "old guard" bankers loyal to chairman Michel David-Weill.

After his recruitment drive at Lazard, he is flanked by a swarm of new bankers, many of them former First Boston colleagues. David Kungl, a director at US research group SNL Financial, says Mr Wasserstein "is really like a brand name".