Robert Lenzner, ContributorI'm trying to wise up 300 million people about money & financeFollow   (248)9/04/2000 @ 12:00AM

Assault on the House of LazardFRIENDS AND ENEMIES DISAGREE about which anecdote best captures the arrogance of Michel David-Weill, chairman and chief executive of Lazard LLC and the fourth-generation scion to rule one of the world’s richest private financial empires. Some say it was in 1998, at a meeting of the powerful partners who run Lazard’s many-tentacled operations, when he pointed at each in turn and declared: “I don’t need you. I don’t need you. I don’t needyou–and I don’t need you.”

Others say it was at the firm’s 150th anniversary celebration that year, when David-Weill ungraciously failed to thank Felix Rohatyn and Antoine Bernheim for their roles in building Lazard and enriching David-Weill himself.

Then there was the recent meeting with a big institutional investor that holds stakes in Lazard entities and complains of shabby treatment. David-Weill drew on a big cigar and blew smoke in the faces of his visitors for half an hour, declaring he had no interest in the concept of minority-shareholder rights.

Take your pick. For 23 years Michel David-Weill has run Lazard, its 2,750 employees and its mysterious labyrinth of interlocking investments, as if they were his private fiefdom. He has been obsessed with maintaining control, structuring holdings to insulate his power. He loses longtime allies rather than share power with them–star dealmaker Steven Rattner, even his own son-in-law Edouard Stern.

Yet for all the maneuvering, Michel David-Weill’s control over Lazard is threatened. Over the years he has alienated legions of partners and investors. Now an outside provocateur, French industrialist Vincent Bollor hopes to tap the antipathy as he pushes to break up the Lazard empire and sell the parts to the highest bidder.

Bollor says Lazard can’t survive in a world dominated by titans like Goldman Sachs and Morgan Stanley. He says David-Weill is mired in the past. “He’s locked in his character and his legend,” Bollor says. “His group may have problems to solve in the future.”

Far more than the House of Lazard is at risk in this battle of the rich. Assets worth $12 billion are controlled by four French families: David-Weill’s, whose holdings date back to the mid-1800s, and the families of three partners who joined the firm in the early and mid-20th century–Antoine Bernheim’s, Andr Meyer’s and Jean Guyot’s.

The Lazard firm itself is worth perhaps $5 billion. Other holdings include $1 billion of prime real estate in Lyon and Marseille; a $1 billion stake in Generali, an Italian insurance company; and a $1.2 billion piece of the Danone food and beverage company. The Lazard name alone is worth a lot; the firm has advised statesmen, billionaires and blue-chip corporations. Recent mergers on its scorecard: Warner-Lambert and Pfizer, Seagram and Vivendi, Saatchi & Saatchi and Publicis. Lazard is the world’s largest remaining private investment bank and holds $600 million of capital.

It is quite a fight: Bollor, 48, the fierce, self-made dealmaker who assembled a portfolio in shipping, manufacturing and tobacco with combined sales of $3.5 billion, versus David-Weill, 19 years older, the supercilious aristocrat who professes to be unconcerned by this arriviste.

Bollor has brashly assembled a 31% stake in Rue Impriale de Lyon, which indirectly controls 17.4% of Lazard. Bollor’s piece of Rue Impriale is almost twice the size of David-Weill’s stake. It

cost him $350 million. David-Weill, however, has the reins in hand: With his allies, he controls 61.6% of the votes in Rue Impriale. The assets are laid out in a honeycomb of cross-ownerships, holding companies and indirect stakes (see chart). It is by this means that David-Weill, with a net worth that we estimate at $2.2 billion, has controlled businesses worth five times as much.

By itself Bollor’s minority stake in one of these holding companies does not threaten David-Weill. But there are other cracks in the empire, and the outsider hopes to exploit them. The investment banking business is booming, but Lazard isn’t getting its share. In the global-merger advice business, Lazard’s share is down by almost half in two years, to 7% today. In the U.S. it ranks 13th in advising acquirers and 16th in defending targets through the first six months of 2000; ten years ago, it ranked 4th in both categories.

The firm still stings from $100 million in fines, legal and other costs to settle charges of illegal profit-skimming in municipal bonds in the early 1990s. A Lazard fund foolishly invested in overvalued retirement communities and saw the fund’s assets decline by $300 million.

All of this happened on David-Weill’s watch. But he says these problems don’t matter because the firm is thriving: It claims to have $400 billion in pending deals, and pretax profit could hit $600 million this year (flat with 1998).

“The big firms can’t change because they are based on fragile markets and excessive paychecks. The only satisfaction they give is money,” he says. “We can do anything we want because we are small and not at the mercy of the markets.”

David-Weill dismisses Bollor as an opportunist, but he may be underestimating his adversary. Bollor is counting on a cast of resentful characters to help shake up Lazard. His personal financial adviser is 76-year-old Antoine Bernheim, a retired partner and the patriarch of one of the four controlling families atop the Lazard empire.

Until now Bernheim has sided with David-Weill, but his loyalty may be wavering. He is said to have felt slighted at the 150th anniversary dinner, and Bollor may be able to exploit the simmering resentment. (David-Weill dismisses Bernheim’s feelings about the dinner as growing sensitivity in his old age.) Bollor also has a potential ally in UBS Warburg, one of the world’s largest investment banks. It owns pieces of three Lazard companies and complains that David-Weill has disregarded its interests and the interests of other shareholders. So far David-Weill has turned a deaf ear to such complaints.

“He was unhelpful and incredibly arrogant,” says an institutional investor who recently met with David-Weill. “He lit up a humongous cigar and puffed it in our faces for half an hour. He really dismissed us as totally unimportant … and we had been large shareholders in his companies for years.”

The Lazard chief faces challenges even in his own ranks. At Lazard’s money-management division, which handles $75 billion in client assets and throws off more than $100 million in annual profit, lead partners Norman Eig, Herbert Gullquist and others are restless. As shareholders in a spun-off portfolio management firm, they would have an equity stake in their results.

David-Weill shows no sense of urgency about his problems, which has led people to see him as isolated, a casualty of his own high-handedness. Behind his back, they call him the Sun King–after Louis XIV, whose absolute monarchy lasted for 72 years.

“Objectively, Michel is the landowner and everyone else is a tenant farmer. They get rich, but they’re still tenant farmers,” says Jean-Claude Haas, a senior partner in Paris. (Haas hastens to add that David-Weill has never acted or talked that way.)

David-Weill knows how to live royally. In New York he owns a Fifth Avenue apartment that once belonged to CBS founder William Paley. His weekend estate is a chteau on the North Shore of Long Island. In France he lives in an 18th-century house in Paris and has a villa at Cap d’Antibes, where he takes much of the summer off.

He gives generously to charity, building churches for the Mexican community in California and funding art museums in the U.S., France and Britain. He has a sharp eye for art, relying on his own expertise to invest in Renaissance paintings, old masters and medieval objets d’art.

All that overhead requires a steady income, and each year David-Weill and his wife, four children and sister take out about $100 million, 20% of Lazard’s 1999 profits. This is more than 50 times what a junior partner receives.

Yet in a firm famous for killer dealmakers of decades past–the ruthless Andr Meyer in the 1950s to the 1970s; the statesmanlike Felix Rohatyn in the 1970s and 1980s; and Steve Rattner, along with a number of other senior bankers, in the frenzied 1990s–David-Weill has never been known for his M&A work. He came to his lofty position the old-fashioned way: inheritance. He then built up the family business with hefty pay for his hired guns, influential contacts in government and a politician’s ability to navigate among Lazard’s three autonomous offices in New York, Paris and London.

The Lazard lineage goes back a century and a half. In the 1840s two Frenchmen, Alexander and Simon Lazard (the frres in Lazard Frres), left Alsace-Lorraine for New Orleans, where they put a fortune–$9,000–into a dry-goods store. It burned down, and in 1849 the brothers moved to San Francisco to ride the gold rush. They set up a gold-export firm and brought in a cousin as their bookkeeper: Alexander Weill, Michel’s great-grandfather. By 1870 the Lazards had offices in three countries. Like the Rothschilds, they began to deal in foreign exchange.

Alexander’s son, David Weill, was named a partner in 1900 and became a famous French financier and philanthropist. To celebrate his prominence he changed his name. David Weill was now David David-Weill (pronounced “dah-veed-VAY”).

David’s son Pierre became a senior partner at Lazard, as well, in 1927. Pierre spent most of World War II in New York, separated from his wife and children. Young Michel, his sister Eliane and

his mother, unable to obtain U.S. visas, hid from the Nazis in a small French village during the war, living under assumed names. Michel’s half-brother died in a concentration camp.

Michel’s grandfather died in 1952; his father, in 1975. Today Michel David-Weill says he has no close personal friends. “If he had two friends, they were his father and his grandfather,” Paris partner Hubert Heilbronn says. “He was close to them, he idolizes them.”

Michel joined Lazard Frres in 1956, at age 24, after graduating from the Lyce Franais in New York and the Institut des Sciences Politiques in Paris. He took five years to become a New York partner; by then Andr Meyer had built Lazard into a force almost as potent as Goldman and Morgan Stanley. Meyer grew ill in 1977, but his heir apparent–Felix Rohatyn–didn’t want the job. So David-Weill took it; he was 45.

David-Weill and Rohatyn worked together for the next 20 years. Michel calls it “a marriage.” Maybe it was a marriage of convenience. Rohatyn ran banking and won renown for handling acquisitions for United Technologies, ITT, Warner Communications and RCA. David-Weill controlled the money. He decided who made partner and set compensation–and kept it secret. “I had the freedom of not being in the limelight,” he says.

But when Rohatyn left in 1997 to become the U.S. ambassador to France, David-Weill lost the velvet glove to his iron fist. He had already brought in his brilliant but abrasive son-in-law, Edouard Stern, as a potential successor, but Stern clashed with David-Weill and other partners. The son-in-law left the firm in 1997 and accused David-Weill of reneging on his severance package. Stern drafted (but never filed) a nasty lawsuit and walked away with millions.

David-Weill turned to Steve Rattner to help him run Lazard, but they later tussled over issues of structure, management and power. While discussing how to merge the New York, Paris and London houses, David-Weill was overly concerned with not diminishing his role or appearing to do so. For example, when

Rattner suggested his new title be president of Lazard Frres in New York, David-Weill said: “You can’t have the title of president. All my friends will think I’ve retired.”

The firm’s star banker took the title of deputy chief executive and set out making fixes that, in essence, threatened to undercut David-Weill’s control. He threw out David-Weill’s secret compensation arrangements and published every partner’s take at the end of the year.

Another tension point between David-Weill and the New York partners: the hefty 15% profit cut that David-Weill took from the New York unit, which accounts for 60% of firm earnings. Felix Rohatyn, who had built the U.S. franchise, took only 5%. On this point Rattner and the partners won: David-Weill agreed to cut his portion from 15% to 10%, still pretty rich. But mostly David-Weill resisted Rattner’s changes. Fed up, Rattner quit last February to set up his own private equity firm, Quadrangle Group. He took three Lazard partners with him. Since 1997 9 of 11 senior bankers with large equity stakes have left Lazard in New York, as well as the senior rain-maker in London. The 67-year-old David-Weill’s take on the defections: “Once you’re no longer the future, people begin jockeying for position to be the future,” he says. “Instead of getting along, they exclude each other.”

Into this dissension came Vincent Bollor. He began buying shares in Rue Impriale early last summer, paying the equivalent of $700 a share; they sell at $1,950 today and have a book value of $2,900, Bollor says. David-Weill became furious. He invited the raider to his villa on the Mediterranean. “You have made a bad investment. You should sell back the shares,” he scolded, as Bollor recalls it. Bollor returned to Paris and raised his stake in Rue Impriale to 31% over the past year.

David-Weill countered by adding ten years to a voting agreement between him and the chief partners in a holding company, Haussmann Percier, that represents the interests of the four families controlling Lazard. Among those going along: Antoine Bernheim, Lazard partner and Bollor’s mentor. Apparently he isn’t ready to betray the Lazard chairman just yet.

Bollor is undeterred. “I’m not impressed by agreements. You can break an agreement,” he says. He recently reached out to Bernheim, agreeing to let Bernheim vote Bollor’s stake in Rue Impriale for one year. That won’t stop Bollor, however, from buying still more shares of Rue Impriale–and that is what he plans to do.

Three other holding companies in the Lazard pyramid are publicly traded and they, too, provide a tinderbox for dissent. A common thread: depressed share prices, reflecting the fact that profits tend to be reinvested elsewhere in the pyramid rather than be paid out as dividends. “The empire is not being ruled justly and fairly,” says lawyer Sophie L’Helias, who represents clients with minority interests in Lazard properties. “David-Weill and his henchmen use holding companies to enrich the partners of Lazard at the expense of the shareholders.”

UBS Warburg owns parts of three Lazard vehicles: Immobilire Marseillaise, which holds real estate and a stake in Eurafrance; Eurafrance, which has insurance holdings and a stake in Azeo; and Azeo, which holds investment partnerships and a stake in Lazard. The three trade at discounts of as much as 59% to liquidating value. UBSWarburg hopes to force a merger of the three firms or, failing that, significant share buybacks.

“We have a mission, some might say, to see all of the anomalies you have in Europe just disappear, with shareholders getting a fair price,” says Jon P. Wood, a managing director in UBS Warburg’s equities division. The need for Lazard’s shell-game structure will disappear when European stock markets “grow up” and get “grown-up rules,” he says.

Wood says Bollor is “a very interesting character, and he certainly supports the concept behind what we’re trying to do.” They have been in touch.

In June UBSWarburg requested that Azeo open its books to facilitate an outside bid for the company. At the Eurafrance shareholder meeting slated for December, UBS Warburg will agitate for a narrowing of that company’s discount.

David-Weill will be ready. He is also Eurafrance’s chairman, and late last year he imposed another obstacle, this one a poison-pill-like scheme to thwart any unwanted takeover of Eurafrance.

Inside Lazard, no one is directly challenging David-Weill’s rule, but he works overtime to tighten his grip. This year he merged Lazard’s Paris, New York and London units, gaining more direct control over those businesses. He formed a new seven-member executive committee, with himself as chairman, three New York partners, one from London, one more from Paris and one representing the rest of Europe.

But he went a step further. During the merger he won an understanding with his top partners that he will not have to name a number two man at the firm for five years, and that he can remain chairman for the rest of his life. To insure these edicts come to pass, David-Weill formed a ten-member supercommittee.

It has never been disclosed outside the firm that the executive committee reports to this supercommittee, also chaired by David-Weill. David-Weill has a seven-vote coalition on the supercommittee from representatives of Lazard Frres in Paris, Azeo and Eurafrance, all loyal to him. In effect, David-Weill reports to himself.

What does Bollor really want? He could sell out his position in Rue Impriale and pocket handsome profits. But he insists he has a more radical end in mind for Lazard: Break it up.

Michel David-Weill has no such drastic plans. He hopes to entice Felix Rohatyn, 72, to rejoin the firm after his ambassadorship ends in France, but Rohatyn is reluctant to do so.

What about younger talent? Stock options would lure them–if Lazard were publicly traded, and better still if its corporate structure were clearly aimed at maximizing shareholder value. That would call for consolidating the investment bank with its affiliates and issuing stock. But David-Weill opposes going public and says only, “We may have to change our means of compensation. Pay in money and also in hope.”

Can a big investment bank in this day and age stay private and convoluted in structure and still keep growing? “My only wish for the firm is to survive and prosper,” says the chairman. “It’s an opportunity for our partners to be independent and not a cog in a machine.”

Independent? Of whom? The Sun King’s reign is teetering. Vincent Bollor may yet have his day.