May 8 (Bloomberg) -- Bruce Wasserstein, Stephen Schwarzman and Ken Moelis made their reputations on Wall Street by buying and selling companies. So why are they doing deals that Henry Paulson, chief executive officer of Goldman Sachs Group Inc., the king of takeovers, has so far resisted?

Wasserstein's Lazard Ltd., Schwarzman's Blackstone Group LP and UBS AG, where Moelis is president of investment banking, earned as much as $50 million advising hedge funds and corporate raiders on hostile takeovers and management shakeups in the past year, data compiled by Bloomberg show. While that's what some CEOs make in a good year, it's not enough to tempt Goldman, which has much more at stake helping companies that disdain hedge funds and raiders alike.

Goldman's mergers and acquisitions group raked in about $735 million in the first quarter, more than any Wall Street rival. The New York-based firm is the world's top merger adviser for the past five years, serving corporate clients including Walt Disney Co., General Motors Corp. and Knight Ridder Inc.

``Advising activist shareholders isn't a long-term business strategy that makes sense for Goldman Sachs,'' said Roy Smith, a finance professor at New York University who was the senior international partner at Goldman during the 1980s. ``They have a lot at stake with their client business.''

Wasserstein, Lazard's 58-year-old CEO, drew criticism from rival bankers last year when he signed on to help raider Carl Icahn in a campaign to split up Time Warner Inc., the world's largest media company. He defended the work for Icahn, 70, in a January television interview with Charlie Rose, saying it was consistent with his view of what bankers are paid to do: ``enhance shareholder value.''

Battle With Wendy's

``There's an old-school mentality about the risks to the franchise if they're perceived to be acting with activist investors,'' said Abner Kurtin, a partner at Boston-based hedge fund K Capital Partners LLC, who successfully lobbied Royal Vendex KBB NV, a Dutch department store owner, to sell itself in 2003. ``It's changing, but it's changing slowly.''

Goldman was on the other side of the Time Warner fight. Time Warner CEO Richard Parsons enlisted Gene Sykes, 48, the firm's co-chairman of M&A, as one of his anti-takeover advisers. Time Warner agreed in February to increase the size of a planned share buyback and cut $1 billion of costs, mollifying Icahn.

Blackstone, the New York-based buyout firm that doubles as a mergers adviser, wrestled with the question of whether to embrace shareholder activists. Blackstone decided to back Pershing Square Capital Management LP in its battle with Wendy's International Inc.'s management.

Pershing Square

``It wasn't without discussion,'' said A.J. Agarwal, 39, a senior managing director at Blackstone. ``We felt that the advantages for shareholders and our client outweighed the potential issues with being associated with a shareholder acting in an activist manner in this unique situation.''

Pershing Square's William Ackman won the contest and Wendy's agreed to spin off Canadian coffee chain Tim Hortons Inc.

UBS, Europe's biggest bank, formed an investment-banking group in July dedicated to winning advisory fees from hedge funds, including activists. Dan Snyder, owner of the Washington Redskins football team, recruited UBS to help in his battle for control of Six Flags Inc., the world's No. 2 amusement park operator. Snyder succeeded in December.

``Everyone on Wall Street is trying to figure out how to effectively cover hedge funds out of investment banking,'' said Craig Wadler, 36, who oversees UBS's U.S. hedge fund banking group in Los Angeles. ``It's a huge fee pool opportunity.''

BAA Bidders

Meantime, Paulson, 60, is trying to avoid damage to Goldman's reputation after the firm's buyout unit courted conflict by making an unsolicited approach to buy BAA Plc, the world's biggest airport operator. The advance was made less than two months after Goldman offered to help BAA fend off another bidder.

Goldman last month said it will continue to advise corporate clients on hostile bids and arrange debt financing. It draws the line at participating as an equity investor. Paulson declined to comment.

Goldman earns a fee from helping companies fend off unwanted advances from activists, said Jeffrey Ubben, the 44-year-old founder of hedge fund ValueAct Capital Partners LP. Ubben, based in San Francisco, seeks seats on the boards of companies ValueAct holds. He was chairman of Martha Stewart Living Omnimedia Inc. in 2003 and 2004.

Ubben is now campaigning for three board seats at Acxiom Corp., which rejected a $2 billion bid he crafted with the help of UBS in December. He said most of his deals are in partnerships with management and their boards.

Stumbling Returns

Hedge fund relationships offer more than just opportunities to work on hostile deals. A group led by New York-based Cerberus Capital Management LP agreed last month to buy 51 percent of General Motors' finance unit for $7.4 billion. Citigroup Inc., the world's biggest bank by market value, is advising Cerberus for a fee that hasn't yet been disclosed.

The $1.2 trillion hedge fund industry is taking up the corporate raider mantle to boost returns after the average fund gained just 9.2 percent in 2005. That's well below the annual average of 16 percent in the 1990s, according to Chicago-based Hedge Fund Research Inc.

About 90 so-called activist hedge funds now exist worldwide, up from 40 three years ago, according to Greenwich, Connecticut- based Taylor Cos., which invests in such funds. Besides Ackman's New York-based Pershing Square, they include Warren Lichtenstein's Steel Partners in New York, San Francisco-based Jana Partners LLC, run by Barry Rosenstein, and Robert Chapman's Chapman Capital LLC in El Segundo, California.

Morgan Stanley

Private Capital Management LP, led by Bruce Sherman in Naples, Florida, spearheaded a campaign that forced the $4.5 billion sale of Knight Ridder Inc., the newspaper publisher that was advised by Goldman and Morgan Stanley.

Morgan Stanley, the third-largest securities firm by market value, also is getting into the activist act. Last month, its investment arm publicly pushed for the elimination of a dual- class share structure at New York Times Co., whose shares fell 26 percent in the past year.

Morgan Stanley Investment Management isn't using its parent company's bankers as advisers -- and didn't hire any bankers at all. That isn't unusual in such situations. Bankers at Morgan Stanley typically steer clear of activists.

`Deal With Activists'

Ackman predicts that while investment banks will continue to steer clear of hedge funds that seek only a quick profit, some will gravitate toward investors who make a compelling case for longer-term change.

``Hedge funds are controlling more and more capital and greater and greater percentages of businesses,'' said 39-year-old Ackman, who got into the hedge fund business in 1993, after receiving a master's in business administration from Harvard Business School in Boston. ``Some banks will stay only on the defensive side, and some banks will decide for business reasons that it makes sense to align with certain hedge funds.''

JPMorgan Chase & Co., the world's No. 3 merger adviser this year behind Goldman and Citigroup, isn't biting. ``They're primarily interested in their own returns,'' said Dennis Hersch, 59, chairman of M&A at New York-based JPMorgan. ``Our focus is on helping corporate clients prepare for and deal with activists.''

Drexel Connections

UBS works with hedge funds in part because corporate clients crave knowledge about how various investors operate and sometimes use them as a source of financing, Wadler said. The Zurich-based bank has provided M&A advice and financing to hedge funds such as Highfields Capital Management LP. Like Lazard and Blackstone, UBS still derives most of its M&A fees from corporate clients. It sometimes advises companies targeted by activists.

``When it comes to activists, we choose very carefully which transactions to get involved in,'' Wadler said.

UBS's Moelis, 47, cut his teeth at Drexel Burnham Lambert Inc., one of the firms that broke ranks with the likes of Goldman in the 1980s to help arrange hostile takeovers. Wasserstein, then at First Boston Corp., did similar work.

Moelis worked in Drexel's investment-banking department in the 1980s and later moved to Donaldson Lufkin & Jenrette. He joined UBS in 2001 to build its investment bank after Zurich- based Credit Suisse Group acquired DLJ. Moelis wasn't available to comment.

UBS, which formed the hedge fund advisory group last year, advised Boston-based Highfields on an unsuccessful attempt to buy Circuit City Stores Inc., the second-biggest U.S. electronics retailer.

Time Warner

Blackstone prepared an analysis for Pershing Square that explained how to uncover hidden value in Wendy's by splitting up the company. In return, Blackstone agreed to tie a portion of its advisory fee to any increase in Wendy's stock. The shares are up 40 percent since Wendy's capitulated, giving Blackstone a gain of about $5 million. Schwarzman declined to comment.

Wasserstein's work for Icahn pitted him against the company he helped create in 1990, when New York-based Time Inc. bought Warner Communications Inc. He too tied Lazard's interests to the success of Icahn's deal, taking as payment a $5 million fee and a portion of the gains in Time Warner shares.

``In the cases of shareholder activism, such as with Time Warner, we believe that the shareholder suggestions would be of benefit to all shareholders and the corporation,'' said Lazard spokesman Rich Silverman. ``A higher stock price is in everyone's interest.'' Wasserstein declined to comment.

To contact the reporter on this story: Dana Cimilluca in New York at dcimilluca@bloomberg.net

Last Updated: May 8, 2006 00:33 EDT