Wasserstein Perella: The Rise And Fall And Rise?

In many ways, Wasserstein Perella & Co. seems the archetypal Wall Street story of rise, decline, and fall. Started in February, 1988, by Bruce Wasserstein and Joseph Perella, defectors from First Boston, "Wasserella" became one of the most successful investment banking boutiques of the past decade.

But in late 1989, the bad news began. The huge Federated Department Stores Inc. buyout that Bruce Wasserstein advised on began slipping toward bankruptcy. Then, last January, former client Interco Inc. threw an $89.5 million malpractice suit at the firm for giving bad advice, which Wasserstein is fighting. And its role in the deal business has shrunk from third in 1989, according to Securities Data Co., to 10th in the first half of 1991. "Wasserstein Perella was like a solar eclipse that is startling in its brilliance but passes away quickly," says one delighted competitor.

'BREATHING FIRE.' Wasserstein's rivals may be writing him off too soon. He's fighting back with the same aggressiveness that he made his name with. Rather than scale back his ambitions and cut costs, like his better-heeled competitors, he is forging ahead with a broad-based global expansion strategy. The firm just hired high-priced talent in Europe in a concerted effort to establish a stronger presence. Somewhat belatedly, it is diversifying into underwriting. "Bruce still comes into the office every day breathing fire," says a colleague.

As confident and ebullient as ever, Wasserstein denies that past mistakes have hurt business and points to a recent flurry of activity not yet reflected in the deal standings. He says his company advised on 10 deals worth $2 billion in the last two weeks. That includes two high-profile assignments reported on July 22: representing Cetus in its stock swap with Chiron, and Amev, the large Dutch insurer, in its bid for Mutual Benefit Life Insurance assets. "We had two deals that went wrong," Wasserstein says, referring to Federated and Interco. "But we had three deals that were the best deals ever--Beecham and Smith-Kline, Philip Morris and Kraft, and Georgia Pacific and Great Northern Nekoosa. The fact of the matter is, we're doing O.K. to better than O.K."

Yet the question remains whether Wasserstein Perella has overcome perhaps its most intractable problem: Wasserstein himself. Many press articles have reported criticism of his deal tactics by shareholders, clients, and the courts. He has been accused, for example, of putting his own interests ahead of his clients'. A spokesman says that "obviously criticism never helps." But since the firm has a strong client base and all operations are profitable, he adds, "Bruce's reputation must be an asset."

Some associates say he is working to dispel his negative image. "Bruce has realized he is mortal," says an executive with Nomura Securities, the large Japanese securities firm that bought a 20% equity stake in Wasserstein Perella in 1988 for $100 million and is having its own image problems these days. "His business is under extreme pressure, and he has to change his arrogant attitude."

When Wasserstein Perella began in 1988, the cockiness seemed justified. Its partners' goal was nothing short of breaking into the ranks of Goldman Sachs and Morgan Stanley to become, as Wasserstein put it, the "Lazard Freres of the 1990s," and they nearly succeeded. The idea was to shun capital-intensive trading and be a classy, old-fashioned partnership that lived off its close advisory relationships with the captains of industry. Wasserstein Perella jumped into the leveraged buyout business as well, with a $1 billion fund.

SHRINKING MARKET. Profits were strong for the first 18 months. But in late 1989, the deal business fell off a cliff. Most Wall Street firms cut back their mergers and acquisitions departments and started building up their trading and underwriting departments. Not Wasserstein Perella. With the exception of its foray into junk-bond trading, it stubbornly remained an M&A firm focused on an ever-narrowing market--advising on big, hostile deals--that barely exists today.

The numbers tell the story. Through mid-July, 1991, Wasserstein Perella advised on only 10 deals, earned no disclosed fees, and had a 5.1% market share (chart). That's down from 56 deals in 1990, which earned $40.6 million in disclosed fees and garnered a 20% share. The firm squeaked in at 10th place for this year's first half by working on $8.4 billion worth of deals. But $7.4 billion of that was due to its tenuous involvement in Matsushita's purchase of MCA Inc. The Japanese staff at Wasserstein's joint venture with Nomura was a secondary advisor to Matsushita.

The jury is still out on how well Wasserstein Perella's LBO fund will perform. In its haste to score the biggest LBO in Britain, it tied up a big chunk of its $1 billion fund in Isosceles PLC, a supermarket chain that its management is trying to upgrade. While there is talk that the firm might sell its 40.2% stake next year, its $340 million investment is more than double Isosceles' current market capitalization, says a Salomon Brothers analyst. KDI Corp., a conglomerate it bought with management in 1988 for $260 million, had to be restructured this year. Wasserstein Perella ended up losing its $10 million equity investment. Wasserstein says the fund's three other deals are going well. "We continue to do well as principal investors. We think we have major, built-in profits."

The firm has been aggressively trying to break into investment banking in Europe, but with negligible success. Unlike its U. S. rivals, Wasserstein hasn't shown up on listings of big European M&A players. In April, 1990, it teamed up with Banque Paribas, Germany's Commerzbank, and Holland's Amro bank, to create the $344 million European Mezzanine Fund. They bragged that it was the largest such fund in Europe. But to date, not one cent has been invested.

STILL HIRING. The European slowdown has lost the firm some talent. Last April, Jean-Luc Biamonti, who ran the firm's Paris office, quit to become vice-chairman of Credit Lyonnais' investment subsidiary. In July, No. 2 Yves Alexandre quit to go to Goldman Sachs. Both say they resigned on good terms.

Lean times have increased tensions within the firm, over which Wasserstein maintains tight control. He has been cutting compensation but has steadfastly resisted reducing his staff of 120 professionals and 120 support people. Indeed, he says he is even hiring. "There's a lot of ego at stake," says a competitor.

Wasserstein insists the good news far outweighs the bad. The firm's junk-bond business, started in mid-1989, has been lucrative. The 12-person trading desk makes money trading for clients and itself. Clients give it high marks. "It's pretty neat that you have a small firm in there that competes with much larger, better-capitalized competitors" such as Salomon Brothers and Merrill Lynch, says Dan Harmetz, a portfolio manager at Fidelity Investments.

The firm now hopes it can leverage this into expanded trading and underwriting. It hired Luis Mendez, a well-regarded trader from First Boston, to build its underwriting capability. And Wasserstein Perella recently got its first assignment: underwriting $50 million of the $2.7 billion Time Warner rights offering.

Time Warner isn't the only longstanding client that seems to have stayed loyal to Wasserstein Perella. Philip Morris, which hired Wasserstein for its 1988 takeover of Kraft, says it would hire him again if the situation merited it. "We maintain an ongoing relation with Bruce Wasserstein, as we do with other investment bankers," says Hans Storr, the chief financial officer of Philip Morris.

To revitalize his European operations, Wasserstein is recruiting local talent. The new team includes Lord Haslam, the ex-chairman of British Coal, British Steel, and former deputy chairman of ICI, and Sir Peter Levene, ex-head of procurement at Britain's Ministry of Defense. In Italy, Franco Reviglio, a former finance minister, just joined. And in Germany, Helge Petersen, who ran the Thurn & Taxis empire how strong Interco's case is against Wasserstein. And most analysts agree that the firm will need a turnaround in the deal market or lots of staying power for its diversification strategy to bear fruit. But in the words of a competitor, "the one thing about Bruce is, you can never count him out."

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