At Wasserstein, Lbo Stands For Lumbering Buyout Operation

Moments after Maybelline Inc. announced on Sept. 21 that its earnings would fall short of expectations, phones started to ring at the New York headquarters of Wasserstein Perella & Co. Angry investors in a Wasserstein leveraged buyout fund that had controlled Maybelline were calling to complain. Their beef: A few days before the announcement, when Maybelline had been trading at nearly $30, Wasserstein distributed the fund's Maybelline shares to its investors--taking for itself a big chunk of the investment's gain. But as they watched Maybelline stock plummet to $18, the investors cried foul.

Less than 24 hours later, Wasserstein agreed to recalculate the basis on which its management share was doled out, in effect handing an estimated $10 million back to its investors. That has mollified some of the big institutions in the fund. But it hasn't ended the contretemps. Many investors complain that Wasserstein botched the entire process by dumping more than 10 million shares of a thinly traded stock on them all at once. Doing so just before Maybelline cut its earnings forecast, says one investor, "was either stupid or devious. I don't have enough facts to judge, but I'm not fully satisfied with the process."

Michael J. Biondi, a Wasserstein managing director, denies any ill intent: "I like to think we were unlucky. We believe we have done everything we can to treat our investors fairly." But the Maybelline episode is another black eye for Wasserstein's ill-starred buyout fund, which has produced meager returns for a blue-chip list of investors who ponied up $1.05 billion in the late 1980s (table). Though Wasserstein says the fund's annual return is in the low teens, many investors say it will be lucky to reap annual returns of 5% to 10%--far below the 25% to 50% annual gains notched up by many buyout firms. Some investors are more pessimistic: "Limited partners will be lucky to get their money back," fumes a manager at one investor. Insiders say there is the threat of imminent legal action over the accounting of profits, a rarity for a private fund.

That's a long way from the heady days of 1988 and 1989, when Wasserstein raised the buyout fund. Then the hottest name in merger-and-acquisitions investment banking, Bruce J. Wasserstein's firm had no trouble convincing investors that its M&A expertise would enable it to snap up the best deals.

It didn't work out that way. The fund started deep in a hole in 1989 with a $350 million investment in Isosceles PLC, a British supermarket chain that turned sour within a year. And with the collapse of the high-yield bond market, deals became scarce by late 1990. Former Wasserstein employees say that the firm compounded the problem by treating the buyout fund like a stepchild: Only a few staffers were assigned to run the fund; investment bankers were supposed to help out part-time, but the awkward arrangement didn't work well.

What's more, sources close to the fund say the number of potential deals was small because investment banking firms wouldn't bring their best ideas to Wasserstein, seen as a rival. Moreover, they say, Wasserstein lacked the capital during one period to contribute to the investments as required by the partnership. That may be why the fund didn't do a single new transaction during one 31/2-year stretch. Randall J. Weisenburger, who now runs the Wasserstein fund, says the firm had plenty of capital and adds that the firm has had no problem finding deals.

SELECTIVE BUYING. By the time its investment period ended in August, the Wasserstein fund had put about $900 million into only seven deals. The record: Two were disasters, a third is still struggling, and the rest are winners. Meanwhile, Wasserstein was getting about $12 million a year in management fees. And it reaped hefty fees acting as an investment banker to the fund. Selling bits of Wickes Cos. (now Collins & Aikman Group Inc.) netted at least $30 million in fees for Wasserstein.

Of the seven deals, Maybelline was by far the biggest success. By the time the cosmetics company went public in late 1992, the Wasserstein fund had already recouped a sizable chunk of its $155 million investment. But in recent months, says Weisenburger, some of the fund's investors have wanted to increase their liquidity. Maybelline seemed the obvious choice, and Wasserstein decided to distribute the stock to investors rather than sell it in a secondary offering.

Bad timing. Maybelline had been counting on growth in its new Revitalizing line of cosmetics. But late this summer, sales started to slow. Weisenburger says his firm didn't know about the slowdown until its executives were briefed by management on Sept. 20, two business days after the shares had been distributed. Most observers agree that the sequence of events was embarrassing but don't believe Wasserstein intentionally tried to cheat investors. "The timing sure looks bad, but they're just not that stupid," says a manager at a big investor not involved in the situation. And Wasserstein's Biondi insists that the firm realized it had made a mistake and moved to fix it even before investors began complaining.

CREDIBILITY GAP. But some Wasserstein investors aren't sure that's the full story. With four seats on the board and control of the company, they figure Wasserstein was keeping close tabs on operations. Also, Smith Barney Shearson Inc. analyst Holly B. Becker had sniffed trouble. Relying on information from retailers and competitors, she realized that Revitalizing was slowing and downgraded Maybelline stock on Sept. 19, the day before Wasserstein says management gave it the bad news. (Becker won't comment.) "How could an analyst on the outside figure this out, but somehow Maybelline's management didn't know?" asks an executive at one fund investor. "It strains credibility."

One reason Wasserstein may have moved with such alacrity to assuage its investors: Investment bankers say the firm is trying to launch another buyout fund. Wasserstein has put out feelers to several firms that raise money for such funds, but so far it has no takers. "Based on their record, it would be very difficult for them to raise a fund in the large institutional market," says a banker at one such money-raising firm. One of Wasserstein's angry investors puts it more bluntly: "The idea that they're starting another fund is preposterous. It belongs in a Woody Allen movie."

With deal mania back in fashion, Wasserstein bankers are having a banner year anyway. They've advised on some of the biggest transactions this year, including Sandoz Ltd.'s purchase of Gerber Products Co. They may be learning, as critics point out, that there's a big difference between advising on deals and actually doing them.

            BIG BUCKS
              SOME INVESTORS IN
                              Commitment, millions
      DAIWA BANK                     $100
      REVERE EQUITY                   50
      SUMITOMO BANK                   25
      GEORGIA-PACIFIC                 25
      BANKERS TRUST                   25
      BANKAMERICA                     25
      EMERSON ELECTRIC                15
      DARTMOUTH COLLEGE               5
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