Commentary: A Deal That Could Break The House

Dressing up Lazard for a $3 billion IPO is further weakening the fabled firm

Few locations in the world's corporate landscape have emanated such clout over the past five decades as a fin-de-siècle office building on the corner of Boulevard Haussmann and Avenue Percier in central Paris. This is the epicenter of the House of Lazard, or Lazard LLC, whose partners in Paris, New York, and London discreetly put together deals for such blue-chip clients as Italy's Agnellis, France's Groupe Danone food empire, and U.S. pharmaceutical giant Pfizer (PFE ). The bywords of la maison, as its chairman and major shareholder, Michel David-Weill, always calls it, were thrift -- partners were notoriously stingy -- and secrecy.

Those days, however, are quickly fading into history. "Now, there's a public fight over money and a public clash of egos," says Jean-Marc Espalioux, chief executive officer of Paris hotel group Accor and a sometime Lazard client. He's referring to the uproar over plans by Bruce Wasserstein, the brash New York dealmaker who took over as Lazard's chief in 2001, to take the venerable group public in a $3 billion initial public offering. The deal involves doling out around $1.2 billion to buy out David-Weill and other "nonworking partners," who now control 36% of the group's capital, and selling shares to the public early next year. The inability of Lazard's board to sign on to the initial public offering plan in an Oct. 5 meeting means Wasserstein will need to further refine his strategy.

Whatever happens now at Lazard, it is the end of an era -- and certainly the end of the fabled group's existence as one of the great investment banking partnerships. Lazard's mystique as power broker to a narrow corporate elite in Europe and the U.S. in fact wore off long ago. And it was never able to make the transition to a richly capitalized global money machine like Goldman, Sachs & Co. (GS ) or Morgan Stanley (MWD ). Nor was it able to flourish like privately held Rothschild, which has used good management and tight cost controls to carve out a profitable transatlantic investment banking business.

So is this Lazard's chance to clear out the elitist cobwebs and establish itself as a modern, well-capitalized player? Don't count on it. The goal of the IPO, some insiders say, is not to raise capital to expand the firm, as did New York-based investment boutique Greenhill & Co. when it raised $100.6 million in a public flotation last May. Nor is it to make Lazard a publicly quoted investment bank with quarterly reports and disclosures of executive compensation. Rather, it's the only way for Wasserstein, whose contract expires in 2006, to end a debilitating dispute with David-Weill. The betting is that an IPO would give Wasserstein breathing room to dress up the firm for a quick sale. Many critics believe he hopes to duplicate the successful $1.4 billion sale of the Wasserstein Perella & Co. investment boutique to Germany's Dresdner Bank four years ago.

But that may be a tough feat to repeat. Lazard's European business, which represents about 37% of revenues, could be hit if Vice-Chairman Gerardo Braggiotti leaves the firm over disputed terms, as he has threatened to do. One insider says Braggiotti has signed on to the deal. Still, the protracted power struggle and the fight over how much working partners will receive in the deal have created "terrible" morale inside the firm, according to one partner.

Moreover, Lazard will hardly be going public on a strong footing. Profits are weak, and drastic cost-cutting will likely be needed to bring expenses in line with rivals'. And to buy out David-Weill and others, the firm will add some $700 million in debt. Wasserstein has been paying top dollar to bring in new dealmakers, but Lazard this year slipped to 10th place in the global league tables -- from 6th in 2003. Once-loyal Lazard clients such as France's Vivendi Universal (V ) or Sanofi-Aventis (SNY ) now shop around for advisers. André Meyer, the French financier who transformed Lazard into a dealmaking powerhouse from the 1950s to the 1970s, is no doubt spinning in his grave.

By John Rossant with Emily Thornton

— With assistance by Emily Thornton

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