TCS Daily

Lazard Succumbs

By Andy Kessler - October 1, 2004 12:00 AM

The last of the closely held financial empires is about to give in to Wall Street's demands. Say it ain't so, but Lazard Freres may go public, or will die trying.

Lazard (the quaint Freres got dropped for obvious marketing reasons) almost defined global finance, spitting off huge profits, for the better part of 150 years. Like the Rothschilds, Lazard set up a loose confederation of companies in Paris, London and New York sticking to the high end of the business, merger and restructuring advice to big companies and managing money. Very snobby, white shoes type of investment banking. No retail offices in Milwaukee Manchester or Marseille pitching variable annuities to the gold chain and double knit crowd.

But that era is over. First off, Lazard has been left in the dust decades ago by the globalization of Citigroup/Salomon Brothers, Morgan Stanley, Goldman Sachs, JP Morgan of late, as well as fellow European firms CS First Boston and UBS. They all have offices everywhere and do cross border deals.

Worse, Lazard became so closely held it strangled itself. It's not without its squabbles between partners. All family partnerships must eventually die, or at least de rigeur mortis sets in. Lazard is still a boutique (an apt French name), petit yet effective. Wasserstein (bid 'em up Bruce from RJR Nabisco fame) took over after selling his last firm to the Germans and has turned Lazard into more of an American firm, with big bonuses to the big dealmakers. That is at odds with the quite un-American sounding non-working partners of Lazard. The chairman, Michel David-Weill, owns 9% of the firm, but also sits on top of French investment firm Eurazeo that owns another 16%, and between them, they control 6 of 11 board seats. When the minority is in control, you often get la revolution. All in, 36% of the profits get paid out to these non-working and minority controlling shareholders, in effect, sucking the blood out of a once vibrant firm, de rigeur indeed.

To make matters worse, it takes money to make money on Wall Street these days. Ask Goldman Sachs, who could no longer generate enough working capital internally. They trailed publicly traded competitors like Morgan Stanley and Merrill Lynch in how much capital they had under their belt, and tapped the public markets to keep up. They also were plagued by non-working partners, ex-bankers keen on taking their money out rather than re-invest in the business.

An IPO solves a lot of these problems. Wasserstein hopes for a $3 billion deal to make the last of the Lazards go away. (A minor sticky point -- I'm not sure I like investing in deals where the money goes to someone else.) Another boutique, Greenhill and Co went public in the spring at a huge value -- investors like profitable companies. But how profitable is Lazard? Who knows? Wasserstein claims they made $250 million last year, David-Weill suggests they lost $150. The $400 million question is how big of a bonus pool do they need to keep their talent. The discipline of an IPO, operating a public company and retaining earnings rather than draining it, may help Lazard return to their powerhouse days.

This is the modern Wall Street, where both smarts AND capital are required to generate returns, whether that's on Wall Street or in the real world. You can't have one without the other anymore. This deal may signal the triumph of the American shareholder financial model and a nail in the coffin of the elite European style. It should serve as a wake up call to other family businesses shy about tapping the public markets to shake off their mortis.

Andy Kessler is the author, most recently, of Running Money.


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