1st Boston’s M&A; Chiefs Quit, Form Rival Firm : Wasserstein-Perella Defection a Blow to Company’s Investment Banking Unit
In a stunning defection that could threaten First Boston Corp.’s profits and standing as a top merger and acquisition concern, the firm’s two highly regarded investment banking co-heads and at least two other top officials resigned Tuesday and formed a rival company.
The resignations of Bruce Wasserstein and Joseph R. Perella, among the nation’s best known and respected mergers and acquisitions specialists, immediately raised questions about at least one major pending takeover deal and about the future strength and morale of First Boston’s bread-and-butter M&A; business, which accounts for as much as half of its profits.
Rival investment banking firms were said to be courting First Boston clients, while the two departing executives were believed to be working to lure those clients to their own new firm. First Boston, meanwhile, moved quickly to replace the pair by promoting two officials who had been under Wasserstein and Perella.
“It’s a major, major loss for First Boston,” said one rival investment banker. “I can’t believe they can replace them. There’s nobody with the reputation or visibility of those two.”
“Clearly Wasserstein and Perella are extremely well regarded individuals,” said Paul Baastad, financial services analyst for S. G. Warburg. “Their departure will have a meaningful, detrimental impact on the firm’s M&A; activities.”
The departures stemmed from a disagreement over the firm’s emphasis on merchant banking, a highly lucrative but risky activity in which investment banking firms facilitate mergers by acquiring stock in target firms or providing temporary financing.
New York-based First Boston, apparently concerned about the potential risks of merchant banking, concluded in a recent strategic study that it did not want to expand the activity as fast or as far as Wasserstein and Perella wanted. The two executives, along with two other high-ranking officials in First Boston’s investment banking group, said they formed a new merchant banking company, Wasserstein, Perella & Co.
“We have a different vision of the future of the business than is reflected in the conclusions drawn from the recent strategic study,” Wasserstein said in a statement.
“After 10 years of working together on over 1,000 transactions at First Boston, we felt it timely to set up our own firm,” Perella added.
The shake-up is yet another striking example of the upheavals on Wall Street as firms reassess their priorities following the devastating October stock market crash. A number of firms have curtailed or slowed expansion of merchant banking, which critics have described as the riskiest investment trend on Wall Street.
The risk comes from the firms’ putting up their own capital to support merger deals that may be overpriced and could collapse if the stock market or economy weakens, thus putting that capital--and the companies providing it--in potential jeopardy.
The shake-up also highlights the recent conflicts between superstar investment bankers, who had achieved immense power and multimillion-dollar incomes in the 1980s bull market, and the top managements at their firms, who now must cut costs and restrain the superstars’ risk-taking.
Tuesday’s departures come as First Boston, like some of its competitors, already is reeling from major losses stemming from the October debacle. The firm on Tuesday reported that its fourth-quarter profit fell 91.7% to $5.1 million, staying in the black only because of a one-time $80-million pretax gain from the sale of its interest in its New York headquarters building.
About 500 employees, or 10% of First Boston’s work force, may lose their jobs due to rising overhead costs and trading losses.
Made Some of Top Deals
The news also depressed First Boston’s stock as investors clearly saw the departures as worrisome. The firm is regarded as a leading bond trader, but its biggest profits have come from investment banking--and, specifically, M&A; work. Under Wasserstein and Perella, the firm has been involved in some of the biggest deals in American corporate history, including its role as adviser to Texaco in its $10.1-billion acquisition of Getty Oil Co. in 1984.
First Boston derives as much as half of its profits and a third of its revenue from M&A;, sources familiar with the company estimate. Overall, the firm ranked second last year in M&A; activity, with $55.1 billion in deals, compared to $63.5 billion at top-ranked Goldman, Sachs & Co.
In New York Stock Exchange composite trading Tuesday, First Boston shares fell $1.875 per share to close at $24.375.
Also leaving First Boston to join the new firm are Bill Lambert, a managing director who specialized in helping clients identify potential acquisition targets, and Charles G. Ward, a managing director and co-head of mergers and acquisitions who helped administer that department’s day-to-day activities.
First Boston officials refused to comment immediately on the departures but moved quickly in an attempt to repair the damage by naming two of the firm’s veterans, Richard H. Bott and James R. Maher, as new investment banking co-heads to replace Wasserstein and Perella.
Bott, a co-manager of investment banking, helped run the firm’s day-to-day activities in such investment banking activities as stock and bond underwriting and corporate finance. Maher, as co-manager of M&A;, ran the day-to-day activities of that side along with the now-departing Ward.
But Bott and Maher lack the reputations of Wasserstein or Perella--regarded as arrogant but highly successful--and it was unclear whether they can retain First Boston’s key investment bankers and clients and overcome what is expected to be a slump in morale, Wall Street sources said.
Others Expected to Leave
“Those that remain in the department are going to be viewed as the ‘B’ team, since Joe and Bruce are going to take the top people with them,” said one investment banker close to First Boston. He said that as many as eight or nine other First Boston investment bankers are also believed to be leaving to join the new Wasserstein Perella firm, at which Wasserstein will serve as president and chief executive and Perella will be chairman.
The departures of Wasserstein and Perella comes only two weeks after a management shakeup that gave the two greater responsibilities, presumably in a bid to retain them. The firm merged part of its corporate finance group and its real estate finance group into the investment banking department headed by Wasserstein and Perella.
The pair were reportedly close to leaving the firm last summer to join Lazard Freres & Co. until First Boston assured them that merchant banking would continue to play a major role there.
Investment bankers said that with their reputations, there was little doubt that Wasserstein and Perella could run a viable merchant banking operation and lure at least some of their First Boston clients. “They can make a few phone calls and get $100 million (in financing for deals) in 10 minutes or $500 million in half an hour,” one investment banker said.
The departures fueled speculation on the future of at least one major pending acquisition deal, Campeau Corp.’s proposed $4.2-billion takeover of Federated Department Stores.
Seen as Setback
First Boston, which has been Campeau’s adviser, refused to comment on whether it would retain that role, but a Campeau spokeswoman said Tuesday that “First Boston is still our banker.” However, Federated’s stock dropped $2.50 per share to close at $51.25 in NYSE composite trading Tuesday as investors interpreted the departures as a setback for Campeau’s bid.
In another takeover development Tuesday, Campeau amended an earlier suit in U.S. District Court in New York challenging Federated’s “poison pill” provision. It asked in addition that the court declare Delaware’s new anti-takeover law unconstitutional.
In response, Judge Leonard B. Sand sent a letter to Securities and Exchange Commission Chairman David S. Ruder asking for the agency’s comments on the issues raised by Campeau.
Staff writer Martha Groves contributed to this story.
FIRST BOSTON’S BIG DEALS
Completed through January; in billions
Advised Target
Effective Target Acquiror $ Amt. Jun. 1987 Standard Oil British Petroleum $7.89 Dec. 1985 Hughes Aircraft General Motors 5.12 Sep. 1986 Sperry Burroughs 4.80 Aug. 1987 Borg-Warner Acquisition Group 4.23 Apr. 1986 Texas Oil & Gas U.S. Steel 3.66 Jan. 1986 ABC Capital Cities 3.52 Mar. 1987 Celanese American Hoechst 2.82 Advised Acquiror Feb. 1984 Getty Oil Texaco 10.13 Nov. 1985 General Foods Philip Morris 5.75 Sep. 1985 Signal Allied 5.00 Nov. 1985 Am. Hospital Supply Baxter Travenol 3.80 Dec. 1986 Allied Stores Campeau 3.47 Jan. 1985 Carnation Nestle 3.00 Apr. 1986 MidCon Occidental Petroleum 3.00
Source: IDD Information Services
TOP 10 FINANCIAL ADVISERS, 1987
Ranked by value of all mergers and acquisitions handled. Dollar figures in billions.
Adviser $ Amt. Deals Goldman Sachs 63.47 134 First Boston 55.09 174 Morgan Stanley 42.34 120 Merrill Lynch 34.32 101 Shearson 25.63 164 Lazard Freres 24.25 44 Drexel 22.71 126 Salomon Bros. 21.86 76 Kidder Peabody 13.52 70 Dillon Read 11.17 42
Source: IDD Information Services
