Way Too Hot to Hold

Like baseball teams and ballet troupes, Wall Street investment firms are built around stars. Well known and well paid, cosseted and coddled, the stars eventually become almost synonymous with the institutions that employ them. Nowhere was this more true than at the elite investment firm of First Boston, where the duo of Bruce Wasserstein and Joseph Perella created a mecca for merger-and-acquisit ion advice. Owing largely to their prestige, First Boston was the busiest takeover player on Wall Street last year, handling an estimated 174 deals. Serving as masterminds in some of the biggest corporate struggles of the decade, the two men have sparred with raiders ranging from T. Boone Pickens to Carl Icahn and have invented strategies like the "Pac-man" defense, in which a raided company turns around and gobbles up its attacker. Almost every corporate battle in which they have been involved has become the stuff of high drama, from Du Pont's $7.4 billion takeover of Conoco in 1981 to Canadian Robert Campeau's current $5.5 billion bid to acquire Federated Department Stores.

But in one stroke last week, First Boston lost its takeover titans to two lures: greater freedom and, though each already makes about $6 million a year, bigger rewards. Wasserstein, 40, and Perella, 46, along with high-ranking Colleagues Charles Ward, 35, and William Lambert, 41, abruptly quit First Boston to start a rival firm. Adding to their employer's misery, they immediately began recruiting First Boston co-workers and clients. Their departure, while certainly the most dramatic Wall Street split in years, is only one episode in a broader upheaval and personnel shuffle taking place on the Street. In the wake of October's crash, hefty trading losses and a slowdown in business have forced investment firms to cut back their payrolls and curb their appetites for expansion. At the same time, the First Boston episode highlights an increasingly common Wall Street struggle between the traders who buy and sell securities and the dealmakers who negotiate and finance takeovers.

Wasserstein and Perella say they left First Boston after a dispute about strategy. The two, who served as co-heads of First Boston's investment-banking operations, failed to persuade their bosses to increase the firm's financial commitment to mergers and acquisitions. The two dissidents believed the statistics were on their side, since the highly profitable investment-banking group produced $850 million of the company's $1.3 billion in revenues last year. The two men wanted First Boston to devote fewer resources to the firm's trading side, since revenues from those money-losing operations plunged 47% last year, to $211.6 million, largely as a result of the drops in the stock and bond markets.

The rift between First Boston's top management and the two stars had been growing for months. Last July, Chief Executive Peter Buchanan, 53, launched a review of the firm's operations. While Wasserstein and Perella hoped that the study would spark a complete rethinking, the report called for "no fundamental change in strategic direction." Wasserstein and Perella chafed against the firm's policies, even though the men were given increased power and responsibilities only three weeks ago. Says Perella: "It was like being put in charge of the dining and engine rooms of a ship, while the guys at the helm keep to the old course."