Lazard Profit Beats Estimates on Rise in Takeover Fees

Lazard CEO Kenneth Jacobs
Lazard, led by Chief Executive Officer Kenneth Jacobs, seen here, is looking for a rebound in takeovers to make up for increased spending to hire bankers. Source: Lazard Ltd. via Bloomberg

Lazard Ltd., the biggest independent merger adviser, reported third-quarter earnings that beat analysts’ estimates on higher revenue from advising on mergers and acquisitions.

Profit rose 18 percent to $62.2 million, or 46 cents a share, from $52.5 million, or 41 cents, in the same period a year earlier, the Hamilton, Bermuda-based firm said today in a statement. Profit surpassed the 42-cent average estimate of 10 analysts surveyed by Bloomberg. Operating revenue from mergers and acquisitions advice jumped 29 percent to $160.7 million.

Chief Executive Officer Kenneth Jacobs has added bankers as Lazard bets on a rebound in takeovers. The firm got a boost this quarter by advising on the merger of Continental Airlines Inc. and UAL Corp., and on $14.4 billion of transactions between Coca-Cola Enterprises Inc. and Coca-Cola Co., according to the statement. Asset-management revenue climbed 32 percent.

“We’re looking for a gradual improvement in M&A and you’ve been seeing that,” Chief Financial Officer Michael J. Castellano said in an interview today. “CEO and board confidence has recovered tremendously from where it was a year ago and the financing markets have gotten better.”

Jacobs, 52, was named CEO in November 2009 after the death of Bruce Wasserstein, the Wall Street dealmaker who took Lazard public in 2005.

‘Solid Quarter’

“Solid quarter and, more important, the outlook remains encouraging,” Douglas Sipkin, an analyst at New York’s Ticonderoga Securities LLC ,said in a note today. He has a “buy” rating on the stock.

Lazard rose 59 cents, or 1.6 percent, to $36.83 at 4 p.m. in New York Stock Exchange composite trading. The shares are down 3 percent for the year.

The quarter’s increase in revenue from takeovers cushioned a 45 percent drop from restructuring advice to $66 million, Castellano said. Operating revenue from asset management increased to $208 million. Lazard looks to that business to temper the swings in its advisory businesses. Asset management provided at least 35 percent of annual revenue from 2004 through 2009, according to data compiled by Bloomberg.

“The star here was asset management,” Chris Kotowski, an analyst at Oppenheimer & Co. in New York, wrote today in a research note. The unit’s operating revenue was 16 percent higher than he estimated.

Kotowski downgraded the stock to “perform” from “outperform” after it hit his price target. There is nothing to dislike about Lazard other than its stock price, he wrote, calling the shares “not cheap.”

Assets Accumulate

Assets under management climbed to $143.6 billion at the end of September from $123.5 billion in June this year and $120.2 billion in September 2009.

The firm gathered $1.1 billion of net inflows to the management business, which is about 84 percent equities, Castellano said. Year-to-date inflows are $6.2 billion.

“We continued a positive trend in an environment when many managers are seeing significant outflows,” Castellano said.

Compensation expenses rose to 59.7 percent of operating revenue from 58.2 percent in the same quarter last year, according to the statement. The latest figure exceeded the firm’s target of no more than 57.5 percent, spelled out in Lazard’s initial public stock offering prospectus in 2005.

The ratio has moved down this year as deal-making has picked up, Castellano said. For the first nine months it was down to 60 percent from 62.9 percent for the same period a year earlier. The firm expects new government restrictions on bigger competitors to hold down Wall Street pay, Lazard executives said in a July conference call.

Compensation Costs

Following an initial round of hiring after the start of the credit crunch, Lazard pruned its payroll to control compensation costs. The firm had as many as 154 managing directors in its financial advisory segment in March 2009 when it took a $63 million charge to cover staff reductions, according to company filings. At the end of June, Lazard had 131 managing directors to provide financial advice on deals, restructuring and raising capital, according to a report filed with the U.S. Securities and Exchange Commission.

The firm was the 10th-ranked financial adviser by the value of deals announced in the first nine months of the year, according to Bloomberg data.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE