Commentary: Lazard's IPO May Be Hazardous

But the prospectus is so mind-bending, it's hard for investors to tell

Years of embarrassing controversies over convoluted financial reports should have taught companies and their legions of advisers to keep their messages to investors simple. Instead, some seem determined to make shareholders' lives complicated. Like Lazard.

On Apr. 11 the storied 157-year-old investment bank led by brash dealmaker Bruce Wasserstein filed detailed plans to collect about $1 billion from investors by going public. But the prospectus raises almost as many questions as it answers. The combination of Lazard's complex ownership structure and its apparent efforts to continue to be taxed as a partnership are problematic. The 205-page main filing also doesn't come clean until halfway through on whether the firm has made money after paying its managing directors. "This is one of the most complicated things I've ever seen," says Robert Willens, accounting analyst at Lehman Brothers Inc. (LEH ). Through a spokesman, Wasserstein and Lazard declined to comment, citing Securities & Exchange Commission restrictions ahead of stock offerings.

To be sure, coming up with a clear prospectus for a bank like Lazard is a challenge. It is one of the world's most secretive and byzantine investment banks. And unlike at other banking partnerships that have gone public, such as Goldman, Sachs & Co. (GS ), some Lazard partners plan to leave pronto. Indeed, Wasserstein wants to go public in part to buy out Chairman Michel David-Weill, scion of the firm's founding family, and his close associates, to end a feud over the bank's direction.

Still, some experts see Lazard's mind-bending prospectus as part of a troubling trend. Instead of using the occasion of going public as a chance to simplify operations, many companies, real estate investment trusts, and limited partnerships are making themselves more impenetrable than ever. "People are saying the corporate structure doesn't give us the protection it used to," says Kathleen Smith, principal of independent Renaissance Capital, which researches initial public offerings. "They are looking for structures that reduce their taxes and their liabilities, and it is making the filings more complex."

In Lazard's case, investors will need to keep a close eye on several moving parts. Outside shareholders will have just one-third of the voting rights in Lazard Ltd., a public company specializing in corporate advice and asset management. In turn, that company will own only one-third of a private holding company called Lazard Group. Lazard's managing partners will keep control of both businesses as well as a separate, privately owned business that will make investments and underwrite stocks. What's more, Lazard's senior bankers will get 85% of a windfall in expected tax savings that could be as much as $1.7 billion. The savings, which the firm hopes to reap after buying out David-Weill and his associates, will go to a private holding company called LAZ-MD Holdings controlled by Lazard's 207 managing directors.

Lazard also thinks it has figured out a way to outsmart Uncle Sam. Most investment banks pay a 35% rate in federal taxes. But Lazard expects to continue to be taxed at an overall 28% rate. That's because it hopes to be treated as a "publicly traded partnership," though it concedes that the Internal Revenue Service may disagree. If Lazard prevails, "certain income will escape corporate taxation in the U.S.," says Willens. In Bermuda, where Lazard is incorporated, companies don't pay taxes on income, the prospectus notes. Even if that changes, a Bermudian Finance Ministry official confirms, Lazard will be exempt until 2016.

Of course, if Lazard doesn't make money, that will be moot. Wasserstein and David-Weill have squabbled for months over the wisdom of hiring star bankers and whether the bank, with roots in the American gold rush, is profitable or not. Lazard admits that if it includes its managing directors' compensation, the firm lost money in each of the last three years -- but not until the middle of the prospectus. "I wish they would have been more forthcoming," says Alan Johnson, a veteran Wall Street compensation consultant.

Add it all up, and investors had better be real comfortable with Wasserstein's stewardship before they get involved in his next excellent adventure as the CEO of a public company. Eventually, the market will sort through the confusing details of the prospectus and value Lazard accordingly. Wasserstein has built a career by defying gravity. But this could be one rocky liftoff.

By Emily Thornton

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