Lazard investors getting two for the price of one

April 27, 2012

By Antony Currie
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Lazard shareholders are getting two businesses for the price of one. The first-quarter results unveiled on Friday confirm what has become increasingly evident: asset management is its quiet powerhouse. Yet investors either give Lazard virtually no credit for it – or else negatively assess its high-profile advisory and M&A business. A Breakingviews sum-of-the-parts analysis suggests Lazard may be worth double its current $3.5 billion market value.

Assume both units grow by 10 percent this year and next. That would still leave the money-managing arm with slightly less revenue than banking, though it’s also cheaper to run. The pre-tax operating margin of about 40 percent last year was twice what the bankers generated. If that remains the case and the division’s share of the corporate costs is 10 percent of revenue by the end of next year, as Lazard expects, it should earn $340 million before tax in 2013.

A similar breakdown of investment banking yields future pre-tax income of $240 million – assuming its pre-tax margin improves to somewhere close to 30 percent, as Chief Executive Ken Jacobs hopes.

Applying the firm’s current 25 percent tax rate and the 16 times estimated 2013 earnings multiple at which rival Greenhill trades makes Lazard’s advisory business worth $2.9 billion. Valuing asset management is a little tougher, as it doesn’t have quite as comparable a peer. But using a multiple of 16, just shy of the one ascribed market leaders Affiliated and T. Rowe Price, would make Lazard’s worth $4.1 billion. Combined, that would put the firm’s value at $7 billion.

It’s not obvious Lazard can slash expenses to the extent it wants or what that might do to its tax bill. But the chasm between the market and imputed values implies either investor indifference or a poor job by Lazard making its case.

The problem isn’t lost on Jacobs. He’s releasing far more information in his letter to shareholders this year, partly to address the valuation gap. But if he isn’t able to persuade them, Jacobs might find himself needing to heed the same advice his bankers would give any other client facing a similar dilemma – and consider breaking up Lazard.

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