Lazard advises Wall Street on how to take the pain
By Antony Currie
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Lazard is showing Wall Street how to take the pain. The M&A advisory and asset-management firm will slice off $125 million of expenses, or some 8 percent of the total, by the end of the year. That means Christmas has come early for investors, chiefly activist Nelson Peltz, though not for some of Lazard’s employees. While the firm still shells out more on its staff than rivals, the move is consistent with Chief Executive Ken Jacobs’ goal to boost shareholder returns.
In April the firm outlined plans to boost the company’s operating margin to 25 percent by 2014. Slow markets have hindered that – on a GAAP basis it currently stands at around 16 percent for the first nine months of the year. One quick fix would be to defer more pay – though that would simply kick the problem down the road and would reverse Jacobs’ stand against such practices last year. It probably also wouldn’t fly with Peltz, whose firm Trian owns 4.5 percent of Lazard and who in June published an endorsement of Lazard’s strategy.
So instead Jacobs is intending to find two-thirds of the savings by cutting staff – without any of the usual Wall Street bluster about “not cutting into muscle.” The jobs affected, he says, are in unproductive areas of financial advisory and support that will have no impact on revenue.
All in, the cuts would boost Lazard’s current operating margin to around 22 percent for the year, once annualized. That puts the firm much closer to its target, and sooner.
Bulge-bracket firms have not been as quick to react. While all have been cutting costs, compensation remains around 42 percent of revenue while for most of them return on equity languishes below 10 percent. Lazard’s ratio is higher, but with no trading franchise its capital needs are lower, pushing its returns to around 20 percent.
Nonetheless, at 62.7 percent of revenue, compensation is almost 10 percentage points higher than smaller rival Greenhill. That’s what has concerned investors. Jacobs is right to address the problem head on, even if it will make for a pretty grim end to the year.