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WIKI ANALYSIS
Lazard (LAZ) is a leading international financial advisory and asset management firm. On the financial advisory side of their business, Lazard advises clients on financial matters such as mergers and acquisitions, restructurings and other complex transactions. The asset management division manages investments for a wide range of investors including institutions and high-net worth individuals. It invests this money across equities, fixed income, alternative investments, cash and merchant banking funds.
Lazard's business model is less diversified than those of its larger investment banking peers like Goldman Sachs Group (GS) or Merrill Lynch (MER), leading to more cyclicality in the company's business. This is evident in both of their major operating segments. The advisory practice, which contributes over 60% of firm's revenue, is heavily dependent on the health of the U.S. Economy. Their asset management business has only slightly less exposure to us economic cycles. This is due to the fact that more than $96B of their $110B is concentrated in equities and alternative investments[1]. Equities typically move with the economy. One potential hedge against a downturn in the U.S. market is company's expanding international presence, which currently has a footprint in 29 cities across 16 countries throughout Europe, North America, Asia, Australia and South America.
Business Financials
The firm, which was a private partnership for nearly 150 years, went public in 2005. The firm also saw a significant change in senior management that year, when Bruce Wasserstein took over as CEO [2]. Since Wasserstein took over, the firm has been aggressively recruiting top managing directors. The recruiting of managing directors is especially important to a firm like Lazard, since its relationships with clients is what leads to advisory business.
Business & Financial Metrics[3]
In 2009, Lazard incurred a net loss of $130.2 million on revenues of $1.53 billion. This represents a turnaround from 2008, when the company earned $3.1 million on $1.56 billion in revenue.
Business Segments[3]
Lazard operates through two reportable business segments.
- Financial Advisory (64.5% of total revenue): This segment offers corporate, institutional, government, and individual clients financial advsiroy services regarding things like mergers and acquisitions (M&A), restructurings, and capital raising.[4]
- Asset Management (39.3% of total revenue): This segment provides manages money for institutional, private, and other clients.[5]
Trends and Forces
Business Cycles
Lazard is highly impacted by both global and US economic conditions. During periods of rapid economic growth, companies typically pursue more mergers and acquisitions, leading to greater demand for Lazard’s Mergers and Acquisitions advisory services. Also, the stock markets typically move in the same direction as the overall economy. If the market is up, then the demand and performance of Lazard's asset management services will likely increase as well. Conversely, if the economy is depressed, demand for Lazard's Mergers and Acquisitions advisory services can decrease substantially and the value or performance of the assets in the asset management business could also decrease. One thing which offsets this trend is Lazard's Financial Restructuring practice, which has historically been more active during periods of economic weakness and slowdown [6]. Another factor, mentioned above, which could be a potential hedge against a downturn in the US market is company's strong presence in Europe and elsewhere.
Subprime Lending
Subprime lending refers to the practice of extending credit or loans to borrowers who fail qualify for prime or market rates due to their less than optimal credit scores. For the past decade, the interest rates associated with subprime mortgages have been about 2% higher than those associated with prime loans; the rationale is that borrowers with lower credit scores carry a higher risk of default and must therefore pay a considerable risk premium. Subprime borrowers can be extremely sensitive to interest rates. As rates rise, these borrowers, many of whom have adjustable-rate mortgages, find themselves unable to meet their debt obligations.
While Lazard doesn't have exposure to subprime mortgages as do many of its larger investment banking peers which have significant mortgage divisions, Lazard is affected by the impact that worries about subprime lending are having on the overall market. In particular, the subprime fallout has scared banks, who are afraid that it is symptomatic of a broader deterioration in credit quality.
Competition
Lazard competes head-to-head with larger investment banks such as
- Goldman Sachs Group (GS) - ranked number one in mergers and acquisitions advisory for the last 8 years running. GS is also a big player in the trading, principal investing, and asset management functions.
- Morgan Stanley (MS) - typically ranked number two in mergers and acquisitions advisory, behind Goldman Sachs.
- J P Morgan Chase (JPM) - one of the largest financial institutions, with operations in Investment Banking, Commercial Banking, Treasury, Asset Management, Credit Cards, and Retail financial services.
Lazard also competes with other leading boutique advisory firms such as Blackstone (BX), Evercore Partners (EVR), and Greenhill (GHL) . Lazard, unlike many of its larger peers, does not maintain an extensive retail brokerage sales force, opting instead to focus on higher-margin businesses such as financial advisory. However, as mentioned above, its relatively narrow focus also exposes the firm to swings in the economy.
Notes
- ↑ LAZ 2006 10k, Item I, Pg. 6
- ↑ Business Week: The Taking Of Lazard, http://www.businessweek.com/magazine/content/06_45/b4008001.htm?chan=search
- ↑ 3.0 3.1 LAZ 2009 10-K pg. 39
- ↑ LAZ 2009 10-K pg. 1
- ↑ LAZ 2009 10-K pg. 5
- ↑ LAZ 2006 10k, Item Ia, Pg. 16
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