CORRECTED-UPDATE 2-Lazard results signal rebound in advisory business

Thu Feb 7, 2013 3:57pm EST

(Corrects name of COO to Alex Stern, from Alex Smith in paragraph 7, drops reference to morning trading in paragraph 8. Corrects ticker symbol for Dell Inc to DELL.O, from DELL.N in paragraph 18.)

* Adj EPS 61 cents vs analysts' estimate 33 cents

* Financial advisory business revenue rises 19 pct

* 4th-quarter revenue rises 22 pct to $574 mln

By Lauren Tara LaCapra

Feb 7 (Reuters) - Lazard Ltd posted stronger-than-expected fourth quarter results on Thursday as it made more money from advising companies on deals, and it said its mergers and acquisitions business may be at only the beginning of a long-awaited recovery.

The three necessary conditions for a mergers rebound are in place: valuations are reasonable, financing is available, and executives are confident now, said Lazard Chief Executive Ken Jacobs, noting that for a long time, confidence was the missing component.

"The macroeconomic environment is better going into 2013 than it's been in awhile and that helps our business generally," Jacobs said in an interview. "Between our two businesses, we've never been positioned better historically than we are today."

Lazard's main businesses are advising on acquisitions and restructurings, and asset management. The bank's advisory revenue rose 19 percent to $309 million in the fourth quarter from the same quarter a year ago, while its asset management revenue rose 20 percent to $245 million.

The recent uptick in deal activity is a welcome gift for independent advisory firms like Lazard, whose profits are more weighted in deals than bulge-bracket rivals like Goldman Sachs Group Inc or Morgan Stanley, which rely more heavily on trading.

Lazard said it also made progress on an expense-savings plan it announced in April.

Chief Operating Officer Alex Stern said the firm has been getting out of businesses with low-growth potential or low productivity, and that about 200 employees will be leaving as a result. Lazard has also consolidated some operations onto the same support staff and technology platforms, and ended contracts with outside firms that provide data, technology and real-estate services to reduce costs, he said.

Shares of Lazard were up 2.8 percent to $37.69 in afternoon trading. As of Wednesday's close, the stock was up 23 percent year-to-date.

"A solid quarter for Lazard should be interpreted positively by investors, and we would expect the stock to continue to move higher today despite what has been an impressive run recently," Sandler O'Neill analyst Devin Ryan said.

Overall, Lazard reported a fourth-quarter net loss of $5.3 million, or 5 cents per share, compared with a net loss of $4.8 million, or 4 cents per share, a year earlier.

Excluding special items like expenses related to its cost-cutting plan, Lazard earned 61 cents per share. Operating revenue rose 22 percent to $574 million.

Analysts on average were expecting earnings of 33 cents per share, on revenue of $477.2 million, according to Thomson Reuters I/B/E/S.

DEAL REBOUND

Like Lazard, rival Evercore Partners reported robust results due to an uptick in merger activity in the final quarter of the year.

For several years, Lazard and other independent firms as well as regional banks have been gaining market share from bigger rivals.

Boutique banks say they are less conflicted when they advise clients, because they are not trying to sell other services, such as underwriting, to clients.

Over the past 12 years, large Wall Street firms' share of advisory fees has dropped significantly while the share of smaller, independent firms' has grown, according to Thomson Reuters data.

Nine bulge-bracket banks including Goldman, Morgan Stanley and JPMorgan Chase & Co saw market share decline to 44 percent in 2012 from 63 percent in 2000. A group of 21 independent firms including Lazard, Rothschild and Evercore Partners Inc, saw their share climb to 21 percent from 10 percent over that same timeframe.

Lazard, which ranked eighth in the league tables last year with $734 million in fees, earned 4 percent of the merger advisory fees in the industry, up from 3 percent in 2000. It has been named as an adviser on several large deals recently, including advising Microsoft Corp on its role in Silver Lake Partners's planned buyout of Dell Inc.

On a conference call with analysts, Jacobs said Lazard outperformed competitors in several markets last year. Its European advisory revenue was flat compared with an overall decline of 32 percent for the industry, and its U.S. advisory revenue was up 17 percent compared to just a 2 percent gain for the industry.

Overall, Lazard's advisory revenue is close to its all-time peak, reached in 2007, said Jacobs.

COST CUTTING PROGRESS

In April, Lazard outlined a plan to achieve an operating margin of 25 percent in 2014 through headcount reductions and other cost-savings initiatives, even if revenue does not improve.

However, because of a four-year deferred compensation plan in 2008 that has dragged on results, and expenses related to the cost savings plan, like severance and payments to exit contracts early, the savings have not yet reached the bottom line.

In 2012, Lazard's operating margin was flat at 16.8 percent. But executives said the firm is on track to meet its target next year, and that they expect a margin of 21 to 22 percent this year.

Ultimately, Lazard aims to save $125 million a year from its cost-cutting plan, and aims to push its compensation ratio down to a range of 55 to 59 percent, and push non-compensation expenses down to a range of 16 to 20 percent. Its compensation ratio of 61.8 percent and non-compensation ratio of 21.4 percent last year were still short of those goals. (Reporting by Lauren Tara LaCapra in New York; Additional reporting by Avik Das in Bangalore; Editing by Supriya Kurane and Leslie Adler)