Ticonderoga Securities cut boutique investment bank Lazard Ltd (LAZ.N) to "neutral" from "buy," saying U.S. and European debt concerns and tougher regulation of large deals would hurt recovery in merger activity.
"While we still expect to see solid second-half advisory revenues for Lazard, it is possible the first quarter of 2012 will now show annual declines driven by the slower pace of merger announcements," the brokerage said in a note to clients.
Ticonderoga said anti-trust concerns surrounding the proposed merger of Express Scripts Inc (ESRX.O) and Medco Health Solutions Inc MHS.N were also endangering chances of success of the biggest deal in Lazard's backlog.
"While it (the merger) very well may proceed, we do believe the added regulatory risk attached to large transactions is another emerging impediment to M&A activity," the brokerage said.
U.S. regulators have been cracking the whip on large acquisitions, such as AT&T Inc's (T.N) $39 billion deal to buy T-Mobile USA, hurting the fees that the banks earn on completion.
With the possibility of fewer fees raising the compensation ratio -- the percentage of revenue paid out as compensation -- at the firm, and debt interest costs that represent as much as 5 percent of net revenue, negative operating leverage becomes a real risk, the brokerage said.
Shares of the company closed at $25.80 on Thursday on the New York Stock Exchange. (Reporting by Jochelle Mendonca in Bangalore; Editing by Sriraj Kalluvila)