CORRECTED-BREAKINGVIEWS-Lazard’s turnaround pales next to M&A boom

The author is a Reuters Breakingviews columnist. The opinions expressed are his own. Corrects PJT Partners market cap in chart to $6.7 billion.

By Jeffrey Goldfarb

NEW YORK, July 24 (Reuters Breakingviews) - After years of slogging through government budgets and economic policies, Peter Orszag is probably better equipped than most investors to endure the grind of a turnaround. As his third anniversary running investment bank Lazard LAZ.N approaches, the onetime U.S. presidential adviser looks on track to fulfill financial promises he made for 2030. The CEO’s patience will be tested, however, as he struggles to persuade fund managers that the boutique can capitalize on a booming M&A market while doubling down on its quirky business model.

Orszag swung an axe to achieve long-term goals he spelled out in a September 2023 blueprint. Lazard slashed 87 managing directors, about 40% of the end-2022 tally, and replaced them with ones considered more productive and collegial. Orszag also overhauled leadership at the struggling asset management arm, which represents 40% of total revenue, and is building a separate private capital advisory unit, turbocharged by the acquisition of specialist Campbell Luytens for up to $660 million.

Despite the upheaval, much is going to plan. The top line is roughly on pace to reach a $5 billion target by 2030. Likewise, Lazard’s total shareholder return, including reinvested dividends, has been about 15% a year so far, the top end of Orszag's range.

Rivals Evercore EVR.N, Jefferies JEF.N, Moelis MC.N and PJT Partners PJT.N have been growing faster, however; Lazard's latest quarterly net revenue from dispensing financial advice, disclosed on Thursday, fell 9% from a year earlier. Moreover, $100 of Lazard stock purchased when Orszag unveiled his strategy would now be worth about $150, but the same investment in PJT and Evercore would have turned into $210 and nearly $250, respectively.

There’s little indication of optimism among investors either. Lazard stock trades at less than 11 times forecast 2027 earnings, according to Visible Alpha, a discount to all its boutique investment banking peers, which together command a median valuation of more than 14 times.

Lazard is confident its rainmakers will soon be generating enough revenue to offset sums lost from ones it sent packing, and reach $10 million apiece by 2028. The bank jumped to fifth on LSEG’s first-half worldwide M&A league table, buoyed by mandates like advising utility NextEra Energy NEE.N on its $67 billion acquisition of Dominion Energy D.N. In asset management seeds of a rebound are evident with $7.4 billion of net inflows, the most to start a year in nearly two decades.

Although the unit's comparatively steadier fees help balance out choppier advisory income, it's not clear the diversification is widely appreciated. Orszag’s shakeup also made Lazard late to a worldwide deal resurgence. Even with sustained progress, he may find that Wall Street’s attention span is as short as Washington’s.

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CONTEXT NEWS

Investment bank Lazard said on July 23 that it generated a 1% increase in net revenue in the second quarter, to $808 million, from a year earlier, with a 20% increase in its asset management unit helping offset a 9% decline in the financial advisory business.

Net income fell 91% on a GAAP basis, hurt by a higher than usual tax rate, Lazard said.

(Editing by Peter Thal Larsen; Production by Maya Nandhini, Pranav Kiran)

((For previous columns by the author, Reuters customers can click on GOLDFARB/jeffrey.goldfarb@thomsonreuters.com))