A strange floating world

Lazard

Apr 14th 2005 NEW YORK
From The Economist print edition

The public offering of a venerable investment bank draws near

LAST year Lazard, a 157-year-old boutique investment bank, came close to imploding. The reason was a protracted power-struggle between Michel David-Weill, the bank's chairman, and Bruce Wasserstein, a brash American dealmaker he hired in 2001 to revive the firm's then flagging fortunes. Mr Wasserstein himself made lots of expensive hires, but Lazard consequently had less money to distribute to its owners, including Mr David-Weill. A messy public row ensued.

Now the tension appears to be easing. On April 11th Lazard filed details of an impending initial public offering (IPO), valuing the bank at up to $2.7 billion—the biggest flotation of an investment bank since Goldman Sachs went public in 1999.

That looks like a straightforward victory for Mr Wasserstein. Mr David-Weill and some of Lazard's other owners had been fiercely opposed to a flotation. A compromise was reached last autumn whereby Mr David-Weill and his allies agreed to the IPO in exchange for reassurances that, should Mr Wasserstein fail to pull it off by the end of 2005, he would quit. The owners have also negotiated a $1.6 billion price for their 37% stake in the bank.

To pay for this, Lazard will use almost all the expected $730m in net IPO proceeds as well as a chunk of another $1 billion-plus raised by issuing other securities. And that is why Mr Wasserstein's victory might be more apparent than real: the IPO rather resembles a modestly leveraged buy-out.

On the face of it, Lazard's timing is good. The market for mergers and acquisitions (M&A) is booming after years in the doldrums. Lazard has benefited from the improved deal flow. In the first quarter of this year, it saw its M&A revenues jump by 64% over the same period last year. This should help sell the bank.

But look beyond the flotation, assuming it goes ahead. Lazard will have some $1.3 billion of debt on its books—unusual for a small investment bank that is heavily reliant on cyclical financial-advisory revenues. True, the bank's asset-management fees are more stable—but these provided just 38% of total revenues last year and the asset-management partners are not part of the flotation scheme.

By far the biggest worry is whether and how Lazard can retain the dealmakers who are at the heart of its success. Most—but not all—of Lazard's bankers have signed on to the deal. Last year a core of high-earning partners was vehemently opposed to the idea of a flotation, and only a few of them are thought to have changed their minds. While they are no longer actively opposing the IPO, they are not supporting it either, and the flotation prospectus is hazy on details about how Lazard thinks it can hang on to them in future.

To prevent a brain drain, Lazard has structured the deal so that a managing director who leaves the firm before the two-year anniversary of the flotation would have to wait eight years after the IPO to cash in his equity. Some think this may not be enough. Lazard's stated vow to cut its compensation costs from 74% to 57.5%—still above the Wall Street average of 50%—means that paying huge bonuses to retain talent may not be possible. And even a departing director who was poached by a competitor would get his cash eventually.

All this raises the question of why outside shareholders would want to get involved. Mr Wasserstein has little option but to complete the IPO. But such are the uncertainties around this strange flotation that some observers are already wondering whether it is an opening move rather than an end game.

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