Business Context and Reporting Period
Company: Lazard Ltd (Bermuda holding company controlling Lazard Group LLC).
Reporting Period: Fiscal year ended December 31, 2009.
Business Model: Global financial advisory and asset management firm operating primarily through two segments: Financial Advisory (M&A, restructuring, capital structure) and Asset Management (equity, fixed income, alternative investments). The company operates in 40 cities across 25 countries.
Key Financial Metrics
| Metric | 2009 | 2008 | 2007 |
|---|---|---|---|
| Net Revenue | $1,530.5 million | $1,557.2 million | $1,917.7 million |
| Operating Income (Loss) | $(182.2) million | $25.1 million | $418.3 million |
| Net Income (Loss) Attributable to Lazard Ltd | $(130.2) million | $3.1 million | $155.0 million |
| Net Income Per Share (Basic) | $(1.68) | $0.06 | $3.04 |
| Total Assets | $3,147.8 million | $2,862.9 million | $3,840.4 million |
| Total Debt | $1,261.5 million | $1,264.6 million | $1,764.6 million |
| Cash and Cash Equivalents | $917.3 million | $909.7 million | $1,055.8 million |
| Assets Under Management (AUM) | $129.5 billion | $91.1 billion | $141.4 billion |
Material Changes vs. Prior Period
- Revenue Decline: Net revenue decreased 2% to $1.53 billion. Financial Advisory revenue fell 4% due to a 35% drop in M&A fees, partially offset by a 216% surge in Restructuring revenue driven by corporate defaults. Asset Management revenue declined 2% due to lower average AUM, despite a 114% increase in incentive fees.
- Profitability Impact: The company reported a net loss of $130.2 million, a significant deterioration from the $3.1 million profit in 2008. This was driven by a 16% increase in compensation and benefits expense and significant "special items."
- Special Items: 2009 results included $209.6 million in pre-tax charges related to restructuring ($62.6 million), acceleration of RSU amortization due to the death of the former CEO ($86.5 million), and accelerated vesting of deferred cash awards ($60.5 million). Excluding these items, operating income would have been $27.3 million.
- AUM Recovery: Ending AUM increased 42% to $129.5 billion compared to 2008, driven by market appreciation in the second half of 2009, though average AUM for the year remained 15% lower than 2008.
Guidance, Outlook, and Risks
- Outlook: Management expects the Restructuring business to remain active in 2010 due to the lag in corporate defaults. M&A activity is expected to remain cautious but is showing sequential improvement. The company plans to continue optimizing its personnel mix and expanding alternative investment activities.
- Capital Actions: The Board authorized a new $200 million share repurchase program in January 2010. A quarterly dividend of $0.125 per share was declared in January 2010.
- Key Risks:
- Market Volatility: Continued disruption in global financial markets could reduce M&A volume and AUM values.
- Regulatory Changes: Potential impact of the Wall Street Reform and Consumer Protection Act of 2009 and restrictions on placement agents for public pension funds.
- Counterparty Risk: Exposure to financial institutions, highlighted by the 2008 Lehman Brothers bankruptcy which resulted in a $11.4 million loss.
- Investment Losses: The company wrote off a $13 million investment in Sapphire Industrials Corp. warrants in Q4 2009 after the SPAC failed to complete a business combination.
Investor Verification Checklist
- Special Items Impact: Verify the sustainability of operating margins by analyzing results excluding the $209.6 million in 2009 special items (restructuring, CEO death-related RSU acceleration, deferred cash vesting).
- Compensation Structure: Review the shift in compensation policy toward higher cash components and its impact on future expense volatility and retention.
- AUM Flows vs. Market: Distinguish between AUM growth driven by market appreciation versus net client inflows to assess organic business health.
- Debt Covenants: Confirm continued compliance with the Credit Facility covenants (Leverage Ratio < 4.0x, Interest Coverage > 3.0x), which were met at year-end (2.76x and 5.35x respectively).
- Regulatory Exposure: Assess the potential financial impact of new regulations on placement agent fees and the SIBHC (Supervised Investment Bank Holding Company) program.