M&A bankers: deal drought makes cost increases tough to justify

US investment bankers are expensive to hire. The support services they depend on do not come cheap either. Last week, Lazard announced it would cut its 3,400-person workforce by a tenth this year. It cited a M&A deep freeze not expected to thaw for several quarters.

The reversal comes after the venerable investment bank increased its managing director tally from 163 to 212 in 2020-2022.

Banker pay, particularly for senior financiers, is supposed to be variable. Most of their payouts come in the form of year-end bonuses that ebb and flow with productivity.

But boss Kenneth Jacobs noted that Lazard’s fixed cost base has soared in recent years. In particular, base salary bumps have become the norm across Wall Street. This is especially so among junior bankers. They were pushed hard in 2020 and 2021 amid the pandemic-era financing boom.

At the same time, seemingly scalable overhead costs related to technology, rent, data services and the like also rocketed due to inflation and higher investment. At Lazard, non-remuneration expenses in the first quarter of 2023 totalled $142mn. That figure in 2021 was just $102mn. The firm says it can now surgically slash costs without risking the top line.

When Lazard rival Moelis & Co reported its first quarter, year-on-year revenue dropped 38 per cent. Yet Moelis struck a more defiant tone. Analysts even doubted the safety of the dividend. Pay costs hit 80 per cent of revenue, about 25 percentage points above where they typically fall.

Chief executive Ken Moelis argued this was not the time for retrenchment, given the availability and affordability of talent. The bank announced it had hired 11 new employees to cover technology companies. There are more hires to come in other sectors, even as Moelis admitted profit margins would suffer.

Shares in Lazard and Moelis have dropped more than a tenth since last week. A cynical view would be that both austerity and opportunism are excuses to sell when deal flow is weak.