Lazard/ADQ: public stockholders once a solution, now are the roadblock

Lazard is proudly celebrating its 175th anniversary this year. The 176th year of the venerable investment bank’s existence is, however, proving complicated.

The Financial Times on Tuesday reported Lazard conducted and terminated preliminary buyout discussions with ADQ, a sovereign wealth fund of Abu Dhabi. Such talks should not come as a surprise. Lazard is attempting to reset itself amid a significant deal drought and heightened competition. At the same time, tens of billions in Gulf money is being thrown at western sports and financial institutions for commercial or soft power reasons.

Lazard has been a public company for almost two decades. Even after a recent rough stretch, it still commands an enterprise value of about $4bn. Most professional services firms historically were owned and managed by employees. The introduction of public, non-management shareholders is a relatively recent experiment. Its shortcomings are now manifest in Lazard’s plight.

Lazard’s current stock price is only marginally higher than its 2005 listing price. It still grossed a healthy $1.7bn in deal fees in 2021. But those are erratic and are not the ideal foundation for public equity which prizes a steady, predictable and gently upward trajectory in profits. The asset management business was intended to be such a hedge. But Lazard Asset Management is a relative minnow with roughly $200bn in AUM.

Lazard would benefit from being private and not having to expand simply for growth’s sake. The company generates strong cash flow and has paid a healthy dividend for years. Its current dividend yield is six per cent. A single, long-term oriented shareholder could be ideal if it did not undermine the group’s unique independence. But to get to that juncture, public shareholders would have to be bought out at a price well above intrinsic value.

Lazard, ironically, went public to raise proceeds needed to buy out old-line shareholders. A better option back in 2005 — when Lazard bankers owned the majority of the firm — would have been to find a party such as ADQ to fund the purchase of those minority legacy owners’ stakes. That would have avoided its largely lacklustre run as a public stock. Instead, Lazard finds itself with few options other than to continue as an independent, public company.