What a difference three weeks makes. On September 26, with the global credit crisis in full flower, the stock of Lazard, the venerable 160-year-old M&A and asset management boutique, hit nearly $46 per share, just 12 percent below its 52-week high reached about a year ago. The firm’s stock reached this mini-milestone in the wake of the serial blow-ups of Fannie Mae, Freddie Mac, Lehman Brothers, AIG, Merrill Lynch, Washington Mutual and Wachovia, in part because the market recognized that the firm had no involvement in the credit crisis and would likely benefit from a flight to quality as corporate CEOs looked in the future for intelligent, independent advice.
There was also the sense that Lazard’s world-class restructuring advisory business would benefit in the whopping recession on its way. Indeed, the Lehman Brothers estate had already selected Lazard as its bankruptcy advisor in what is the largest United States bankruptcy of all time.
CEOs are in no mood to do deals. Indeed, they seem to have little interest in completing the deals they have already announced.
But, as of yesterday, Lazard’s stock had reversed course, taking a disproportionate pounding to $28 per share, down nearly ten percent Thursday alone and some 40 percent in a month. Lazard’s stock now trades just 12 percent above its May 2005 IPO price of $25 a share.
What gives? Part of the story for the stock’s decline, no doubt, is that the market is trying to anticipate what the firm’s third-quarter numbers will look like when they are announced next Wednesday. The numbers will, understandably, likely be down from last year’s third quarter profit of $40.2 million but there is no reason to believe the firm won’t be profitable, which in this environment for a financial services firm is impressive.
The more likely culprit for the decline is the market’s increasingly obvious recognition that a world in recession is a world with a severe decline in the number and value of M&A deals. Through the third-quarter of 2008, global M&A volume has already tumbled 27 percent from the same period in 2007. There is no question that the full-year numbers will be lower still. The decline in the volume of M&A deals will be even more profound in 2009 and beyond. Corporate CEOs are in no mood to do deals given the uncertain economic future and the nearly frozen credit markets.
Indeed, CEOs seem to have little interest in completing the deals they have already announced. In the last few weeks alone, GE appears to have ended its effort to sell its railcar-leasing business to GATX, United Technologies ended its $2.63 billion deal for Diebold and Xstrata announced it was canceling its $9.6 billion deal for Lonmin. So far this year, 736 acquisitions worth $374 billion have been cancelled or withdrawn, up from 585 deals in 2007 and 526 deals in 2006. Withdrawn deals mean no M&A success fees, which is Lazard’s lifeblood (along with the management fees it receives from its asset management business.) True, the firm’s financial institutions M&A business, led by Gary Parr, is having a banner year. But chances are high that investors have noticed the great unwind going on and have wondered how Lazard will fare in the future, despite the likelihood revenue will increase in its restructuring business.
Still, it is never wise to bet against the magician Bruce Wasserstein, Lazard’s CEO. He has made a career of confounding people when they least expect it. Even at $28 per share, Wasserstein’s holdings in Lazard are worth around $330 million, or more. And there is no question that Lazard—even if the firm has no clear successor to the 60-year-old Wasserstein—should prosper once the markets and the economy stabilize. Wasserstein must think so, too. He is on the verge of hiring 41-year-old Alexis de Rosnay, Lehman Brothers’ former co-head of European investment banking. De Rosnay decided not to join Nomura, the Japanese firm that bought much of Lehman’s European operations. He would be a senior banker at Lazard’s plush office in the tony Mayfair section of London.