Lazard and Evercore are doing more with less in the continuing M&A boom. Second-quarter results this week show the two independent advisers have not reaped as much benefit as bulge-bracket rivals from the recent dealmaking surge. But they leave more of the gains for shareholders.
Revenue from mergers and acquisitions increased just 11 percent in the first half of this year at Lazard, and almost 13 percent at Evercore. Both lag their large rivals: Citigroup and Goldman Sachs both posted 50 percent increases in M&A fees, and Bank of America, JPMorgan and Morgan Stanley all did better too.
That’s another sign of Wall Street’s big guns recouping in recent months some of the market share lost to independent and boutique firms over the past decade. It’s too early, though, to call it a long-term trend. BofA and Citi, for instance, are recovering from a league-table slump following the 2008 crisis.
In any event, smaller firms do a better job of passing on gains to their owners. That’s in part because they have simpler business models. Advisory firms require very little capital, unlike trading businesses. Nor are they systemically important financial institutions, a designation which comes with elevated capital charges, which make it harder to deliver decent returns.
That means even less spectacular M&A fee growth can have more impact. Lazard, which also has a well-run asset management unit, is the best performing Wall Street stock this year, up 16 percent, with Evercore second on 12 percent. Only Citi can match that, at 12 percent, thanks to improving expense controls. Hopes of interest-rate increases have helped bump up other mega-banks, but by lesser percentages.
Lazard might hope for even more recognition from investors. The firm run by Ken Jacobs cranked out an operating margin in excess of 26 percent in second-quarter results announced on Thursday. That’s better than Evercore’s 22 percent, adjusted for costs from last year’s acquisition of research brokerage ISI.
Yet Evercore trades at almost 19 times this year’s estimated earnings, despite building a capital-intensive equities business which has an operating-margin target for the next couple of years of just 17 percent. At 16 times earnings, Jacobs’ Lazard may have more room to run.