Billionaire Nelson Peltz criticized Lazard Ltd. (LAZ:US)’s pay and cost structure in meetings with senior executives before he disclosed a 5.1 percent stake in the advisory firm this week, said people familiar with the matter.
At a series of meetings starting in March, Peltz and Ed Garden, one of his co-founders at Trian Fund Management LP, told Lazard Chief Executive Officer Kenneth Jacobs the firm paid bankers more than deal flow or productivity merited, said the people, who asked not to be named as the talks were private.
The two advised Lazard to bring pay and productivity in line with peers Evercore Partners Inc. (EVR:US) and Greenhill & Co., the people said. Peltz also expressed concern that Lazard’s managers were putting their interests ahead of shareholders’, the people said. The month after he began the meetings, Lazard revealed a new strategic plan to rein in banker compensation more quickly.
The meetings reveal that Peltz, 69, was much more confrontational with Lazard in private. Trian called the advisory firm “a premier global financial services company with significant brand and franchise value” in its statement this week, emphasizing its support of Lazard’s management.
Lazard began drawing up its new strategy before Peltz voiced his concerns, one of the people said. Trian owns about 6.3 million Lazard shares, making it the firm’s largest holder, according to data compiled by Bloomberg. The stock has declined 31 percent in the past year.
“Lazard has substantial room for earnings upside, which would argue for a much higher stock price,” said Devin Ryan, an analyst at Sandler O’Neill & Partners LP in New York. The firm and its peers are facing a “depressed” deal environment, which has weighed on their profit and shares, he said.
Peltz and Hamilton, Bermuda-based Lazard are in agreement for now on plans for banker compensation, cost structure and revenue-per-banker measures, said two of the people.
Jacobs, who has worked at Lazard for more than two decades, was named CEO after the death of Bruce Wasserstein. A onetime corporate lawyer, Wasserstein rose to the top of the ranks of merger advisers during the 1980s and won a power struggle with Michel David-Weill to take Lazard Freres & Co. public. He also worked on some of the biggest deals in the last 30 years.
After Jacobs took over in 2009, Lazard began an “intensive” review of the firm’s business to “better align the interests of employees and shareholders” and keep the rate of pay growth lower than that for revenue, according to an April 27 letter to shareholders.
In revealing its holdings, Trian released a 39-page slide deck laying out its views on Lazard. On page 25, Trian estimated Lazard’s revenue (LAZ:US) will rise 4 percent annually from 2011 to 2014, compared with an annual increase of about 1 percent for compensation. That page caught the attention of senior Lazard executives because it indicates nearly flat pay for the next three years, said two people familiar with the matter.
That pace may not be fast enough for Lazard’s bankers, who may seek better prospects with other firms, said the people. The projection also signals the firm may look to job cuts to keep compensation stable, they said.
Judi Mackey, a spokeswoman for Lazard, declined to comment.
Anne Tarbell, a Trian spokeswoman, declined to comment on any private conversations, adding that the shares could double from the current price if the new plan is successfully implemented.
Lazard’s stock closed at $25.77 in New York yesterday, compared with $37.21 a year ago.
“We regularly meet with our largest shareholders, who are not shy in expressing their views about Lazard’s progress,” the firm said in the letter, which detailed its new strategy.
Lazard’s proposals will impose “greater cost discipline and more efficient use of capital,” according to the 26-page letter.
Lazard also wants to reduce the ratio of compensation to revenue to a range of 55 percent to 59 percent from 62 percent, the letter shows. The weighted average for rivals in Lazard’s two main businesses, advisory work and asset management, is 56 percent, according to the firm.
Lazard’s Jacobs told analysts in February that the firm would attempt to maintain a compensation ratio in the mid to high 50 percent range. The firm was “very aggressive” in reducing compensation in 2011, Jacobs said then, pointing to a 20 percent cut in discretionary bonuses.
The firm is ranked 12th in advising on global mergers and acquisitions this year, data compiled by Bloomberg show. That compares with eighth place for 2011. This year, the firm has advised on deals such as United Parcel Service Inc.’s agreement to buy TNT Express NV (TNTE) for about 5.2 billion euros ($6.6 billion).
Global announced deal volume declined for the third straight quarter in the three months ended March 31, according to data compiled by Bloomberg. Some companies have held off on deals amid concern about the European sovereign-debt crisis.
Lazard reported a 23 percent drop in first-quarter profit from a year earlier as expenses climbed. The firm set aside $312.7 million for compensation in the first quarter, compared with $268.9 million last year.
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