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For all of the lamentations about a weak dealmaking environment, independent investment banks had a respectable second quarter. Lazard, which reported results on Thursday, beat expectations. Its investment banking revenues, like those of rivals Evercore and Greenhill, rose versus the prior year.
Mergers and acquisitions revenues are lumpy, however, and there is typically a lag of several months between when deals are announced and when the firms book the associated revenue. The important news is improved profitability. Margin growth at Lazard LLC was particularly notable, since revenue from its advisory business actually fell 17 per cent in the first six months of the year from 2012's first half. Nelson Peltz, the corporate gadfly, must feel vindicated. Mr. Peltz's Trian Partners has a 5 per cent stake in the boutique, and has pushed for cost cuts.
At 28 per cent, Greenhill, whose business is purely M&A advice, had the highest operating margin of the three. Lazard, despite improvements, still has the lowest of the three. This is striking, given that about half its revenue is from asset management, which should have higher margins.
Greenhill's cost discipline earns it a premium valuation in the stock market. It trades at about 27 times this year's earnings versus 21 times for Evercore and 22 times for Lazard. But that means that if Lazard can keep cutting costs, there is room to expand its multiple. Of course, a stronger M&A market, providing some operating leverage, would be a help as well.
Still, questions remain about the long-term investment thesis for the boutique banks. Evercore's shares have moved higher, but Lazard and Greenhill remain far from their all-time highs (Lazard reached its high pre-crisis; Greenhill peaked in late 2009). Given the cyclical nature of M&A deals, revenues will swing wildly. New competitors pop up every year. And most importantly, controlling compensation costs is an endless fight. Sustainable long-term growth is not assured.