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Lazard Profits Fall on Higher Expenses, Weak Fees From Deals

Lazard posted weaker-than-expected quarterly earnings amid higher costs and little growth in merger and acquisition fees, sending shares of the financial advisory firm down.

First-quarter net income rose to $55.0 million from $52.5 million a year earlier. Earnings per share, assuming the full exchange of all ownership interests, fell to 47 cents from 51 cents, reflecting an increase in shares outstanding.

The earnings fell short of analysts' average forecast of 62 cents a share, as calculated by Thomson Financial.

Lazard shares fell 6% in pre-market trading before paring losses .

"We expect the stock to respond negatively to this morning's (earnings-per-share) miss, which we would take as an excellent opportunity to buy a premier global M&A franchise with still solid (earnings-per-share) visibility in '07," Bank of America analyst Michael Hecht wrote in a research note.

For years, New York-based Lazard's booming M&A business picked up the slack for a laggard money-management arm undergoing a turnaround, but those roles were reversed in the first quarter.

Operating revenue rose 11% to a record $388.2 million, driven primarily by 23% growth in asset-management revenue.

Assets under management rose 13% from the end of December, to $124.9 billion, a new record, fueled by a net increase of $11.6 billion in new customer funds.

But in a period of rampant takeover activity worldwide, Lazard's M&A business eked out just a 1% gain in fees to $196.1 million, though that was a record for the first quarter.

Lazard Vice Chairman Steve Golub said the flat results reflected the timing of completed deals, which is when advisers are paid.

"It's relative to completions," Golub said in an interview. "This year it seems as though our backlog is weighted toward the second half."

BofA's Hecht said merger and restructuring revenue came in below his forecasts, and costs were higher.

Compensation and benefits costs rose 10% to $220 million in the quarter, although operating revenue gained 11%. Non-compensation expenses rose to 18.3% of operating revenue, compared to 16.5% in the quarter a year ago, reflecting increased recruitment costs, professional fees and other costs, it said.

Still, Hecht said Lazard's prospects are bright thanks to a backlog of pending fees and strong momentum in its money-management unit.

"The good news is that Lazard's pipeline of deals continues to be solid at a total of $402 billion, with $160 billion expected to close in the second quarter," he said.

Lazard Chief Executive Bruce Wasserstein said in a statement that the company will expand its M&A coverage into new markets and "adjacent businesses" through takeovers, investments and new hires.

"We are also actively pursuing expansion of our asset-management business through acquisitions, new investment products, including merchant banking investments," and the
hiring of individuals and teams, he said.

Lazard's restructuring business remains "soft," with revenue falling 29% to $9.6 million in the first quarter. Golub blamed the glut of investor cash keeping corporate default rates down around 1%, compared with 2% to 4% historically.

Non-compensation expenses surged 22% in the quarter, driven by investments in asset management and M&A, though the year-ago period included one-time recoveries.

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