Lazard Inc (LAZ) 2007 Q4 法說會逐字稿

Good morning and welcome to the Lazard fourth-quarter and full-year 2007 earnings conference call.

This call is being recorded. (OPERATOR INSTRUCTIONS).

At this time, I will turn the call over to Judi Mackey, Lazard's Senior Vice President and Director of Global Communications. Please go ahead.

Good morning and thank you for joining this conference call to review Lazard's results for the full year and fourth quarter of 2007. Participating on the call today are Lazard's Chairman and Chief Executive Officer, Bruce Wasserstein; Vice Chairman, Steven Golub; and Chief Financial Officer, Michael Castellano. A replay of this call will be available on our website, Lazard.com, beginning today after one o'clock.

Today's call may contain forward-looking statements. Any forward-looking statements are based on our current expectations and projections about future events. They are subject to known and unknown risks, uncertainties, and assumptions. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from those expressed or implied by the forward-looking statements. These factors include but are not limited to those discussed in Lazard's filings with the SEC, including our annual report on Form 10-K, quarterly reports on Form 10-Q and current report on Form 8-K. Management cannot guarantee future results, the level of activity, performance or achievement. Moreover, Lazard assumes no responsibility for the accuracy or completeness of any of these forward-looking statements.

Investors should not rely upon forward-looking statements as predictions of future events. Lazard is under no duty to update any of these forward-looking statements after the date on which they are made. Further, investors should keep in mind that Lazard's quarterly revenue and profits can fluctuate materially, depending on many factors, including the number and size of completed transactions on which we advise as well as on seasonal factors. As such, Lazard management believes that annual results are the most meaningful.

Accordingly, Lazard's revenue and profits in any particular quarter may not be indicative of future results. It is for this reason that Lazard holds conference call twice per year to review our first-half and full-year results.

I will now turn the call over to Mr. Wasserstein.

Thank you for joining us to discuss Lazard's 2007 full-year and fourth-quarter results. Today, I would like to focus on some of the highlights of these results and also to discuss why Lazard continues to be successful. I will also discuss the strategic steps we have taken to create a path of growth for the future.

This morning, we are pleased to report record results for both the full year and fourth quarter of 2007. In fact, since we went public in 2005, we achieved record outcomes each year and have achieved our strategic objective to deliver average annual earnings per share growth of over 20%. Each year has also been a record in both our financial advisory and asset management businesses. Our exceptional results demonstrate that Lazard's simple business model continues to work successfully, even in the current environment.

This morning, we announced record annual operating revenues of more than $2 billion. In Financial Advisory, we achieved an annual record of $1.24 billion in operating revenue for the year and a record $393 million in operating revenue for the fourth quarter. The Financial Advisory revenue includes record annual and quarterly M&A revenue of $969 million and $314 million, respectively.

Our Asset Management business continues to do very well despite the recent downturn in the equity markets. Asset Management revenue increased 31% to $717 million for the year and grew 32% to $231 million for the fourth quarter -- both records.

Assets under management grew 28% since the end of 2006 to more than $141 billion. Lazard achieved net income of $323 million on a fully exchanged basis or $2.70 per share for the full year of 2007. Net income for the fourth quarter was $123 million, or $1.04 per share. These results represent a 37% increase in net income over the full year 2006 and a 43% increase in net income over the fourth quarter of 2006. We increased our net income per share by 24% over the full year 2006, and by 33% over the fourth quarter of 2006.

What are the reasons for this success? First, it's our unique position. We are an intellectual capital firm. This differentiates us from investment banks, commercial banks, brokers, and boutiques. We have built critical mass. We continue to build on our existing global platform, deepening our industry expertise and expanding our product offerings.

We are not in the sub-prime business. We are not a public hedge fund. Nor do we have SIVs or hanging bridge loans. We are not burdened with massive write-offs.

We have maintained our strategic focus of advising our clients and managing our clients' assets. We have continued to invest for our future growth. Our goal is to continue to anticipate and to serve the changing needs of our clients.

During the past year, we have continued to make major investments. We hired senior talent, made a number of acquisitions, and opened new offices. We continue to develop new financial advisory and asset products.

On recruiting, we've been able to hire at senior levels some of the best financial leaders in Europe. Most recently, we were joined by Rodrigo de Rato, former head of the IMS and minister of the economy for Spain. In the fall, we recruited Ken Costa, former chairman of UBS's Investment Bank for Europe. We have added managing directors in Japan, the UK, Houston, and Boston, with expertise in the energy, infrastructure, technology, transport, and logistics sectors.

We have also broadened our geographic footprint through acquisitions, investments, and alliances in Australia and Eastern Europe and Russia and Latin America. We have also opened new offices in Dubai, Zürich, and Boston. We expect that broadening our geographic platform will continue to bear fruit, as is evidenced by the series of deals that have arisen from this broader footprint.

Our product expansion includes taking creative approaches to raising capital, such as advising on Special Purpose Acquisition corporations, the Private Investment in Public Equities and Registered Direct Offerings. As a result of acquiring a middle market specialist firm, we launched in the United States Lazard Middle Market, which advises mid-sized private companies.

It's also very important to remember that Lazard has the world's leading restructuring practice. This practice is explicitly designed to help clients in this kind of challenging environment. These skills complement the analytical tools throughout the firm and are applied to many complex situations, such as advising the UAW on retiree health care benefits, and Eurotunnel on its restructuring. Indeed, we feel that the turmoil in the markets is creating opportunities for us, opportunities which Lazard is in a unique position to develop.

We are finding that independent advice and our intellectual capital approach are particularly critical for our clients during these turbulent times. We are playing a prominent role in advising international investors, including sovereign wealth funds, who are helping to refinance global financial institutions and will be a major factor in other recapitalizations.

For example, we advised China's CIC in its investment in Morgan Stanley and the Kuwaiti Investment Authority in its investment in Citi, as well as a number of other advisory assignments to major financial institutions.

Market pressures also create asset sale velocity, and due to our global reach and industry expertise, we think we can do a superior job for sellers in finding the best value for their assets. We also believe that strategic buyers, the majority of our client base, now have greater opportunities in this environment. Of course, the short-term timing may be erratic and valuations will be recalibrated, but we do believe this is a time of opportunity for us. Our asset management business is diversified by geography and by product, many of which are oriented to value investing. Our businesses continue to be successful despite the challenges in the equity market in the second half of the year. We are pleased with the continued success of our asset management business.

In closing, because of Lazard's unique characteristics and breadth of platform, we remain sanguine about our future, even in these turbulent markets.

Steve will now discuss some more details about our business and performance.

Thank you, Bruce, and good morning, everyone. As Bruce mentioned, I will elaborate on our asset management and financial advisory businesses, highlighting specific results and transactions. We are gratified with both our annual and quarterly results, our achievement of reaching a record $2 billion in operating revenue and yesterday we were pleased to report an 11% increase in our quarterly dividend.

Our Asset Management business continues to succeed at a steady pace with 28% growth in Assets Under Management since the end of 2006. We also reported record full-year operating revenue in Asset Management of 717 million and record fourth-quarter operating revenue of $231 million, 31% and 32% increases over the respective 2006 periods.

The full-year and fourth-quarter 2007 management fees also achieved records at 596 million and $165 million in the respective periods. Our strategy for the Asset Management business continues to be focused on actively pursuing its expansion through new investment products, new hires, acquisitions, and upgrading our current platform for future growth.

Our Financial Advisory operating revenue of $1.24 billion for the full year of 2007 and $393 million for the fourth quarter, both records, included record M&A revenue of $969 million and $314 million in the respective 2007 periods. As we expected, completions for our Financial Advisory backlog were heavily weighted toward the second half of the year, further underscoring why our results are measured best on an annual basis.

Last quarter, we discussed the expected emergence of more global transactions and the reemergence of more strategic transactions, for which Lazard is especially well-suited. During the fourth quarter, we completed a number of transactions of this nature. These included Acciona and its agreement with Enel and their EUR44 billion transaction with respect to Endesa; Groupe Danone's EUR12 billion offer for Royal Numico and the $7 billion sale of its Biscuits and Cereal Products business to Kraft Foods; Coles Group's Australian 18 billion sale to Wesfarmers; France Telecom's EUR1.4 billion acquisition of One GmbH with Mid Europa Partners; and its EUR1.3 billion sale of Orange mobile and internet operations in the Netherlands to Deutsche Telecom; and finally, ITT's $1.7 billion acquisition of EDO.

Our backlog of announced mergers and acquisitions continues to demonstrate the need for independent advice. During the fourth quarter and since the beginning of the year, we have advised on a number of major complex transactions, including BHP Billiton's proposed combination with Rio Tinto; Gaz de France's EUR45 billion merger with Suez; Trane's 10 billion sale to Ingersoll-Rand; Resolution PLC's GBP5 billion Sterling sale to Pearl Group; and Louis Dreyfus's EUR2 billion sale of its 29% stake in Neuf Cegetel to SFR. As Bruce mentioned, we've also been advising a number of sovereign wealth funds on their investments in global financial institutions.

Financial operating revenue was $127 million for the full year of 2007 compared to $71 million for the full year of 2006 and was $32 million for the 2007 fourth quarter compared to $20 million for the fourth quarter of 2006.

Notable restructuring assignments completed during 2007 include advising Adelphia Communications, SunCom Wireless, Eurotunnel, Tower Automotive, InSight Health Services, New Century Financial Corporation, and Northwest Airlines Creditors Committee.

Fourth-quarter 2007 restructuring revenue also included fees for advising the UAW in connection with its ongoing contract discussions with GM, Ford, and Chrysler over their retirees' healthcare obligations and in connection with Delphi's bankruptcy and Calpine's Unsecured Creditor's Committee in connection with Calpine's restructuring of $21 billion in debt and liabilities. In addition, we continue our work on a number of other restructuring assignments, including those involving the UAW, Movie Gallery, Tarragon Corporation, and TOUSA.

We also are continuing to grow our corporate finance area. Corporate finance and other operating revenue grew to a record $144 million for the full year of 2007 compared to $110 million for the full year of 2006 and was $47 million for the 2007 fourth quarter compared to $34 million for the fourth quarter of 2006. Our Private Fund Advisory, Equity Capital Markets, and Alternative Capital Finance Groups each contributed to the increase in revenue during the full year of 2007, and the increase in the fourth quarter of 2007 was driven primarily by our Private Fund Advisory group, which advised on a number of fund closings in the quarter.

In addition, our Equity Capital Markets group advised on a number of recent transactions in the fourth quarter of 2007, including special acquisition company transaction or SPACs, for China Holdings Acquisition and Golden Pond Healthcare. In addition, the group advised EnergySolutions, Power Medical Interventions and Targanta Therapeutics on their IPOs. Our Alternative Capital Finance Group has served its placement agent on a number of private investments in public equity or PIPEs and Registered Direct Offering or RDs. Notable transactions during the fourth quarter included PIPEs for TXCO Resources, SGX Pharmaceuticals, and Advanced Life Sciences and an RD for Favrille.

Before I hand the call over to Mike Castellano, I will share a few observations on the current market environment. We are [financed] where we are in the M&A cycle. The M&A business today is not reflective of one cycle, but rather a series of different cycles. We view the current M&A environment from a number of perspectives.

First, we look at the volume of strategic deals. Although the cycle for LBOs has softened, strategic transactions should continue to be strong. We see the new M&A landscape is providing opportunities for strategic buyers. We also see an industry cycle. For instance, transactions on the financial services sector are the early stages of a cycle whereas others are at a mature phase of consolidation or waning. Other industries like pharmaceuticals are countercyclical and are simply evolving because of Biotech and other factors. Another example is the evolution of our classic utilities while looking at alternative energy investments. Then, geographically, we see the emergence of global investors, such as from China, Singapore, India, Brazil, the Middle East, and Russia. There is a consolidation across Europe and global cross-border activity is accelerating.

The restructuring cycle has also changed and although the measure of expected growth for that business is correlated to the level of defaults, the solutions must be adapted to the new economic landscape.

In addition, our advisory product is increasingly broader than M&A and includes restructuring, privatizations, and capital markets advice. Therefore, we believe we are well-positioned due to the varied experience of our teams, diversity of our products, and the investments we have made in our business.

Mike Castellano will now provide more details on our financial results.

Thank you, Steve. Bruce and Steve have addressed the key elements of our business results and success, including the 28% increase in operating revenue to just over $2 billion and the 24% increase in our earnings per share to $2.77. Additional details of our results can be found in the earnings release. However, I would like to clarify a few points and then we will be happy to answer your questions.

We continue to achieve declines in the ratios of both our compensation expense and non-compensation expense to operating revenue, which were 55.7 and 16.8%, respectively, for the full year 2007. The non-compensation expense ratio excludes the effects in 2007 and '06 of the provisions of our tax receivable agreement and the 2007 amortization of intangibles relating to our acquisitions. The non-compensation expense of 2007 also includes provisions of $6 million related to leases for abandoned space.

Our effective income tax rate on a fully exchanged basis and including the effects of the tax receivable agreement, declined to 25% in 2007 from 28% in 2006. The decline was due primarily to our ability to recognize certain benefits of deferred tax assets, for which we had valuation allowances and the settlement of audits in nine U.S. jurisdictions for amounts less than the recorded reserves.

Corporate revenue in the quarter was a negative $7 million compared to income of $15 million in the fourth quarter of 2006. Corporate revenue consists primarily of net interest income, the return on the corporate fixed-income portfolio of our Paris bank, and of investment income from the temporary investment in equity securities of a portion of our excess cash balances. The Paris bank invests the proceeds from its customer deposits in a portfolio of corporate fixed-income securities, of which approximately 85% are investment grade. The portfolio has experienced an unrealized decline in market value as credit spreads continued to widen, resulting in the fourth-quarter charge to earnings. And so far in 2008, corporate spreads have continued to widen. Since the bank's general practice is to hold these high-quality corporate securities to maturity, we believe that these declines will not be realized.

We also invest a portion of our excess cash balances in equity securities, including seeding new asset management products, which are also marked-to-market. During the fourth quarter, we experienced declines in the market value of these investments, corresponding to the general declines in the equity markets, resulting in further unrealized charges to earnings.

I would also like to point out that our financial position continues to be strong and our balance sheet is highly liquid. At the end of 2007, we had over $1 billion in cash and cash equivalents. Our $1 billion in balance sheet investments consists primarily of high-quality corporate fixed-income securities and readily marketable equities securities. And our shareholders' equity is now positive at $70 million and is increasing. And finally, I should point out we have no on or off-balance sheet SIVs nor do we have any hanging bridge loans.

Finally, we continue to integrate the recently acquired businesses in Australia and the U.S. middle market business. Principally as a result of purchase accounting adjustments, these acquisitions did not significantly impact the firm's fully diluted net income per share for growth both the full year or the fourth quarter of 2007. This concludes our remarks. Thank you for joining us, and we'll now turn it over for questions.

(OPERATOR INSTRUCTIONS). Michael Hecht, Banc of America.

Congratulations on a nice quarter, nice year. I guess the first question would be -- and it sound like you guys were obviously involved in a lot of outstanding deals, but I guess this year has kind of started out a little bit slow, and I just wanted to get your perspective on what you see as kind of being the major sticking point amongst the buyers for not seeing more strategic M&A activity. Is it pricing, lack of CEO confidence, worries about the economy?

This is Bruce. I think we can talk generally or for us as a firm, so let me start with us as a firm, which is, as you say, we actually do see a lot of activity. The nature of the activity is somewhat different because a lot of the time is being spent on things like recapitalizations, investments in companies, things of that sort. Obviously, there are many large transactions that are pending, an example being the BHP kind of a transaction.

What we think more generally on M&A is that this will go in spurts, because of both what you say, confidence, but also because people are waiting to see at what point there is a stability of outlook. The volatility has been such that pricing outlook, assumptions have all varied. But what we do know is that the strategies are very active in looking through and seeing where their comparative opportunities are.

And I guess that's the important thing for thinking about our Company is that the outlook for mineral companies in New Jersey -- sorry, mineral companies in Australia is different than an industrial company in New Jersey that was thinking about a large LBO. The outlook for Indian investors looking worldwide or Brazilian investors looking worldwide is quite different again.

And the next point is that we talk about M&A activity, and there are a couple of key considerations to keep in mind. First, when people look at the precedents, they tend to keep coming back to the old M&A U.S. cycle, a cycle dominated by industrial activity. The world is dramatically changed. Half of our business, actually more than half, is outside the United States. And that has a dramatic effect on us in a number of different ways.

Secondly, the blend between M&A and advisory activity is a very fuzzy line and a lot of what we do is the general advisory activity, and you can see it in the fee levels that we have, so the fee levels are strong. And restructuring, which used to be a U.S. phenomenon is now a global phenomenon. And just the example of Eurotunnel illustrates that, but obviously, it's also true of the recapitalization of financial institutions.

Now, this firm is very different prospectively than it's been historically because not only, as Steve points out, is there a greater product depth by giving advice in a lot of these areas like capital markets and things of that sort, but also, as the restructuring products has gone global, we have another whole level of activity, and our footprint is very different. That is, we never were a strong force in India, Latin America, Eastern Europe and in China. And if you look at the activity this year, you can see, and will continue to see, the evolution of our business toward decided strength from those areas. And then, particularly, the Middle East and Australia, where we have been able to build on our historical base to, I think, very interesting levels.

So all of those things in combination put us in an interesting position. Or another way to state it is global plus our strategic position plus the advisory plus the new products lead to a different equation than just looking at the U.S. industrial model. And that's been basically our strategic objective, which is to find where our intellectual capital approach can be salient in this sort of environment, and we think it's working.

Okay, great. That's helpful. Can you talk a little bit about the head count growth you saw last year in terms of [NDs] on the M&A side and I guess it will be skewed by some of the acquisitions. But I guess what I'm trying to get to your outlook for kind of banker productivity -- does that have room to grow in 2008 and then outlook for head count additions again on the M&A side, for 2008.

I guess we'll have Steve fill in some facts and figures. But just, philosophically, where we are now is we know exactly where we want to go and have a chart of first, what we have covered, how strong we are in what we have covered and where we think we need some additional help. And so basically, we will, and still are, in a selective hiring mode. But at this point, as you can imagine in these markets, we are inundated with people who would like to be here as an island of stability.

But from our point of view, what works with this model is really people of a special caliber, and so we have to be quite discerning and disciplined about that process, and we can afford to do that. So that's our approach, is to be quite selective. You can see we have been hiring people and we will continue to do in selective areas, the last obvious group of which is that we have really reinforced our new energy practice worldwide. And partly that's to complement what's been going on with our team traditionally in Europe, but also the needs of our clients with our broadening relationships in Australia. So what we try to do is to reinforce our geographic platform with our expertise worldwide in our specialized industry focus. And Steve?

We'd added people in both our businesses, the managing director level. Financial advisory as well as asset management. And it really fills us out in terms of industry depth and geography around the world. We bought the Australian business last year. A guy named John Wiley heads that up, and he's really helped our practice. We've been in the Coles transaction; we're currently in the BHP Billiton transaction. We'd added Ken Costa in the UK; we've opened up an office in Boston with Mike Murray to expand our technology practice. Bruce mentioned our energy practice, hiring Bruce Bilger and John Rutherford in Houston. So we've tried to -- yes, and Rodrigo de Rato in Spain. We opened up an office in Zürich.

So we've tried to expand ourselves geographically to meet the needs of our clients around the globe and deepen our industry depth as well as our geography. It's working very well. So we will do that as long as we can and it makes sense to filling out our global footprint.

Okay, thanks. And then I think Mike kind of alluded to this in his comments, but maybe a little bit more color on some of the acquisitions you made and the revenue contribution that they may have made in the fourth quarter. And I guess what I'm trying to get a sense of is there's some things you've added that haven't made a full contribution yet from an acquisition standpoint and could be an important driver for '08.

Well, yes, both of the acquisitions at this stage have been fully integrated with the rest of the firm, and we actually don't track the revenues for each of the acquisitions separately because they've been fully integrated.

However, I think Mike, as we've talked before, one of the things that affects the income, certainly, is the amortization of the intangibles in connection with the purchase. And that hits heavy in the first couple of months, in this case about five months, as you have to book a charge for the work in progress if you will at the time of the acquisition. And that's why we say that both of those didn't really contribute much to the bottom line. But in the future, all other things being equal, but not having that amortization charge, we would expect these to be very, very good businesses for us and contributors.

Okay. And then last one and I'll get back in queue. Sorry to be question hog here. Just anything on backlog in terms of the financial restructuring and kind of corporate finance and other segments? I know you talk about the business broadly and they seemed to be very strong last quarter and last year. But how should we think about the backlog for those areas?

Yes, I think we can do it more anecdotally, which is, there has been a -- I think a geometric rise in competitions or presentations for advice on restructuring cutting across industries. Now, that's a -- the way that works, that industry works, is in most cases, not all cases, there tends to be, you have the competition, there are selections, there are retainers, and then sometime later, a year later or whatever, there's a -- maybe two years later, there are success fees. So it becomes a deferred annuity. But on some situations, there are obviously faster types of results as has happened in the beginnings of the financial services restructuring. So we would anticipate more of that, and that's why I say the M&A and the restructuring, traditional restructuring, side have blended because most of the situations that will occur this year are in this twilight zone, where there are companies that are undergoing capital changes, require some restructuring, but it's not a court type of process.

Okay, great. Thanks, guys. I've got a couple more but I'll get back in queue. Thank you.

Guy Moszkowski, Merrill Lynch.

As Mike Castellano alluded to, you had achieved positive shareholders' equity. And of course, at anything like the current earnings rate, the net worth is going to become fairly meaningful, fairly quickly over the next couple of years. Does that drive any change in strategy -- anything that you could do to use your balance sheet strategically in a way that you haven't been able to do until now?

Really that number has, as we've said consistently, has not been a particularly relevant number other than symbolically. The fact is, as Mike alluded, we have and are sitting in a position where we are obviously very financially strong. We are sitting with over $1 billion in cash equivalents. And we obviously had a lot of flexibility to use that in the best way for our shareholders for the long term, and we are obviously thinking carefully about some of those alternatives. So we feel quite financially strong I guess is the right way to put it.

But I think the characteristics of the Company are very important and I think it's something that's understated somewhat, which is that the quality of the cash earnings are very pure. That is that we generate cash without the need to be locking it up in capital markets activities or things of that sort, and therefore, it can be deployed in ways that are beneficial to shareholders. And I think we've been able to demonstrate that.

So essentially, I think what I hear you saying is that just because you will, going forward, have positive net worth as opposed to in the past it doesn't really drive any strategic change in how you're going to manage the business.

That's correct.

A separate question. Can you give us a sense for how significant a response you are seeing among your international clientele to the fairly dramatic foreign exchange realignment that we've seen over the last year or so at the expense of the U.S. dollar? Does that make a difference in their cross-border thinking?

Yes, it would make a difference, but other events are preoccupying people, including development in the particular countries. I think macro or thematic developments are, obviously, influencing some of these mineral type activities that you see cross border. But on the question of why aren't Europeans snapping up assets in the United States given the exchange rates, I think most have been focused on their own backyard. We do believe that in the longer term, that that will be an important factor. But I think to that you have six months to go before that begins. I do think that this is a Steve point.

When you look at what people think is an M&A cycle, which we described as a series of curves or cycles, that one layer on it is the international level of activity. And as you know, that has barely started, and we think there's a lot of inherent interest in that, and it will develop quite strongly over the next few years and is part of, obviously, our plan of building this global position because we believe we will be uniquely positioned to take advantage of that surge.

And regarding the Asset Management business, could you give us a little bit more of a sense for what characterized the flip from positive to negative in terms of net outflows in Asset Management this quarter?

I think that, Guy, as we've talked before, the Asset Management business, we've spent under Ashish Bhutani's leadership, a lot of time over the last couple of years repositioning that business and focusing on developing new products, et cetera. The timing of inflows really is a timing event. You're going to have some really strong quarters as we had for a few quarters last year. And there will be the occasional quarter where there will be a net outflow. And again, given the turbulence in the equity markets, in the November or December timeframe, it's not surprising. The actual seeding of new investments by people have been postponed a little bit.

Nothing that we see to be any systemic issue. It's just sort of the ebb and flows of any particular timing of when things come in or go out. But basically, the business is very healthy, and we have -- are very optimistic about it.

Thanks. Talk a bit -- going back to do M&A and corporate finance businesses, you have had a lot of success in growing corporate finance revenues over the last year. How much of that is attributable to the growth of the middle market initiative? And maybe overall you could comment on the revenue mix within Investment Banking of the middle market part of the business versus your more traditional large Company-oriented business.

At the moment, it's essentially the larger company business overall. However, some of the financings, and it depends which particular product, are more middle company oriented. So I would say it runs the gamut.

The capital market advice activity is the largest of companies. We tend to do best on that product with the most sophisticated companies who are trying to seek advice between very complicated proposals they get from a whole series of people. And the question is not only what product is right, but basically what should be their capital markets strategy.

On some of the products that we have, like advising special purpose acquisition companies, that, inherently, by size, tends to be middle market acquisitions. The Goldsmith Company, which is now morphed into our Lazard Middle Market Company, which we've built around, the effect of that is yet to be felt really this year that will have the impact of the activity that you are talking about.

But you can see that our hope is that both on the advice side to them on a product for larger companies and in terms of some of these corporate finance advice products, that there is a lot of possibilities of a good fit for us and it's basically because we already have the infrastructure with our industry groups to give that -- to have a comparative advantage in giving these people good advice. And when they want to sell, having a global sales network to make available to them. So that should work out pretty well.

So we see it as a good addition to our base business, but our base business is our base business. And the way to think about this is we have a base business. It's obviously as we broaden these products, each of which add 5 or 10% of our business, but we have a whole series of them and you accumulate the broader geography, more depth in industries, different size of American companies, more products for companies and all of a sudden that all tends to accumulate and you have a much broader platform and we believe quite a positive outlook.

I'm just going to ask one final question, which is with relation to Steve's comment about financial services being a very early part of the M&A cycle, I guess I just can't resist asking if you could elaborate on what you see that drives that observation, Steve.

What we're seeing now, you are seeing the beginnings of the recapitalization of a number of global financial institutions. As you look at companies that need to recapitalize, you usually end up seeing, as they go through the non-core assets, the ability to potentially sell some of those non-core assets. And ultimately, you will see the possibilities, as we saw in Europe last year, with ABN AMRO of a consolidation of some of these big financial institutions around the globe, specifically in Europe.

And with financial institutions, the activity has really barely begun globally. And I think what Steve is saying is with the large institutions as the source of capital, you can sell equity or you can sell assets. We believe there will be a lot more velocity on the asset side as well as some of these recapitalizations.

In addition to that, they are in around the world, both in asset management and in commercial banks, there are many mid-sized institutions. And under times of challenge, there is an impetus to get to the point where there is more consolidation, pricing is different, things of that sort. We think that will come at a later stage, but we think it will come.

And obviously, similarly, for the insurance business we're watching things happening that are quite interesting and all sorts of subsections of that business. So we think Financial Services is a great market for us. We've invested heavily in it. We think we have certainly one of the world's leading teams, if not the leading team and we think that our position of independence, particularly helps that position.

That's very helpful. Thank you very much.

Michael Hecht, Banc of America.

I just had a couple of quick follow-ups. Can we talk a little bit about the long-term outlook for the margin at Lazard, I guess overall, which was I guess pretty steady last year, pretty good top-line growth -- I guess around 21, 22%. Do you think long-term mid-20s is still a range you hope to get to? And I guess as part of that, can you talk a little bit about how you see the margins developing across your two businesses? Obviously for the M&A business, it may depend on activity levels, but on the asset management side, I think with the momentum you've seen in terms of asset growth the last year, we might expect to see a lift in the margins there.

Mike, I fundamentally say to you that what you've seen from us in the three years now that we've been reporting as a public company, both on the compensation to operating revenue ratio and on the non-compensation expense to operating ratio, you have been seeing those decline as a percent of operating revenues over the three-year period. We don't have a particular numerical objective, but we've been trying to drive the business to expand our operating revenues. And at the same time, drive down both these ratios over time. And we've been successful with that to this point in time. And we will continue to try to operate in a fashion to keep that going in the same direction but without a particular target in mind at the moment.

Yes, but just remember in Asset Management in particular that we have continued to invest in upgrading the teams and creating more depth, and we think as has been our style in Asset Management, that that investment pays off; it pays off with a lag. But again, what differentiates us is partly we very much religiously believe in investing for the long-term future. All of us care very much about the positioning of the firm for the long term and feel that we shouldn't sacrifice those investments for short-term gain.

So what you see when you look at the Company is a company that's been quite aggressive in making those positions, because you know in Asset Management, when you hire a team like, for example, we brought in a whole group of quant people, the returns from that are over time; it isn't an instantaneous turnaround.

Okay that's fair enough. And just last question, sticking with the Asset Management business for a minute, are there still I guess acquisitions there that would be of interest and where are your kind of strategic gaps as you see them on the Asset Management point at this point?

Yes, well we are, as I think we've said before, we had mentioned the quant possibility before and we did that with hirings. We obviously are thinking about companies that might complement our existing business, but there may be cost efficiencies or distribution efficiencies. We are looking at firms that, again, add depth geographically. We are looking at some firms that have different product expertise. But we are also looking at firms that have somewhat of a different investing orientation. And all of those, with the idea that we added them to our platform, is this something that we feel we could develop further.

These are all at the study stage. There is nothing that's imminent. But certainly, as you know, we have what I think is a able team that's focused on these strategic questions, and we think that we will be able to achieve some positive results from that approach.

Okay, great. Thanks a lot.

Thank you. And this now concludes the Lazard conference call.