Chopping the roots

Recently, Blackstone (NYSE:BX) announced its intention to sell off its advisory division. For those who are unfamiliar with the companys history, Blackstone started out as a pure advisory business, specializing in mergers and acquisitions. Over the past two decades, the company has ventured into the asset management business and grown into one of the worlds largest private equity firms and the worlds largest alternative assets manager.

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Source: SEC Filings

Looking at its segments, revenue from financial advisory amounts to a mere $118 million, which is approximately 5% of the companys total revenue. However, given the internal conflicts of interests, by being a part of Blackstone, the advisorys group revenue and profit opportunities are greatly hindered. Hence, the above numbers do not represent the true potential of the advisory group.

Conflicts of interests

In order to understand how the advisory group is being throttled by being under the Blackstone umbrella, we need to first understand how the private equity, fund management and the advisory side of investment banking work.

For example, lets assume that two private equity firms, Blackstone and Kohlberg Kravis Roberts, are looking to acquire a company. Thus, the two rival firms are on the opposite side of the transaction. Both parties will then hire advisors to advise on the deal. After some back and forth by the rival firms, KKR manages to outsmart Blackstone and acquires the target company. The letter of intent is drawn up, signed and the deal is closed. Fees are paid to the advisors that the two rival firms hired.

Astute readers would notice the glaring disadvantage that Blackstones advisory group faces here. Suppose KKR initially wanted to hire Blackstones advisory group to advise on the deal. Being logical, KKR would obviously choose not to hire Blackstones advisory group; one would be foolish to hire ones competitors. After all, conflicts of interests are apparent. As a result, the advisory group misses out on an opportunity to advise on a deal, an opportunity that could have resulted in fee revenue for the group. Given the large deal success fees that investment banks and their advisory groups are paid, significant potential revenue is essentially lost.

To make matters worse, as I have outlined above, Blackstone manages a huge volume of assets, with total AUM amounting to $279 billion as of June 2014. Given the asset managements division sheer size, it is able to participate in principal investing across many markets, ranging across private equity, real estate, credit and other asset classes. As a result, the asset management division would surely show up on one side or another of many potential deals that its advisory group would like to get hired for. As evident from my earlier example, this effectively severely limits the advisory groups potential. Furthermore, given the asset management divisions large size, it would naturally participate in large deals, most notably the recent Hilton Hotel deal. Large deals beget large fees, which are valuable revenue that the advisory group is missing out on, solely due to its affiliation with Blackstone. It does not take a genius to figure out how severely crippled Blackstones advisory division must feel when it cannot advise on a majority of deals simply because of its attachment to the asset management division.

Now, suppose the advisory group is separated from Blackstone, a situation that would become a fact post-spin off. These conflicts of interest are no longer a problem. The advisory group can freely advise on whatever transactions it could get hired for, and pocket the large fees that these deals pay. Considering the prowess of the advisory group, evident from its well-known clients such as Microsoft, Procter amp; Gamble, Verizon, Comcast, and many more, it is clear that it has the ability to take on deals of any size and complexity.

Joining Paul Taubman

In addition to the spin-off announcement, the company also acknowledged that its advisory group would join forces with PJT Partners, an investment banking kiosk headed by Paul Taubman, a renowned investment banker. Paul Taubman is a name that is well known in the industry. After leaving Morgan Stanley, the banker took on large solo deal assignments, such as the monstrous $130 billion Verizon-Vodafone deal last year. Clearly, Mr. Taubman has no problem holding his own as a solo banker.

The combined entity of PJT Partners and Blackstones advisory group would certainly be a force to be reckoned with in the industry. As I emphasized in an earlier article, investment banking is a business rooted on relationships, and I have no doubt that the combined entity would be able to realize synergies where its bankers would be able to broaden their network of clients, which would in turn, result in increased probability of advising on large deals. Given the current near-perfect economic conditions for capital and Mamp;A market activity, such as cheap access to funding and increased management confidence, I have no doubt that the combined entity would be able to capitalize on the situation in the future. I look forward to investing on the new PJT-BSs advisory publicly traded entity, and I dont see why you should not.

This is something the boards financial advisory committee would like the full board to consider, said Priya Clemens, district spokeswoman, adding public comment would be sought if it moves forward. But it is by no means set in stone. Its just a concept right now.

The bike and pedestrian tolls appeared on the districts 2009 financial plan, but were deferred because of ongoing maintenance on the sidewalks.

From May 1937 to December 1970, a pedestrian toll was charged and collected via a coin turnstile. The board voted to discontinue a 10-cent toll on Dec. 15, 1970. That year some 48,000 pedestrians crossed the span.

If voters approve a proposal for Ann Arbor Public Schools to annex Whitmore Lake Public Schools, homeowners in the Ann Arbor district will pay 0.25 mills more than they do now.

But without annexation, tax rates would go down by 0.19 mills.

That means theres a 0.44-mill difference between the rate Ann Arbor homeowners would pay with annexation compared to without annexation.

Voters from the two school districts will decide Nov. 4 whetherAnn Arbor Public Schools will annex the 944-student district, taking on Whitmore Lake students, staff, buildings and debts.

Heres how millage rates would change based on whether or not annexation passes, according toinformation from Stauder, Barch amp; Associates, an Ann Arbor-based financial advisory firm.

Resident tax rates

  • If Ann Arbor Public Schools annexes Whitmore Lake, the debt millage rises from 2.45 mills this year to 2.75 mills in 2015 and the hold harmless millage falls by about 0.05 mills from 4.49 mills to 4.44 mills. The net increase over this years rate is 0.25 mills.
  • If the annexation fails, the debt millage falls from 2.45 mills to 2.37 mills and the hold harmless millage falls by about 0.11 mills from 4.49 mills to 4.38 mills. The net decrease is 0.19 mills.
  • With annexation, the residents exchange a 0.19-mill cut for a 0.25-mill increase, which is a differenceof 0.44 mills.

Business tax rates

  • If voters approve annexation, Ann Arbor businesses in 2015 would pay a non-homestead rate of 21.75 mills, whichis 0.3 mills more than the current rate of 21.45 mills.
  • Without annexation, the tax rate falls by 0.08 mills to 21.37 mills in 2015.
  • Business owners would exchange a 0.08 cut fora 0.3 mill increase, which is a 0.38-mill difference.

Looking long-term

If annexation is approved, thedebts from both districts will bespread across both communities through the debt millage, said Deb Mexicotte, Ann Arbor schools Board of Education president, at an Oct. 14 community forum.

Were taking on the whole thing and theyre taking on our whole thing, she said.

Ann Arbor schools has about $175 million in debt from infrastructure and building improvements, saidMarios Demetriou, the Ann Arbor schools assistant superintendent of finance and operations. Whitmore Lakes debt is about $60 million.

Ann Arbor taxpayers will pay off the districtsdebt millage in 14 years if the districtdoesnt annex Whitmore Lake.

Without annexation, the debt millagewill decrease slightly each year through 2028 when taxpayers pay it off, according to the tax ramifications document.

If the district does annex the Whitmore Lake school district, the debt millagewill increase by 0.25 mills to 2.75 mills from 2015 through 2018 for Ann Arbor and Whitmore Lake homeowners. After that, the debt millagewill decline each year through 2032 when taxpayers pay it off, according toStauder, Barch amp; Associates.

With annexation, Whitmore Lake taxpayers would have decreased tax ratesbecause the taxes are spread through both Ann Arbor and Whitmore Lake. Whitmore Lake schoolstaxpayers also will no longerpay the districtsrecreation millage.

Whitmore Lake homeowners would pay 2.75mills in the debt millage in 2015, which is a 5.21-mill decrease from the current debt millage tax rate of 7.96 mills. The residents also will pay 4.9 mills in Ann Arbor Public Schools taxes, including the hold harmless millage, sinking fund and tech bond.

If voters approve annexation, businesses inWhitmore Lake would pay 21.75 mills, which is 4.81 mills less than thecurrentrate of 26.56 mills.

If the annexation fails, Whitmore Lake homeownerswill start paying 9.86 mills next year, which is a 1.9-mill increase from the 2014 rate.

Tax rates would fallto 9.46 mills in 2016 and 9.4 mills through 2037, according to Stauder, Barch amp; Associates. The tax rate drops to 9.05 mills in 2038.

Businesses would pay 28.46 mills next year if annexation fails, which is a about a 1.9-mill increase in the tax rate.

Lindsay Knake is the K-12education reporter for The Ann ArborNews. Follow her ontwitteror contact her at 989-372-2498 This email address is being protected from spambots. You need JavaScript enabled to view it. all Washtenaw CountyK-12 education stories on

Lazard Ltd. (LAZ), the largest independent merger-advisory firm, posted third-quarter profit that beat analysts' estimates as financial-advisory revenue increased.

Net income rose 47 percent to $88.9 million, or 67 cents a share, from $60.3 million, or 45 cents, a year earlier, the Bermuda-based firm said today in a statement. Thirteen analysts surveyed by Bloomberg estimated 65 cents a share.

Lazard, which derives about half its revenue from advising on mergers and restructurings, has benefited as deals increased this year. Financial-advisory revenue climbed 24 percent in the third quarter to $291 million, beating the $260 million estimate by Paul Gulberg, an analyst at Portales Partners LLC, and $289.7 million by Devin Ryan, an analyst at JMP Group Inc.

"Lazard should be a direct beneficiary of what we expect to be a multiyear recovery in Mamp;A activity levels," Jeff Harte, an analyst at Sandler O'Neill amp; Partners LP, said in an Oct. 13 note.

Shares of the company, which gained 7.5 percent this year through yesterday, rose 0.6 percent to $49 in New York at 8:18 am

The firm ranks seventh this year in total deal value globally, with $442 million in transactions.

Revenue from the asset-management division rose 16 percent to $287.9 million. Assets under management increased 5.7 percent from December to $197.6 million.

Market Volatility

Market volatility increased in mid-September, then subsided last week as the Chicago Board Options Exchange Volatility Index rose to a 28-month high then dropped at least a point a day starting Oct. 16.

"Persistence in a prolonged period of volatility affects confidence levels," Kenneth Jacobs, Lazard's chief executive officer, said in an interview after results were released. "Confidence is really one of the key drivers of Mamp;A activity. What we're focused on is how long and how deep this period of volatility exists."

Lazard's business advising on deals in Europe could be affected if volatility persists in the region, Jacobs said, adding that September was a "pretty busy month for us in Europe."

To contact the reporter on this story: Madeline McMahon in New York at This email address is being protected from spambots. You need JavaScript enabled to view it.

To contact the editors responsible for this story: Peter Eichenbaum at This email address is being protected from spambots. You need JavaScript enabled to view it. Steve Dickson, Steven Crabill