investment banks in demand, but not at any price
Investment banks in demand, but not at any price June 30, 2004 6:08am ET (Reuters)
By Jane Merriman
LONDON, June 30 (Reuters) - Investment banks which dropped off M&A shopping lists during the three-year bear market in equities are coming back into fashion among investors.
UK stockbroker Cazenove [CAZ.UL] has received takeover approaches and U.S. corporate advisory boutique Greenhill floated in May on a relatively expensive multiple of about 4.9 times 2003 revenues, suggesting investment bank price tags are on the up.
Lazard [LAZ.UL], the independent investment bank, is mulling a flotation that could value it at $3 billion, based on a Greenhill-style multiple.
But potential buyers may think carefully before paying the fancy prices seen at the peak of the 1999/2000 stock market boom, which saw the last run of big investment bank deals.
In those heady days, investment banks sold for more than three times the value of their assets, or their book value.
Credit Suisse paid $11.5 billion for U.S. investment bank Donaldson Lufkin & Jenrette in August 2000, an estimated 3.2 times book value. But the Swiss bank then paid out more than $1 billion on top to lock in staff, many of whom quit despite the financial inducement to stay.
"The key is whether you can really make the integration work without losing key staff," said Piers Brown, European banks analyst at Commerzbank Securities. "DLJ demonstrated that even with a big lock-in (payment) you could still end up losing a lot of staff if the fit is not right.
Traditional banks are usually valued on multiples of book value or their price to earnings multiples. But different investment banks have such a disparate mix of businesses such measures apply less well and it's tough to find common benchmarks.
"There's a big difference between a bank with a capital-intensive trading business, and something which is a pure M&A boutique like Greenhill, where you ought to be able to make a much higher return on your capital," said a senior banker at one European banking group.
Cazenove, the market leader in UK corporate broking, has a likely price tag of 750 million to 800 million pounds ($1.5 billion) based on the value of its shares, which can be traded within the firm by its employees.
"With a business like Cazenove, the key is how much you can preserve of the revenue stream," said one corporate broking executive. "And an even bigger unknown component is how much more revenue you can squeeze out of the relationships with Cazenove clients."
HIGH PRICES
Some of the deals at the height of the stock market boom are now viewed as excessive.
Credit Suisse's DLJ deal is often pointed to as a prime example, but the $7.2 billion J.P. Morgan paid for Britain's Robert Fleming in August 2000 is also now seen as rich price.
"Robert Fleming and DLJ were both at the height of the boom, when there was a ridiculous amount of euphoria around," said one senior corporate financier. "They are not good precedents in the current climate." The last big deal was Chase Manhattan's acquisition of U.S. investment bank J.P. Morgan in mid 2001. This followed a string of multibillion-dollar acquisitions in 2000, also including UBS's acquisition of U.S. brokerage Paine Webber for $12 billion
Lock-in payments to keep key staff on side in a deal are increasingly common. Critics say they effectively force the buyer to pay twice for an acquisition.
"You have to lock people in with golden handcuffs - that's an increasing trend now," said one banker. "Nobody's going to pay three times book (value) for something and then risk the value disappearing that night."
But some investment bank acquisitions have proved value for money. Merrill Lynch bought Britain's Smith New Court in 1995 for $842 million, seen expensive at the time, but the purchase paid off hugely. "Everybody thought was it was terribly expensive when they did it and they've made a mint out of it since," said one banker.
Citigroup bought the investment bank arm of UK firm Schroders for 1.35 billion pounds in 2000, seen as a reasonable price for a deal where integration worked despite fears of a culture clash
