Valuing Investment Banks

Heidi Moore has found a June report breaking down Lehman Brothers on a sum-of-the-parts basis:

Lehman Brothers asset management alone is worth $8 billion if it is valued the same as its peers using a multiple of 20.1 times the share price to trailing-earnings since 2000, wrote David Trone of Fox-Pitt Kelton Cochran Caronia Walker on June 13. That $8 billion is pretty considerable when you consider that all of Lehman had a market value of about $13 billion when the report was written ($11.5 billion as of Tuesday). It means the core Lehman businesses-investment banking, fixed-income and equity-was valued at only about $3 billion. Combined. (The remaining $2 billion in Trone's valuation of Lehman comes from the high-net-worth brokerage business-the guys who sell Neuberger Berman's funds, among others.)

Moore doesn't quite connect the dots: If the asset-management business is worth $8 billion, the high-net-worth brokerage business is worth $2 billion, and the whole shebang is worth $11.5 billion, that means the value of the investment bank has fallen by 50% to just $1.5 billion over the course of the past four weeks. That's less than JP Morgan paid for Bear Stearns, and it's simply too small to be viable.

Back in October, Jesse Eisinger said the end was nigh for one or two stand-alone investment banks; maybe even all of them, bar Goldman. Now, with Bear gone and Lehman going, he's looking prescient. And Merrill Lynch isn't entirely out of the woods yet, either: we'll find out more on that front when it reports earnings next week.

If I had to make a bet on one publicly-listed investment bank right now, I'd probably pick Blackstone, precisely because its investment-banking operations are small, not very risky, and profitable. But of course if Lehman's valuation is dominated by its asset-management operations, Blackstone's is dominated by its private-equity operations. It's getting very hard to find a pure investment-banking play these days.

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