THE TRADER: SVB Financial Group by Kopin Tan
Summary: When Merrill Lynch & Co. Inc. (MER) announced last week its $1.8b deal to acquire First Republic Bancorp Inc. (FRC), SVB Financial Group (SIVB) shares jumped: If MER was willing to pay a 44% premium for FRC's wealthy clients, then SVB -- which has built itself a name as bankers to VCs, silicon valley companies, and wineries -- might soon be the beneficiary of similar indulgence. With a market cap of $1.6b, the company is an attractive target. Its client base would be difficult for a larger bank to replicate, and its clientele would benefit from the wide-ranging services inherent in big operations. Like all banks, an inverted yield curve hurts SVB, but it is less tied to residential mortgages and exposure to a stagnant housing market than most. Lending revenues should continue to outpace peers: MER analyst L. Erika Penala sees 14% income growth in 2007, and calls the stock one of the most attractively valued in the small-cap financial sector. Its inability to control management costs is noteworthy, but likely to be the beneficiary of shareholder pressure. Oppenheimer's Christopher Nolan thinks shares ($47) are worth $54, and $61 on a buyout.
Related Links: Merrill Lynch to Buy First Republic for $1.8 Billion • New Type of Backdating Risk at SVB Financial: To Clients