Lehman Brothers Take-over: Implications for Financials

I thought it would be interesting to take a look at what a Lehman (LEH) take-over would imply for the valuation of financials.

I ran a screen for financials with market caps above $900m that trade in the US and trade below current book value. I then removed some of the more obscure names to narrow down the list and make it more succinct.

The below analysis shows that even if we assume LEH gets taken-out for $20 (which is +28% above current price and +45% above Thursday’s closing price), the deal would still only be at 42% of book value.

As you can see the majority of this “peer group” is trading above this multiple so if 42% of book is the current market clearing price for a battered financial it suggests more down-side for the group as acquirers will not be willing to pay up for these questionable assets.

click to enlarge images

Disclosure: Long NCC

Comments

[gurdjieff2000:]

Your assumption that all companies are in the same
dire straits as Lehman would seem to beg the issue!
In addition, Lehman would not opt for such a valuation unless it was the last gasp! Many financials
trading below book value are in much better shape
thank you, and some even are at lowered valuations
due to revised accounting mark to market rules!
All in all, you article is a non starter

2008 Aug 24 04:54 AM

[Shorts.Distort:]

Thanks for the time and effort that went into this article.
Although, I do no think that the other financials hinge on "the lehman Factor".
FRE and FNM I believe will be the true gauge, and their outcome will dictate the valuation of the fore mentioned stocks.
Still its great to look at that chart and see most are climbing back to their rightful spots...Book value..that is...

2008 Aug 24 05:17 AM

[Ishortyou:]

No so sure I would be assuming that because Lehman gets valuated to junk all the related financials would be valuated at the same level. Also no so sure about buying Lehman without assuming its obligations, although it can happened I doubt it and if it does margin calls will start to fullfil those obligations before the deal is closed.

2008 Aug 24 07:59 AM

[Angelo George:]

How can you not point out that BAC has not reported a loss Q but reduced positive earnings. That is #1 and has yet to cut the dividend. Someone needs to adjust perspective. The BAC Board does not have a track record of exploiting Shareholders.

2008 Aug 24 08:21 AM

[Tom Armistead:]

On ABK and MBI you are missing the point: adjusted book value is the proper metric.

Extrapolating from one troubled investment bank to a variety of other types of financial institutions is an exercise in futility - apples to oranges.

2008 Aug 24 08:43 AM

[pokernut:]

Lehman is insolvent and bankrupt! They are facing $65-70 billion in future writedowns - and have a market cap of $10 billion! This buyout rumor was likely planted by those desperate to unload Lehman stock (using Dick Bove as a conduit). Of course, it will NOT be investigated by the SEC or any other US regulatory agency. When will the crooks go to jail? Hasn't the Street ripped the clueless investor for enough money already?

2008 Aug 24 08:57 AM

[Dallas:]

Hey Benjamin,
Maybe everyone else knows the difference between Book Value and Tangible Book Value and knows what LFI is, but I got my Harvard Business masters degree too long ago and would appreciate a little help. Thanks.

2008 Aug 24 11:55 AM

[leh:]

I'm with Pokernut, putting a price on LEH is like trying to value a cloudy swamp--who the hell knows what lurks in those murky waters! IMO LEH is giving off the same panicked stench that Bear emitted before it went down. This may be one token lamb Bernanke and Paulson may be willing to allow to fail.

2008 Aug 24 12:01 PM

[surgcare:]

All this points out is that anyone who puts money into these institutions might as well go to a casino .At least you know your gambling .

2008 Aug 24 02:00 PM

[jjason:]

I don't know what LFI means either.

I do know some helpful ratios and statistics like: book value, tangible book value, debt to equity, total debt to equity, return on assets, return on investment, gross margin, net margin, dividend yield, etc. They are all important to understand. All of this data must be taken into account...as well as the valuation of the underlying assets on the balance sheet and the liabilities before making an investment decision.

I am only familiar with ACAS and I do believe Malon Wilkes when he said that FAS157 has resulted in the decrease in asset values and that without a market for these assets they are hard to value but since these assets will be held to maturity, ACAS will get their money back.

I trust he is right. ACAS has a total debt to equity ratio of less than one and is selling for less than tangible book value ( ACAS has no goodwill or intangible assets on the balance sheet ).

Long ACAS, no other positions, no short selling at all ( I think short selling should be made illegal ).

2008 Aug 24 02:42 PM

[William Feader:]

The only thing I think the table shows is that the entire US financial system is mis-priced, not just Lehmans, but everything. Good luck.

2008 Aug 24 05:09 PM

[macroguy:]

LFI = latest financial information? Agree with majority about difficulty of comparing apples and oranges and notions that no outsider (and very few insiders, if any) really knows the real values of the assets (i.e., book value).

2008 Aug 24 05:36 PM

[Big Al45:]

The so called "peer group" does not provide a meaningful comparison . Lehman has very little in common with monoline insurers, Business Development Companies, and regional banks that don't have significant off balance sheet exposure. Their asset mix (and risk exposure) is considerably different than that of investment banks like Lehman.

The comparators should be limited to other investment banks and the large money center banks (such as BAC, RY, DB, TD, UBS.)

2008 Aug 24 06:40 PM

[whereismybonus:]

So, forgetting the boring acronyms for a second, is it safe to short most of the companies you mention? Is that what you're saying?

2008 Aug 24 10:05 PM

[omooc:]

When MER sold some of its CBOs at 22 cents per dollar, with 75% financed by MER, one commentator, over CNBC, said that the effective rate is actually 5.5 cents on the dollar -- I share this view.

2008 Aug 24 10:15 PM

[Ishortyou:]

CDO or any structured finance vehicle i.e. ABS-MBS price, is dictated by supply and demand, right now there is a glut in the market or oversupply of them due to uncertainty of how much toxic waste they contain, once those uncertainties clear up and the housing market recovers no doubt that the 0.22cents of a dollar will be 1.22 cents of a dollar.

2008 Aug 25 05:59 AM

[User 234133:]

Just fluff - no analysis, something a 5th grader would provide for a school report.

2008 Aug 25 12:28 PM

[1worldcurrency:]

"but since these assets will be held to maturity, ACAS will get their money back."

Wow. Unless they don't.

2008 Aug 26 12:23 AM

[Mayitoval:]

Did you read "Finance for Dummies" and think you could just post an article on SA?

2008 Aug 26 09:09 AM

[whisperonth...:]

Valuation on everything has tanked, which proves one thing to me - everyone is listening to the analysts and no one is looking at the companies. If all the analysts (ALL) were forced to shut up for one month, people would have to do their own research. They would end up buying stock in the companies they believe are good. The market would go up based on how people feel rather than how analysts feel. This could have the effect of stabilizing some of those companies. Do I know which companies are good? No. Do I listen to the analysts anymore? No. I read them, agree or disagree, and end up buying on my own opinions of those companies or selling for the same reasons. We've all lost value in our investments, anyway. Why not just fire the analysts and go it alone?

2008 Nov 23 11:32 AM