Lehman Brothers Take-over: Implications for Financials

Aug. 24, 2008 3:17 AM ETLEH, XLF, JPM, FRFHF, LM, ASB, FNF, AFC, STI, BAC, ACAS, CMA, FITB, SUSQ, TY, CNA, FAF, COF, SOV, C, MER, FHN, ETFC, KEY, ORI, MBI, WBS, PNX, MI, ZION, CNB, GNW, BPOP, ACF, HBAN, RF, NCC, SKF, RKH, COOP, FMCC, FNMA, AMBC, WFC20 Comments

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.

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Disclosure: Long NCC

This article was written by

“one of the last great advocates of reason” We manage a hedge fund that utilizes value investing principles and rigorous analysis. Prospective investors, financial reporters, etc. can reach us using the Seeking Alpha messaging platform.

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