The Bottom Line on Boutique Banks


By Steve Rosenbush In its latest report on Greenhill & Co. (GHL), equity analysts at UBS called the small, publicly held investment bank a "a bit pricey." Shares of Greenhill, adviser to big clients like MCI (MCIP), were trading at nearly $30, or 19 times forecast earnings. The report deemed Greenhill a great company but said its shares were probably worth only $26.

That was in January. Half a year has passed, and Greenhill shares have soared to $35.74, or 28 times earnings. Inspired by its success, rival Lazard launched an IPO of its own last month. Now, privately held Evercore, a powerhouse investment-banking boutique that advises telecom giant SBC Communications (SBC), has announced plans to go public as well.

HARD TO FIGURE. Some signs suggest that the wave may have crested, however. Shares of Lazard are trading at $21.90, 12.5% below the offering price of $25. Even the mighty Greenhill may have reached its peak for now. The shares, which have nearly doubled since their IPO last year, have slipped below their 52-week high of $39.20.

When it comes to valuing these companies, investors are pretty much on their own. Only a handful of brokerages cover Greenhill, launched in 1996 by Morgan Stanley (MWD) and Smith Barney veteran Robert F. Greenhill. And one team of analysts says covering the company has proven a challenge, even for them. "Greenhill is a great company...[but] putting a finger on Greenhill's valuation is a bit difficult, given the limited comps," UBS analysts Glenn Schorr and Michael Carrier wrote in a report.

At least for now, no analysts cover Lazard. Its IPO involved many big advisers, and securities rules forbid them from issuing research on the company for the moment. The recent decline in Lazard shares suggests that even Goldman Sachs (GS), which was hired to price the Lazard IPO, had a tough time calculating the venerable bank's worth.

LIMITED COVERAGE. If Goldman has learned anything from the experience, it isn't in a position to share those insights. Goldman is currently forbidden to follow Lazard because of their commercial ties. Merrill Lynch (MER), Morgan Stanley, and Citigroup (C) also are still barred from issuing research because of their roles in the Lazard IPO. Coverage may start soon, though, as those restrictions expire.

Evercore, created by Clinton-era Treasury official Roger Altman, is hot. It's advising Sun Microsystems (SUNW), which announced June 2 it was buying StorageTek (STK). (See BW Online, 6/3/05, "Sun's Surprising Tale of the Tape".) Given the dearth of coverage, no one can say for sure how shares of Evercore will be priced. Without guidance from stock analysts, investors ought to keep several things in mind before they sink money into these companies. The excitement over small advisory firms ties in to the outlook for the mergers and acquisitions business itself, which did very well last year.

The value of global dealmaking totaled $1.9 trillion in 2004, up a stunning 41% from 2003, according to researcher Thomson Financial. M&A activity will be strong going forward, thanks to readily available financing and buyout firms with lots of cash, according to Thomson spokesman Richard Peterson.

LOOK AND LEARN. But there's no guarantee that it will match last year's success, especially in a volatile environment marked by rising short-term interest rates, a sluggish stock market, and mixed signals on the economy. A good market for investment banking might not be good enough to boost the shares of investment-banking stocks.

Investors also should remember that these businesses don't share the same profile. Lazard draws about 40% of its revenue from asset management. As a rule, asset-management firms don't command the same stock market premium that investment banks do. The p-e of Alliance Capital Management (AC) is a relatively modest 19.

There's no question that the IPO of small investment-banking firms will be a great thing for their partners. They don't need to worry too much about the stock price of their firms, since they'll do well regardless. But investors who desire to share the wealth may want to wait for more information before jumping in. Rosenbush is a senior writer for BusinessWeek Online in New York


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