The too big to fail get bigger and bigger. JPMorgan, which weathered the financial storm better than all except for certain marine cephalopods, is consolidating its position. Its imment buy-out of the half-share in JPMorgan Cazenove, the UK joint venture it established with City broker Cazenove five years ago, is a case in point. For JPMorgan chief execuitive Jamie Dimon, overseeing assets of over $2,000bn, exercising his call option over Cazenove's 50 per cent stake is a mere tidying up exercise. But for City historians, the passing of this fabled institution proves that while advice may still be local, execution is ever more global.
Valuing a broker that has no real comparables is complex. Investment banking multiples range from about 8 times for the likes of Goldman Sachs and Deutsche Bank to about 25 times for boutiques such as Greenhill and Evercore. JPMorgan Cazenove's high return on equity is deceptive: it leverages Mr Dimon's monster balance sheet while committing little capital of its own to its securities and underwriting business. Moreover the highly-rated independent advisory businesses derive their income largely from fees. Cazenove is much more subject to the securities cycle, as well as being restricted in its growth due to the geographical and product non-compete clauses in its shareholder agreement with JPMorgan.
The mooted £1bn valuation for Cazenove's 50 per cent stake implies a multiple of 21 times 2008 earnings of £47m, which were down from £55m in 2007. There are no published numbers for 2009, but JPMorgan Cazenove is having a stellar year, with a 25 per cent share of new equity issuance in the UK in the nine months to September, twice that of nearest rival Credit Suisse. Profits may be up 70 per cent, to a hard to repeat £80m. If the 1,500 Cazenove shareholders are to take home their £1bn, JPMorgan would be paying 16 times the joint venture's average income over the last three years. It had better make sure to lock in the talent.