Thursday, July 06, 2006

Washington Post: FBR ought to be careful

The FBR deal that was announced over a week ago seemed like a great way for the investment bank/mortgage REIT to unlock value in its capital markets business. The justification went that because investment banks and capital markets businesses trade at higher P/E multiples than mortgage banks like FBR, spinning off FBR's capital markets business would unlock value in this franchise for shareholders, given that FBR's current stock trades like a mortgage REIT.

However, the Washington Post sees the deal a little differently, as this article states.

"The plan to raise $400 million through a private sale of stock in FBR Capital Markets Corp ., with parent FBR retaining a 67 percent stake in the unit, pushed FBR's stock up 11.7 percent since it was announced on June 22."

The benefits of said deal are that the capital markets unit gets $400 million in cash and a liquid stock. The downside is that the managing directors, the value of any middle market investment bank, may lose faith in the operation and head for the exits. When the brain trust of an investment bank exits, there is little left. This is unlike most retail businesses, because for investment banks human capital, or stated another way, the strength of the manpower is paramount. An investment bank is only as powerful as its MDs relationships. Sure many investment banks can survive in the lending arena where they can open their balance sheet, but FBR is not a bank and hence have to rely on the confidence their clients have that FBR will be able to provide the best advice and execution.


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