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Eyeing the M&A Firms

With news of high-dollar deals hitting the tape, it may be time to give advisory firms like Evercore, Greenhill and Lazard a long look.
Author:

NEW YORK (

TheStreet

) -- A recent flurry of sizeable acquisitions suggests it might be time to take another look at companies that specialize in advising on such deals.

Though investment banking divisions at places like

Goldman Sachs

(GS) - Get Report

,

JPMorgan Chase

(JPM) - Get Report

,

Citigroup

(C) - Get Report

and

Bank of America

(BAC) - Get Report

all benefit if merger and acquisition activity picks up, their advisory units are dwarfed by their trading operations, results of which can be difficult to predict. That said,

at least one sector watcher

believes first-quarter trading profits could disappoint because of the impact of the Greek debt crisis.

Companies that get a big chunk of revenues from advising on M&A include

Lazard

(LAZ) - Get Report

,

Evercore

(EVR) - Get Report

, and

Greenhill

(GHL) - Get Report

. They have lots of senior investment banker refugees from the big banks who like to think of themselves as true consiglieri to corporate CEOs, as opposed to their counterparts at the big banks who (they will tell you) just try to push their clients into some newfangled equity or bond offering that they don't really need.

If M&A is picking up, it should have a direct effect on the earnings of these companies.

The problem is that despite what appears to be a flurry of big ticket deals, such as

Simon Property Group

(SPG) - Get Report

's proposed $10 billion acquisition of

TST Recommends

General Growth Properties

(GGWPQ.PK),

Thermo Fisher Scientific

(TMO) - Get Report

's

reported

$6 billion offer for

Millipore Corp.

(MIL)

, and

Walgreen's

(WAG)

, planned $1.1 billion purchase of

Duane Reade

, the overall numbers don't look especially impressive.

As of Monday, $156 billion worth of deals were announced in February, better than 2009, but roughly on pace to match the level seen in 2008, according to data provider

Dealogic

. That actually would not be bad, since February 2008 was before the Bear Stearns meltdown. Most of the world was a lot more sanguine about the economy in those days.

However, last month's numbers were pretty weak -- $199 billion worth of deals, compared to $229 billion in January 2009 and $338 billion in January 2008.

Devin Ryan, analyst at Sandler O'Neill, says M&A depends upon the direction and level of equity markets, access to financing and CEO confidence.

"All three of those

factors have improved dramatically from last March, but there's still a ways to go," he says.

So, despite the impression a few big deals may create, M&A is not suddenly taking off beyond the expectations of most investors.

Given that fact, and the seemingly pricey valuations attached to Lazard, Evercore and Greenhill, they don't look like screaming buys. Greenhill trades at 12 times projected 2011 earnings , versus 15 for Evercore and 13 for Lazard, according to

Bloomberg

data. Goldman,

Morgan Stanley

(MS) - Get Report

, Citigroup and Bank of America, by contrast, all trade at single-digit multiples versus 2011 earnings expectations.

Ryan says these companies (Evercore, Greenhill, and Lazard) historically command a higher multiple than many firms that are more trading oriented, as they have higher margins, attractive growth potential, and their businesses are easier for investors to understand. Greenhill, he says, historically trades at about 20 times earnings, suggesting it isn't a bad deal if it consistently hits its numbers through next year.

In sum, if you think the economy is improving, these stocks are a probably good buy, but the same could be said of many stocks. The recent flurry of merger announcements is encouraging, but it looks like it's just getting us back to even after a weak start to the year.

--

Written by Dan Freed in New York