isn't considering a breakup anytime soon, as far as we know.
But given all the recent agitating for a
split, the question of why Goldman shares trade the way they do is an interesting proposition.
In reputation and financial clout, the institution represents Wall Street's high water mark. Goldman's venerable investment banking franchise reported record net revenue this past quarter of $1.72 billion and ranks No. 1 on the merger and acquisition league tables, according to research firm Thomson Financial.
That's not all. Like many financial white-shoes, Goldman has had to become so much more than a simple M&A/investment banking shop. Its commodities trading business has benefited from the volatility in prices tied to energy and natural resources. Its fixed-income platform recently racked up quarterly revenue of $4.6 billion.
Goldman also is raising some $20 billion in private equity firepower. Those numbers rival heavy hitters such as the Blackstone Group, Carlyle Group, TPG and Kohlberg Kravis Roberts, many of which have also been Goldman clients.
Yet for all of Goldman's dominance, the stock is hardly loved by Wall Street. Richard Bove, analyst at Punk Ziegel, notes that Goldman trades at a steep discount to many lesser rivals -- in part because diversified financial giants, like Goldman and Citi, don't tend to get premium multiples.
The observation has Bove toying in a recent research note with the notion of a Goldman breakup.
Bove points out that Goldman trades at 10.4 times its projected fiscal 2007 earnings. Meanwhile, high-profile boutiques such as
sell at multiples twice that of Goldman.
From a private equity/hedge fund standpoint,
Fortress Investment Group
, which was the first hedge fund to go public, trades at a whopping 29 times earnings.
And plain vanilla retail brokers such as
( AGE) and
trade at 17 times and 20 times earnings estimates, respectively.
Bove notes that Lazard, A.G. Edwards and other so-called monoline shops by definition have much more targeted, product-specific lines of businesses than supermarkets like Goldman. So they trade at much higher multiples.
"If Goldman were to break out its earnings along product lines so that they could be compared to these other firms, I have no doubt that one could plot a break-up value for this company that would be 100% above its current price," Bove's report says.
Given Wall Street's investment appetite and its interest in planned initial public offering such as Blackstone's, a hypothetical split-up of Goldman's operations could cause a feeding frenzy.
But as Citigroup's embattled chief Chuck Prince and his predecessor Sandy Weill surely must appreciate, being diversified has its own strong merits. Bove underscores that diversity and steady income generation are big attractions at one-stop shops such as Citi and Goldman.
Citi has been under fire in part because of its soft revenue growth and partly because of its mushrooming expenses. Citi last week set plans to cut 17,000 jobs to bring those numbers down.
By contrast, no one has any problems with how Goldman runs its businesses. And no one is seriously calling for a Goldman breakup, because the firm runs swimmingly and succeeds in cross-selling its various businesses.
Still, coming to grips with what Wall Street wants is a problem vexing many CEOs these days -- and one that LBO shops are more than happy to try and solve.
Diversified banks "have got to start thinking out of the box if they want to get those multiples up," Bove tells
. "If you're management, it's fine because you're getting paid $30 million a year -- but that's not so good for the shareholders."