October 31, 2011 8:09 pm
The two bogeymen at the heart of why MF Globalwent kaput on Monday are the same ones who now make it difficult to know how much the bits of broker-dealer are worth. They are: confidence and timing. Teams of bankers, lawyers and advisers lost their weekend trying to negotiate deals and sell assets. As with European sovereign bonds, however, value often has nothing to do with crunching numbers in spreadsheets.
Consider MF Global’s unravelling first. In essence, there is nothing wrong with having more than $6bn of European debt exposure on book equity a fifth as large (it becomes trickier with no profits). Large banks are still about 10 times geared these days. What is more, MF Global’s sovereign assets may well be good bets. But there is no point being right if no one else thinks you are. Nor does it help being too early. Those rules are as old as finance itself, and are ones that chief executive Jon Corzine, an ex-boss of Goldman Sachs, should have known.
Confidence and timing are also the main things that matter when selling financial companies. Of course, MF Global’s $40bn of assets are worth what they’re worth. But what about the client relationships upon which any salvagable businesses rest? Here, potential buyers have a choice. Pay up hoping that those relationships will hold, or wait, pay less (or even nothing), and figure you can grab many of those clients anyway. This second option looks to have been what ended up happening.
Such imponderables are why negotiations can be fraught. They are also why one side often comes away with a spectacularly good or bad deal in retrospect. By the end of the financial year in which Barclays bought Lehman Brothers’ North American business in 2008, the UK bank had already marked up the value of the acquisition by £2.3bn. MF Global should be so lucky now.
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