Make 5% in a Few Months Off This Investment Bank

Mike is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

On Monday November 12, Leucadia National (NYSE: LUK) announced that they are buying the investment bank Jefferies (NYSE: JEF).  This acquisition is their largest yet and Jefferies shareholders will make up about 36% of LUK stock.  This values Jefferies at around $3.6 billion. Leucadia has been seen as a smaller version of Berkshire Hathaway (NYSE: BRK-B) but this transaction isn’t in line with Buffett’s style. 

Jefferies has recovered in a huge way since the rocky year of 2008.  In the ugly times 4 years ago, Jefferies was feeling the pain.  The firm survived the tough times but had a loss of over $500 million in 2008.  Since then Jefferies has made quite the comeback with a profit of almost $275 million the next year.  This was nothing compared to the massive profits of ibanks like Goldman Sachs (NYSE: GS) and JP Morgan but Jefferies has maintained these profits since.  Jefferies had a net income of about $300 mil in 2011.  Goldman Sachs has been dying ever since their huge 2009 year.  Goldman went from having revenues of $45 billion in 2009 to $28 billion in 2011.  Part of this is due to changes in regulations that hit Goldman a lot harder than companies like Jefferies that were able to avoid it. 

Since Buffett and Berkshire Hathaway’s struggles and eventual exit of Solomon in the 1980’s Buffett has stayed away from substantial positions in investment banks.  Buffet has invested in Goldman and Bank of America but not to the extent he invested in Solomon.  Due to illegal trading by one of Soloman’s traders, the investment and trading firm risked bankruptcy after clients pulled out their money and refused to do business with them.  After firing management, Buffett was forced to take the reins and get the firm through the legal mess. Is Leucadia, the mini-Berkshire, making the same mistake?  Likely not.  Leucadia has owned about 28% of Jefferies for a while.  They have been together through the financial crisis and the recovery.  It is likely that Leucadia knows Jefferies inside and out.

This merger could mean a 5.1% gain for the investor without any market correlation.  This stock deal provides the Jefferies shareholder with 0.81 shares of Leucadia.  Since Leucadia’s shares are at $23.19, each JEF stock will receive $18.78 worth of Leucadia stock in the first quarter of 2013.  JEF stock is at $17.87 so Jefferies shareholders will make a 5% gain on their stock.  This translates into an annualized gain of 14% assuming the deal closes on March 30, 2013.   Plus, the likelihood of the deal completing is quite high.  No financing is needed since it is an all-stock deal plus the two companies know each other well through years of Leucadia ownership so there shouldn’t be any surprises.  Not a bad bet in a financial world full of uncertainty.


mthiessen has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Berkshire Hathaway and Goldman Sachs Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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