Valuing Michael Klein is a fascinating sideshow | Reuters

LONDON, Jan 13 (Reuters Breakingviews) – Credit Suisse (CSGN.S) Chief Executive Ulrich Körner has two thorny valuation riddles. He wants Michael Klein to run a soon-to-be-spun-off investment banking unit. Körner must first buy the star rainmaker’s eponymous advisory firm and merge it into a newly christened First Boston. Depending on how the two businesses are valued, it could mean a big payday for Klein. Luckily for Körner, that only happens if Credit Suisse shareholders also make money.

Klein stepped down from the Zurich-based lender’s board last year to help Körner carve out a U.S.-focused dealmaking and underwriting division under the old First Boston name. By listing the business, with Klein at the helm, Credit Suisse could realise some value from a storied Wall Street franchise that it no longer wants. The two sides have discussed a deal where Credit Suisse would acquire M. Klein & Company with Klein getting a stake in First Boston. Deutsche Bank (DBKGn.DE) is providing a fairness opinion on the valuation. Bloomberg reported that Klein’s brother, who also works at the boutique, may join First Boston as part of the deal.

Putting a price on M. Klein & Co is hard from the outside because its accounts aren’t publicly available. Listed boutiques trade on a wide range of multiples, complicating Deutsche Bank’s task. Another wrinkle is that Klein’s historic earnings might not fully capture his usefulness to Credit Suisse. The boutique lacks a large balance sheet, which means it hasn’t historically sucked all the possible juice out of clients by lending or underwriting equity offerings. First Boston, which could have a roughly $75 billion balance sheet, could offer those other potentially lucrative services.

Multiple options

Bloomberg reported that a deal could value Klein’s shop at a “few” hundred million dollars, implying perhaps $300 million or more. But that number may be too high, according to people familiar with the matter.

Just as important as Klein’s value is the worth that Credit Suisse ascribes to First Boston. Since it’s unlikely to be a cash deal, Klein’s real reward will be the value of the stake he gets in the combined company. The size of that holding depends therefore on the relative worth of First Boston and M. Klein & Co. The higher the value of Klein’s shop compared with First Boston, the more he’ll own.

Assume the new U.S. business starts life with $4 billion of balance-sheet equity, as reported by Bloomberg. Closest public-market peer Jefferies (JEF.N) trades at 90% of forward book value. That would imply a valuation of $3.6 billion. If M. Klein & Co is valued at $200 million, for example, its shareholders, including Klein himself, would get 5% of the combined company in an all-share combination, according to Breakingviews calculations.

But First Boston probably deserves a discount to Jefferies, since its revenue has cratered and the spinoff plans are still in flux. A price of half book value, or $2 billion, could be more realistic. In that case, M. Klein & Co’s share would rise to 9%, assuming the same $200 million value.

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Ceding that much of the new business might eventually look embarrassing for Körner. Imagine that a listed First Boston thrives under Klein, and is then valued in line with Jefferies’ multiple. A 9% stake would then be worth $320 million, implying a huge payday for M. Klein & Co shareholders. Given the Swiss bank’s parlous state, long-suffering investors may feel like they’ve been taken for a ride.

But that critique misses the bigger picture. If Klein makes money, Credit Suisse shareholders would do very well too. The bank’s bombed-out equity value of less than $14 billion is not much more than the price tag analysts ascribe to its domestic Swiss business, which implies that the investment banking unit has at best no value at all. If First Boston is eventually worth 90% of book value, and that is reflected in Credit Suisse’s share price, the Swiss bank’s investors would have gained around $3.3 billion.

And Körner’s alternatives are worse. He could spurn Klein and spin off First Boston on its own. But the lack of a star rainmaker would make that risky. Körner could sell, but rivals might just prefer to hire the top talent instead. Finally, he could simply close the business, implying a big loss and costly redundancies. Given the tough position Körner finds himself in, a good deal for Klein may also be a good one for Credit Suisse.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own. Updates to add graphic.)

CONTEXT NEWS

Credit Suisse is close to buying former Citigroup executive Michael Klein’s advisory boutique, Bloomberg reported on Jan. 9.

In late October, Credit Suisse said Klein would step down from its board to work on the investment banking division that will be spun off and rebranded CS First Boston.

The potential deal is expected to allow M. Klein & Co shareholders to take an eventual stake in CS First Boston using proceeds from the sale, Bloomberg said.

Klein is set to become CEO of the business in 2023, pending regulatory approvals.

Editing by Neil Unmack and Oliver Taslic

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