IPOs For Merrill (MER) And Citi (C) Brokerage Units?

The FT is reporting that Merrill Lynch (MER) and Citigroup (C) are looking at partial IPOs of the retail brokerage units.

According to the newspaper "brokerage businesses trade on much higher earnings multiples than those of banks, which can be in single figures."

The question is whether the move could unlock value the way that EMC’s (EMC) spin-off of VMWare (VMW) did.

Probably not. The Merrill retail unit and Citi’s Smith Barney are established, cyclical businesses that cannot offer the markets the kind of dynamic growth that VWM did. It could actually be argued that as large commercial and investment banks move beyond their current mortgage-backed securities problems, it is the trading and corporate finance areas that will again be the most profitable divisions.

Until recently, Merrill’s shares had out-performed Schwab’s (SCHW) over the last five years. That was not because of the earnings of Merrill’s retail broker operations.  If this occurs, it would be a unique article out of our "Special Situation Investing Newsletter" to read.

Douglas A. McIntyre