Fees. Huge fees.
That's what I thought of yesterday when David Faber chatted with me about Verizon's (VZ) potential for buying out or buying Vodafone. You get a $100-billion deal, lots of banks make lots of money with very few people doing the actual lifting. Gigantic, relatively risk-free, high-gross-margin business.
That's what I think of when I see the acquirers and the investors circling around Dell (DELL) of all things. Dell -- a played-out old tech stock that hasn't been able to move aggressively into higher value-added portions of the tech food chain. Everyone has to have a banker. Everyone has to have some capital. Not everyone is going to win Dell. But if you like Dell, could I interest you in a little Hewlett-Packard (HPQ)? HPQ has hundreds of thousands of employees and many different divisions that don't belong under one roof. Call a banker. More fees coming.
Last night Hertz (HTZ) announces a 60-million-share stock offering. That's a nice-sized deal, big enough to incur, you bet it, huge fees. Like the MGIC Investment (MTG) deal for 135 million shares at $5.15 a piece that just priced, a mortgage insurer with capital that has made it. Or like Radian's (RDN) deal the other day, 34 million shares at $8. Nice. Or like the 10 million shares of J.C. Penney (JCP) put up by Deutsche bank for a nice quick pay day.
Meanwhile, the bond issuance comes hard and fast daily. We have had so many billion-dollar issuances by major borrowers in the last month we don't even bother to notice. But the capital is almost free courtesy of Ben Bernanke and the only real cost is, of course, the fees the bankers are paid.
I know the housing cycle's back, which encourages me to like the regionals, many of which slowly, but surely, are creeping higher. I think those break out soon, but they are still trapped by the fixation on net interest margins, which is like being trapped on the fixation of not wanting good earnings, just good revenue growth, which in the end didn't matter one whit with the revaluation of the consumer-packaged-goods plays.
But it may just be the remaining investment bankers that are the winners here. We have all become conditioned that Dodd-Frank wiped out the principal source of income for these firms, the ability to play hedge fund with their own capital. But believe it or not, the real steady stream comes from helping other companies raise, create and use capital. That's an agency business with huge gross margins that carries very little risk and is capable of getting a real price-to-earnings multiple, not the endlessly shrinking one that we have seen in this business. Plus, it doesn't hurt that the loss leader European bankers have pulled back while the Lehmans and the Bears disappeared forever.
That means JPMorgan Chase (JPM), which is a pretty darned hot stock, Morgan Stanley (MS), and Goldman Sachs (GS) are going to see a sudden spurt from their traditional businesses. Morgan Stanley's still caught in the transition from hodge-podge to retail broker with some institutional services. J.P. Morgan's in very good shape. Goldman? They just named Greg Lemkau as head of mergers and acquisitions and he's got a very fresh and aggressive attitude with a total global focus.
Peek under the shroud of Dodd-Frank. You know what you see? Investment bankers making money for shareholders without the baggage of huge leverage, exactly the stuff that teenage, not single-digit, price-to-earnings multiples are made of. Goldman Sachs ten-times-a-probably-way-too-low 2014 number? Makes sense if they are swinging around billions of their own money. Way too low if they are doing high-quality relationship banking, which is exactly what's starting to happen right now.