Taking the Cowen to Market

Boutique investment banks are definitely back in fashion. One month after former Morgan Stanley (NYSE: MS  ) Vice Chairman Joe Perella opened his doors for business at Perella Weinberg Partners, the Cowen Group is being spun out of French bank SocieteGenerale in an IPO set to debut Thursday. The spinoff brings Cowen full circle after its acquisition by the French bank in 1998. With a price range of $19-$21 per share, the 11.2-million-share offering could raise as much as $224 million. (An overallotment option allows for the sale of an additional 1.7 million shares.)

Cowen is a meat-and-potatoes investment bank, providing research, sales, and trading and investment banking (M&A and capital-raising) services. The firm concentrates on companies in the growth sectors of technology, media, telecom, and health care. Unlike many of its peers, such as Thomas Weisel Partners Group (Nasdaq: TWPG  ) , Greenhill (NYSE: GHL  ) , and Lazard (NYSE: LAZ  ) , Cowen isn't involved in asset management or private equity.

Cowen's 2005 revenues were flat year over year at $294 million, while net income declined 80% to $12 million. Despite no top-line growth since 2003, the company's bottom line has experienced large swings because of significant variability in litigation-related costs.

"Our people are our greatest asset" is a cliched corporate slogan, but it's vitally true for investment banks, which depend on the expertise and relationships of key employees to generate trading and deal activity. To keep these assets from walking out the door, the terms of the IPO grant a total 2.1 million restricted shares -- 14% of shares outstanding, assuming the overallotment is activated -- to 84 senior employees, including 1.1 million for chairman and CEO Kim Fennebresque. His stock will vest at the end of 2010, while the remaining grants will vest in 25% increments on the third and fourth anniversary of the grant date, with the remaining 50% vesting on the fifth anniversary. The firm's incentive plan also provides for immediate stock option grants on 1.1 million shares.

What of the offering price? With losses in three of the past five years, and significant variance in profits over the past two, valuing Cowen based on earnings would require some fancy footwork. Thomas Weisel, which went public in February, is a near-perfect comparable company -- it's similarly sized and has the same focus on growth sectors. On Friday, Thomas Weisel shares closed at $18.25, yielding multiples of 1.66 times trailing-12-month revenues and 1.92 times shareholder's equity. At $20 per share (the midpoint of the announced range), the Cowen Group would change hands at 0.95 times TTM revenues and 1.45 times shareholders' equity.

While Cowen's offering price appears attractive on that basis, I think the company's ongoing litigation exposure, its narrow business focus, and its patchy record of financial performance represent substantial risks for investors.

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Fool contributor Alex Dumortier holds no financial position in any of the companies mentioned in this article. He welcomes your (constructive) feedback. The Motley Fool has a strict disclosure policy.


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