A recent article that appeared in Reuters detailed the struggle between Citigroup and Morgan Stanley in reconciling their independent valuations of their joint venture (see Randomness of M&A advice).
Citigroup has been in negotiations with Morgan Stanley over the wealth management joint venture because Morgan Stanley hopes to boost its controlling stake by 14% to 65%. The two firms’ numbers have a discrepancy of a shocking $13.5 billion.
According to Citi, the venture is worth roughly $22 billion.
As Antony Currie of Reuters notes:
That seems too optimistic…the JV itself is at best a work in progress, cranking out a lackluster 12 percent pre-tax margin last quarter.
On the flip side, Morgan Stanley has written down the value of the venture such that their valuation of the venture is less than half of Citi’s.
I don’t really care one way or another what the true underlying value of the joint venture is.
To me, the farce of it all is that these are two supposedly sophisticated investment banks that have an expertise in valuation, and they charge clients for “impartial” investment advice. Yet here we have a situation in which the two parties to the deal are $13.5B off in their valuations. C’mon, …really?? $13.5B is not a rounding error.
Another point of concern is how many financial experts try to paint financial valuation as a mathematical science. Riddle me this: How can a science, which prides itself on accuracy and precision, result in two parties scratching their heads at a gulf of $13.5B?
Surely there’s lots of sophisticated math involved, but as I always convey to my students, any mathematical model is only as good as the assumptions upon which it is built. And I’m not sure that two valuation models that produce outcomes that are $13.5B apart inspire much confidence in the science part of the art.