One year into the credit crisis that led to the near-collapse of Bear Stearns, some of the remaining big U.S. investment banks are down, but probably will not get taken out right now.
While experts say the weaker Wall Street banks like Merrill Lynchand Lehman Brothers Holdings face pressures that could drive deals, they do not see more takeovers following JPMorgan Chase acquisition of Bear Stearns, at least in the near future.
Of the small pool of potential buyers, some face problems of their own, and it is unclear whether the worst of the credit crisis is over.
"Some (brokerages) will need financial assistance, shall we say, whether that's a cash infusion or the deeper pockets of a merger partner," said Wesley Fredericks, a mergers and acquisitions partner at law firm Heller Ehrman. "What I see is a potential strategic investment more than a takeover."
Merrill Lynch took the latest hit Monday, when it said it would take a $5.7 billion third-quarter write-down and raise $8.5 billion by selling new stock.
The move had a fire sale flavor to it, causing at least some investors to conclude that the crisis, which has already led to more than $400 billion of write-downs and losses at major banks, could still have a long way to run.
Stand-alone investment banks such as Merrill and Lehman may struggle to keep earning the same kind of returns their shareholders have come to expect.
Experts say these companies may have to look for alternatives like partnering with commercial banks, which would give them a stable source of funds as well as help deal with future shocks and sustain growth even if regulators restrict the amount of debt they can take on.
Some of these brokerages could also become tempting acquisition targets, experts said, but they added that things would have to stabilize—or maybe get worse—before any would-be suitor makes a move.
"The question is, can any of the larger investment banks, now that they have gone so far astray, get back to a profitable, reasonable financial position," said Michael Farr, president of Farr, Miller & Washington, which invests about $600 million. "When you see firms trading at 40 percent of book value, that has to whet someone's appetite."
"Somebody is always interested at a price." Lehman, the smallest of the major Wall Street brokerages, is trading at about half its book value, but Merrill -- the third-largest -- is trading at a little above that benchmark. (See accompanying video for more on credit crunch.)
Goldman Sachs Group, which is the biggest of these firms and has largely avoided the credit losses that have hurt rivals, is trading at nearly twice its book value.
Of late, the fate of Lehman has been the subject of intense and sometimes contradictory speculation, with analysts and media reports suggesting a range of options, from going private to asset sales.
Farr said Lehman was a more likely acquisition target than Merrill, which has a better chance of surviving the crisis as an independent entity.
"Lehman is a size that it could be a bolt-on acquisition at the right price," he said. "Merrill is a very big bite for anyone to swallow." Lehman's market capitalization is about $11 billion, less than half of Merrill's.
Both companies declined to comment.
Potential buyers for an investment bank could include large asset managers like BlackRock , as well as U.S. and foreign banks like JPMorgan, Barclays or Royal Bank of Scotland , said Marshall Sonenshine, chairman of New York-based investment bank Sonenshine Partners.
Farr said he thought international banks were the most likely buyers, and ruled out JPMorgan and BlackRock, in which Merrill has a 49.8 percent stake.
But the list of potential acquirers is small, and even among those, some are dealing with problems of their own stemming from the credit crisis. And that is only one part of the equation.
"The relevant factors are not only the dust settling internally within any one firm, but also the dust settling externally," Sonenshine said. "Where are we in the credit crisis? At what point does credit become more available?"
Moreover, investment banks can now borrow from the U.S. Federal Reserve, which is almost a guarantee against their suffering the same kind of run-on-the-bank that hobbled Bear Stearns.
The Fed said Wednesday that it was extending the facility through Jan. 30.
Merrill's ability to line up investors and raise money means that the company can get along without a merger, said Robert Albertson, a former Goldman banking analyst who is now chief strategist at Sandler O'Neill.
"It strikes me as a little bit of overkill to say they can't remain independent," Albertson said. "There could be (deals). But it's a little premature to count them (Wall Street firms) out, to say they need a larger safe harbor."