Business Model Debate... "We are maintaining our Strong Buy rating on Trammell Crow (price target of $17) and our Market Outperform rating (price target of $28) on Jones Lang LaSalle." That's Will Marks, Managing Director at JMP Securities in San Francisco, writing about property services companies just prior to CB Richard Ellis' recent public offering on June 10 at $19. (Yesterday's closing prices: CBG $19.09, JLL $26.98, Trammell Crow $13.39.)

After reading last week's Dispatch, "Transaction Professionals" -- Brokers or Consultants? (Jun 15), Marks forwarded his analytical report on CB Richard Ellis, Jones Lang LaSalle and Trammell Crow. So I called Marks to probe further. What are the advantages of public ownership? What are the disadvantages? Will public ownership of service providers become more common?

The biggest advantage is that public ownership "provides owners of private companies the opportunity for liquidity." The biggest disadvantage is that service provider revenue streams are "very cyclical and seasonal," and, therefore, stock investors will "never offer a premium valuation." As a result, it will "forever be difficult to convince a broker to take part of his compensation in the form of stock."

Publicly traded service providers trade at about eight times EBITDA (earnings before interest, taxes, depreciation and amortization). But, in order to avoid earnings dilution, these companies only want to pay three to five times EBITDA for acquisitions. So if you’re a small company with, say, $5 million in gross income and $300k in earnings (after you pay yourself!), one of the big three might pay you $900k to $1.5 million. As a result, Marks doesn't expect to see a large number of mergers in the future.

Spread the Word... Many thanks to Annette Wilde of Planimetron for sponsoring this week's Dispatch. Planimetron develops property and space management software. If you would like to tell Dispatch readers about your services, send e-mail or call 415-461-4703.

--Peter Pike