VC Arms Don?t Help Out I-Banks

As expected, many banks reported lower first quarter earnings than a year ago, with results driven down, in part, by disappointing results from their venture capital arms.

Merrill Lynch, which invested in more than 30 companies last year, reported earnings totaling $874 million, 21% less than its record $1.1 billion in earnings in the first quarter of last year. Merrill?s venture arm didn?t have all losers last year. It does boast strong portfolio companies such as e-education site, Blackboard Inc. and bill payment service Yodlee.com Inc. However, Merrill also dumped money into the venture capital start-up nightmare Yazam.com.

Mellon Financial Corp., which had an 8% increase per share from the first quarter last year, reporting earnings per share at $0.54, brought in $76 million in revenue from its equity investments. That is a decrease of $27 million from the first quarter of last year. While Mellon Ventures invested conservatively in a handful of successful companies last year, the portfolio companies? revenue wasn?t enough to keep it even with last year?s mark.

Claire Percarpio, an analyst with Janney Montgomery Scott LLC., said, “Mellon did better than a lot of people expected, the swell didn?t hurt them that bad.” As for Mellon Ventures, “it doesn?t seem to have much in the way of losses or gains. It doesn?t matter that much one way or another.”

Citigroup, which also wisely invested in just a handful of companies, posted losses for the quarter. The New York-based company reported income of $3.66 billion, a 7% decrease from its first quarter 2000 results.

According to its quarterly earnings report, “Income from investment activities was $136 million, a sharp reduction from the exceptionally strong results of the first quarter of 2000,” which brought in $634 million.

Unfortunately for e-Citi, on the very top of its investing list is eLance, a freelance placement company whose co-founder and manager Srinivas Anumolu, was arrested in California at the end of March.

The Securities and Exchange Commission and the U.S. Attorney for the Southern District of New York allege that Anumolu took kickbacks, improper gifts and inappropriate gratuities when he worked at New York Life Insurance Co.

Lehman Brothers, which posted its third highest revenue ever at $1.9 billion, didn?t cite its venture arm?s performance in its earning report. But, according to our VentureXpert database, Lehman invested in companies that could have potentially kept this quarter from becoming Lehman?s greatest. The investment bank sunk money into Internet losers like iam.com, an agency that placed entertainers until it closed down, and the now defunct print company printnation.com last year.

JPMorgan Chase was down $552 million from last year, reporting this quarter?s income at just over $1.4 billion, which did manage to beat analyst expectations. Its venture arm, JP Morgan Partners, brought in only $132 million this quarter for the company, as compared to a whopping $654 million at the same time last year.

JPMorgan Partners, like many of its competitors, cited challenging market conditions and limited exit strategies.

Ken Worthington, an analyst with CIBC World Markets, said in general, banks? venture arms are lower on the priority list than the banks? other sources or lack thereof revenue when it comes to the earnings. “But venture arms did have an impact on earnings this quarter.”

He went on to say, that while companies may be able to drum up revenue from services they offer, investments are harder to play with. However, “the market seems to be making a recovery, especially in the high-tech sector where a lot of investments lie, which will gives the banks the potential to sellout, if necessary.”

Contact Danielle Fugazy: danielle.fugazy@tfn.com