In November, brokerage firm Stifel Financial announced that it would be buying investment bank Keefe, Bruyette and Woods (KBW). The strategic merger, as it is being called, will create a mid-tier investment bank with net annualized revenues of about $1.8 billion.
It is surprising that more consolidation in the financials sector has not already occurred. The financial crisis was expected to force banks to sell out or seek partnerships, yet M&A activity in the sector has been muted.
All things are relative. The financial sector in the US is large and the headline numbers are still substantial. According to Dealogic, $42.4 billion in M&A deals in the US financial sector have been announced year-to-date, in line with $43 billion in 2011 and $44 billion in 2010. But that is a far cry from the average $120 billion from 2003 to 2009.
Stifel Financial, which has its headquarters in St Louis, Missouri, has been one of the few active acquirers over the past four years. In 2010 it bought technology-focused investment bank Thomas Weisel Partners and last year it made a large investment in Miller Buckfire, a New York firm specializing in restructuring. Stifel has also bought fixed-income specialist Stone & Youngberg and the New Jersey brokerage firm Ryan Beck & Company. It is also reportedly eyeing advisory and capital markets boutique Gleacher and Company, which put itself up for sale a few months ago.
However, consultants say that Stifel/KBW is a one-off deal and that widespread financial sector M&A will not be returning in the near future. "Many investment banks have yet to work out the path they want to take for growth," says Marshall Lux, senior partner at Boston Consulting Group. He says the investment banking industry seems to be splitting into three tiers. One tier comprises the new bulge bracket: mega banks that are now fewer in number and have global businesses that attempt to offer all the main product lines in nearly all geographies. The second tier are securities firms that are focused on a more limited set of product lines in fewer geographies, with a clear eye on other businesses that they run, such as wealth management. The third tier is boutiques, a segment that is growing in number and importance.
In every tier, says Lux, players are still working out their new strategy: "In the first tier, the question is, what is a bulge-bracket player? What does that look like today? They are trying to work out how they can continue to grow." The second tier comprises those firms that are consistently sixth, seventh and eighth in the league tables. "Those firms are focused on what their future looks like," says Lux. "They will need to place bets on products where they feel they have advantage and shutter other parts of their business. They will need to retrench from certain geographies where they are not winning."
These two tiers, says Lux, are not near to formulating a strategy that would accommodate an acquisition or merger, which is hampering M&A. "The activity is mostly around the boutiques, but the deals seem to be opportunistic and limited in number," he says. "For the most part, it is easier to hire whole teams than merge or acquire. The investment banking industry, despite all the cost-cutting, is still early on in reshaping itself."
In November, Leucadia National announced that it would buy investment bank Jefferies for $2.8 billion. Leucadia and Jefferies have a long-standing relationship. Leucadia already owns 28.6% of Jefferies, and the senior management at both firms have worked together, in some cases for decades. Jefferies chief executive, Richard Handler, will also become CEO of Leucadia, which solves Leucadias succession plan following the retirement of Ian Cumming.
It is an interesting deal, however, given Leucadias make-up. Although Jefferies will be the largest business in the group, Leucadia, a holding company, owns several large non-financial businesses in plastics, telecoms, beef-processing, mining, gaming and auto retail.
Sign of things to come
The head of M&A advisory at an investment bank says the move might be a sign of things to come for investment banking. "The tie-up between an investment company like Leucadia and an investment bank makes sense," he says. "Jefferies gets access to Leucadias capital, while Leucadia gets to source investment opportunities from Jefferies."
One banker points to Centerview as another example of investment companies with diversified portfolios having fused with investment banks. Centerview Partners is an independent investment bank, while Centerview Capital manages a private equity business focused on consumer companies.
The banker says: "There is a challenge of managing conflict, but this type of tie-up is back to the old days of merchant banking almost, where the firms can get involved in a wider variety of transactions and benefit from more stable underlying balance sheets."