Stifel flying lazy circles over B-D stragglers

Industry's pain is company's gain; 24 acquisitions since 1997

Feb 1, 2013 @ 10:25 am

Stifel, brokerages
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Kruszewski: A real tiger in Missouri ((Photo: Bloomberg News))

Stifel Financial Corp. (SF) Chief Executive Officer Ron Kruszewski paused in mid-sentence and asked an employee for the list, a chart showing in red which of the St. Louis-based firm's rivals have closed or sold out.

“There's this huge consolidation,” Kruszewski, 54, said in an interview in his office, referring to the once crowded field of U.S. regional and local brokerages that vied to serve mid-size companies. “What's left is very few firms that ever were in the middle market. We're one of them.”

About a dozen golf putters lean against a table. Nine floors down, the lobby is being remodeled with glass and white stone, while a bronze bull and bear statue is planned for outside. The way Kruszewski views it, St. Louis is now the No. 2 U.S. brokerage hub after New York. From his window he can see the Edward Jones Dome, the stadium named for the city's other prominent securities firm and home field of the National Football League's Rams.

Kruszewski is looking to U.S. brokerage-industry turmoil to provide yet more opportunities to grab market share and grow after a decade of acquisitions propelled Stifel ahead of peers. Smaller firms including Rodman & Renshaw LLC and WJB Capital Group Inc. are shuttering operations or selling themselves to larger companies as a drop in trading and lower commissions squeeze margins. Meanwhile, so-called bulge-bracket banks such as Citigroup Inc. and UBS AG are cutting employees and units as they retrench in the wake of the financial crisis.

'Wildest Dreams'

Navigating that shakeup is key to reigniting Stifel's stock, which snapped a nine-year ascent in 2011, as it fell 23 percent, and then ended last year little changed. Kruszewski says his mission is to simply build the firm into a larger version of its current self: a middle-market brokerage and investment bank. The stock is still up 10-fold since 2001.

When Kruszewski became CEO in 1997, Stifel employed 733 people and had annual revenue of $136 million. The company has since spent at least $1.7 billion on 24 acquisitions, according to data compiled by Bloomberg. There are now more than 5,000 employees and annual revenue exceeds $1.4 billion.

“I don't think anybody in their wildest dreams would've predicted the enormity of his success,” said Stuart Greenbaum, former dean of Washington University's Olin Business School in St. Louis and a member of Stifel's board of directors when Kruszewski was hired. “Every growth opportunity is a failure opportunity at the same time. I think he's done extraordinarily well.”

Rivals Grapple

Other mid-size brokerages and investment banks have grappled with how to grow. Cantor Fitzgerald LP, which has become one of the largest independent U.S. brokerages, has also attempted to push into underwriting and advisory businesses. Moody's Investors Service downgraded Cantor Fitzgerald's credit rating to junk in October, saying the firm's profitability has weakened even as it diversifies.

Jefferies Group Inc. (JEF), the New York-based investment bank run by Richard Handler, has hired bankers and traders and expanded its balance sheet to take on larger transactions. Assets have grown from less than $15 billion in 2005 to about $36 billion at the end of 2012, with staff surging 86 percent in that period.

The firm agreed in November to sell itself to Leucadia National Corp. (LUK), the investment firm that's Jefferies's biggest shareholder. The announcement came almost a year after Jefferies's shares plunged following the October 2011 bankruptcy of MF Global Holdings Ltd. (MFGLQ) The deal will make Jefferies better able to weather market turmoil, the companies said at the time.

'Always' Looking

Stifel runs a wealth-management business and an institutional unit that includes investment banking, research, sales and trading, catering to companies with as much as $5 billion in market value. Kruszewski said he's comfortable pulling between 55 percent and 65 percent of the firm's revenue from wealth management.

Stifel has added to both units through hiring and acquisitions, he said. In 2009, the firm acquired about 55 brokerage branches from Zurich-based UBS for $46 million, according to data compiled by Bloomberg. It also purchased Ryan Beck Holdings Inc. in 2007 for about $100 million, the data show. The company is “always” looking to add to its wealth- management business, Kruszewski said.

Analysts and investors point to Stifel's 2005 acquisition of Legg Mason Inc.'s capital-markets business from New York- based Citigroup as the deal that bolstered the firm's institutional business. Other deals include its purchase of Thomas Weisel Partners Group Inc. in 2010 to add health-care and technology banking.

Plate Full

“Because they stuck to their knitting through the years, they were able to emerge from the financial crisis in an offensive position where a lot of their competitors, larger and smaller, were playing defense,” said Devin Ryan, an analyst at Sandler O'Neill & Partners LP.

In 2011, Stifel had net income of $84.1 million. For 2012, that figure is expected to jump to $138.3 million, according to the average estimate of three analysts surveyed by Bloomberg. Stifel has posted record net revenue every year since Kruszewski took over as CEO. Analysts estimate revenue to reach $1.61 billion in 2012, a 14 percent increase from 2011.

Stifel's global wealth-management group had $908.2 million in revenue in 2011, and the institutional division had $507.4 million.

While the global wealth-management unit has room to grow, “our plate is pretty full” on the institutional side, Kruszewski said.

Tangible Book

Stifel's trading floor carpeting is a patchwork of patterns, expanded in pieces as the company adds desks and employees. On a recent Monday afternoon, the floor was as quiet as an insurance office. No one was standing and yelling. Bells weren't ringing. A few traders turned around to say “Hey, Ron,” as Kruszewski walked by.

Last year, Stifel agreed to buy KBW Inc. (KBW), an investment bank focused on the financial services industry, in a transaction valued at $575 million. The deal, which pays KBW shareholders $17.50 in cash and stock, gives the New York-based firm a valuation that is 7.4 percent higher than its closing price on Nov. 2, the last trading day before the deal was announced.

Stifel investors such as Randy Loving of Silvant Capital Management LLC say they're concerned the firm overpaid. KBW's shares already were trading at 1.3 times tangible book value --a measure of how much a firm would theoretically be worth in liquidation -- when the deal was announced, according to data compiled by Bloomberg.

Deal Volume

“I don't think they needed to pay the amount of money that they paid,” said Loving, a sector portfolio manager for Atlanta-based Silvant whose team oversees $3 billion. KBW was “shutting down parts of the business, and had that continued, I think it's possible that Stifel could've picked up whatever expertise they needed somewhat cheap,” he said.

Moreover, adding sales-and-trading and investment-banking businesses increases earnings risk and volatility, Loving said. It also makes Stifel more dependent on an upturn in banking volume, something Loving said he's not convinced will happen.

“When you think about Stifel as a stock, it actually did OK during the downturn because it was devoid of all these issues,” he said.

After reaching a March 2011 closing high of $49.60, Stifel closed at $36.85 yesterday, down 26 percent from its peak. Still, the firm's shares have outperformed those of the biggest banks since the financial crisis. Goldman Sachs Group Inc. has declined 32 percent since the end of 2007 and Morgan Stanley has plunged 57 percent. Stifel has gained more than 50 percent in that period.

'Advice Driven'

With global deal volume about half of what it was in 2007, it may be too early to judge many of Stifel's acquisitions, said Errol Rudman, portfolio manager at Rudman Capital Management in New York. The KBW deal, in addition to other institutional purchases, positions the firm to take advantage of an upswing in investment-banking activity, he said.

“They expanded at a time when others were contracting, and secondly, they've paid prices that reflected the failed businesses they were buying,” Rudman said. “When and if the time changes, they'll be leveraged to that concept of being larger and having purchased the assets at a cheap price.”

Kruszewski's goal is to build Stifel into a “bigger version of what we are today” by adding employees and letting the balance sheet grow along with it.

What they don't plan to do, he said, is try to boost returns by leveraging the firm's assets.

“That has not proven to be successful,” he said. “We are an advice-driven firm, we provide execution.”

Stifel has “a really solid name as a regional firm,” meaning one that has a few thousand advisers instead of upwards of 20,000, said Mindy Diamond, CEO of Diamond Consultants LLC, a Chester, New Jersey-based search and consulting firm for the brokerage industry.

Regional brokerages can be attractive to financial advisers who prefer more access to senior leadership and don't want to be “one of the 18,000,” she said. They also appeal to those who value culture and size more than the price of a transition package, she said. Regional firms typically pay two times an adviser's trailing 12-month revenue with bigger companies paying 3 to 3 1/2 times, Diamond said.

Advisers looking for a regional firm might prefer that Stifel is based in St. Louis instead of New York because it has a Midwest culture that “works to its advantage,” Diamond said. Known for Budweiser beer, barbecue ribs and ragtime music, the city has a metro population of 2.8 million.

Indiana Native

Stifel's headquarters are less than a mile from Busch Stadium, home of the St. Louis Cardinals baseball team, which has won two World Series titles since 2006. A pair of infield box season tickets cost about $9,500 for 2013. Similar seats for the New York Yankees are about $30,000.

Kruszewski grew up in South Bend, Indiana, about 100 miles east of Chicago. A fan of Chicago sports teams when younger, his allegiances are now “St. Louis through and through,” he said.

Kruszewski's background as an accountant has been a factor in the firm's success integrating acquisitions, investors including Rudman say. A graduate of Indiana University in Bloomington, Kruszewski joined Robert W. Baird & Co. in 1989, where he served as a managing director and chief financial officer of the Milwaukee-based wealth-management and investment- banking firm, according to a 1997 statement from Stifel.

Cost Advantage

He decorates his office with several bull and bear statues of his own, and parks his black Porsche in the basement garage. Pointing to the golf clubs in his office, he says, “None of those putters work,” before laughing and admitting it might be the golfer who's at fault.

Being based in St. Louis gives Stifel a cost advantage over larger competitors, Kruszewski said. Running the same operation in New York would be “a different story” when it comes to expenses, he said. Still, he said he doesn't expect New York to lose its status as the financial center of the world.

“People say, why do you keep building the firm in light of all these declining revenues?” Kruszewski said. “Why not?”

--Bloomberg News--

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