LPL picks bad time to go public

If LPL decides to launch anytime soon — as of yet, no date has been set — it will be doing so smack dab in the middle of an incredibly difficult market for IPOs in general and financial services stocks in particular.

LPL Investment Holdings Inc. couldn’t have picked a worse time to announce its initial public offering.

The nation’s largest independent broker-dealer had been talking about selling its stock to the public for years, but when the firm filed a registration for a $600 million IPO with the Securities and Exchange Commission a little more than a week ago, it caught the industry by surprise.

If LPL decides to launch anytime soon — as of yet, no date has been set — it will be doing so smack dab in the middle of an incredibly difficult market for IPOs in general and financial services stocks in particular.

“A SHOCKER’

The market for IPOs softened last month. Seven deals were either postponed or withdrawn — the highest monthly total this year, according to The Wall Street Journal.

“It’s a shocker, all right,” said Richard Bove, a longtime banking and brokerage analyst now with Rochdale Securities LLC. “Financial stocks are in disarray.”

Year-to-date through last Thursday, the Amex Securities Broker/ Dealer Index, which tracks about a dozen firms, was down 8%.

Mr. Bove stressed that he couldn’t render an opinion on LPL specifically, because he is unfamiliar with the firm.

LPL spokesman Michael Herley, declined to comment on the timing of its IPO, citing the quiet period surrounding the offering.

The LPL offering could act as a bellwether for other financial services stocks, Mr. Bove said.

“If it is successful, it’s a huge positive sign that investors have money on the sidelines for this industry,” he said.

And if the IPO is a success, it will solidify further the firm’s position in the marketplace, observers said.

“They’ve been talking about the IPO since the inception of the organization,” said Tim O’Rourke, managing partner and chief executive of FinServ Consulting LLC, a recruiting and consulting firm.

“Everybody knows this is a challenging time for IPOs — businesses are strapped for cash,” he said. “It’s a pretty smart move if they can pull it off in this market.”

But even if the IPO is successful, there is no guarantee that the stock will do well. In fact, though IPOs often outperform the market at the start, 80% typically underperform the market in the second through fourth years, fund manager Josef Schuster told InvestmentNews.com last month.

SUCCESS STORY

Operating for 21 years as a closely held, deeply insular private company, LPL is undoubtedly one of the great success stories of the independent-contractor-broker-dealer industry, which has long lived in the shadow of the bigger and more profitable wirehouses.

LPL’s network includes 12,000 representatives and financial advisers, making it the largest independent firm by far and one of the largest retail-securities firms in the country.

Although industry observers said that the timing is curious, the IPO filing has long been expected.

In 2005, two private-equity firms, Hellman & Friedman LLC and Texas Pacific Group, bought 60% of LPL from its co-founder, Todd Robinson, who then stepped down as chairman and retired. At the time, the firm was valued at $2.5 billion.

When Mr. Robinson took a sabbatical more than a year earlier, Mark Casady replaced him as chief executive on an interim basis. After the private-equity deal, LPL went on an acquisition binge, buying five broker-dealers.

Since the end of 2008, LPL has taken significant steps to cut costs, grooming the company for its IPO.

That December, it said that it was cutting 10% of its work force.

Last September, it rolled three separate broker-dealers on to the platform of LPL Financial Inc., its largest broker-dealer. The firm said it anticipated annual cost savings of $21 million from the shift.

And last month, LPL restructured its $1.4 billion debt. The firm said that it will use the proceeds of the IPO to pay down that debt.

A 10% PREMIUM

One investment banker, who asked not to be identified, said that the opening price for the IPO could be $30 a share. That takes into account a premium of about 10% on its most recent published price of $27.81 a share.

That was the estimated fair value of the firm’s common stock March 31, according to its SEC filing.

Last year, the firm reported revenue of $2.75 billion and net income of $47.5 million.

Because it has no other lines of business than supporting independent reps and advisers, LPL has a unique position in the market. No other firm with that many independent reps and advisers has ever gone public.

The bankers handling the offering add to the firm’s potential for a successful public launch, said Arthur Grant, president and chief executive of Cadaret Grant & Co. Inc., an independent broker-dealer with about 1,000 reps and advisers.

The underwriters are Bank of America Merrill Lynch, Goldman Sachs & Co., JPMorgan Chase & Co. and Morgan Stanley Smith Barney LLC.

Mr. Grant gives LPL high marks.

“The management has been extraordinary,” he said. “I think they’re doing everything right.” Mr. Grant said.

LPL “will be attractive to institutional investors,” he said.

E-mail Bruce Kelly at [email protected].