In the wake of moves this month by Ladenburg Thalmann Financial Services Inc. and First Allied Securities Inc. to acquire broker-dealers, more deals for independent-contractor firms are on the horizon, according to industry observers.
"There's not that many left to consolidate, but still a few. On the independent side, it's hard to see anything but more consolidation, with only a handful remaining in 10 years," Donald H. Putnam, managing partner in the San Francisco office of Boston-based merchant bank Grail Partners LLC, wrote in an e-mail.
"I think we're going to see acceleration in acquisitions," said Jonathan Henschen, president of Henschen & Associates, a recruiting firm in Marine on St. Croix, Minn. He predicted that independent broker-dealers owned by insurance companies are the most likely targets.
The industry is closely watching LPL Financial of Boston, which made five deals to acquire broker-dealers last year, to see if it will make any further acquisitions this year. The firm said in a May filing with the Securities and Exchange Commission that it was seeking to buy firms and outlined the company's plans to focus on "strategic acquisitions"
(InvestmentNews, May 26).
And LPL is likely to shoot at big targets, Mr. Putnam wrote.
"LPL probably won't waste time on anything other than the largest potential deals because they are time-consuming and [broker attrition] is hard to gauge, but they'll look at smaller deals if they fall in their lap," he wrote.
The terms of the two recent deals vary greatly.
On July 10, Ladenburg of Miami reached an agreement to acquire Triad Advisors Inc. of Norcross, Ga. If Triad hits certain profit targets, the deal could be worth $42 million in cash and stock.
Triad produced $59.4 million in gross revenue last year, so the firm was valued at 71% of sales.
That stands in stark contrast to the value of the representatives and advisers at Red Bank, N.J.-based First Montauk Securities Corp. First Allied of San Diego will pay 30% to acquire First Montauk's rep force, but not the broker-dealer itself.
On July 14, First Allied said that it had paid First Montauk a $250,000 advance to pick up the latter's 180 independent reps and advisers. They are on pace to generate $24 million in fees and commissions this year.
The deal likely signals the end of First Montauk, said Victor Kurylak, its president and chief executive.
"I anticipate an orderly wind-down of the business," he said. "The intent is for First Allied to take all the reps."
Because Triad's ultimate price depends on profit targets, it is difficult to draw any conclusions from the differences in the terms of the two deals, said Larry Papike, president of Cross-Search, a recruiting firm in Jamul, Calif.
Both deals are impressive, but for different reasons, he said.
First Allied is essentially paying about 1% of First Montauk's gross revenue to get a free look at their brokers and advisers, Mr. Papike said. "It is a smart, prudent and sane way for First Montauk to get out of the business."
Mr. Papike said that's a big difference from the move made by Ladenburg, which also acquired an independent broker-dealer, Investacorp Inc. of Miami Lakes, Fla., last fall.
"It's clear that Ladenburg Thalmann is taking a position in the independent-broker-dealer marketplace," he said. "And why not?"
Mr. Papike cited the growth among independent broker-dealers as being extremely attractive to firms such as Ladenburg, an investment bank and full-service broker-dealer. The leading independent firms reported a rise of 26.6% in gross revenue last year, according to the most recent
InvestmentNews survey of firms.
Meanwhile, wirehouses have seen their stock prices plummet and have dealt with embarrassments such as putting clients into auction rate securities, Mr. Papike said.
"My shock is not that Ladenburg Thalmann is getting into the business; it's that more firms aren't," he said.
The view in the industry is that Ladenburg could make more deals, Mr. Papike said. "My only question is, who's next?" he said.
E-mail Bruce Kelly at [email protected].
