Investors Capital Holdings Ltd., a publicly traded independent broker-dealer that put itself up for sale this month, could be an attractive acquisition for
LPL Investment Holdings Inc. and several other large broker-dealers, according to analysts.
While stressing that they have no direct knowledge of an imminent deal, analysts said that LPL's history and appetite for acquisitions make it a strong candidate to acquire Investors Capital.
LPL, which is the largest broker-dealer in the industry with 12,000 affiliated representatives and advisers, has made five acquisitions since 2004.
The company has said that it would like to add 400 advisers per year. With 566 advisers, Investors Capital would allow LPL to reach its goal for this year in one fell swoop. (See more on
'Investors Capital seeking suitors'.)
“Firms like LPL have ambitious growth goals for 2011, and a firm like Investors Capital could be a fit for them,” said Alois Pirker, research director for Aite Group LLC's wealth management practice.
“With the market increasing the value of assets under management, and with rising compliance costs, it seems that a number of smaller shops would be interested in selling and several larger shops would be interested in buying,” said Devin Ryan, a managing director of Sandler O'Neill + Partners LP.
(Want more on possible buyers of Investors Capital? Watch today's INTV inside look.)
In a research note he wrote in January, Mr. Ryan said that he thought that LPL would continue to do acquisitions in the wealth management area, “particularly as firms without scale or the same level of resources increasingly see the benefits of being part of a larger platform.”
In a filing with the Securities and Exchange Commission on March 1, Investors Capital said that its founder and chairman, Theodore E. “Ted” Charles, was selling his 54.6% stake in the company. He wants to sell his shares, as well as those held by his family, for about $5.28 a share, or close to $19 million.
Mr. Charles started Investors Capital in 1995.
The roster of the firm's potential acquirers includes
Ameriprise Financial Inc., Cetera Financial Holdings Inc. and Ladenburg Thalmann Financial Services Inc., according to industry executives with knowledge of Investors Capital's business, who asked not to be identified. They added that management and some of the firm's brokers may attempt to buy the company.
A spokesman for Investors Capital declined to comment on a potential management buyout or any other aspect of its future.
“Due to the pending registration statement, we are in a quiet period and cannot comment,” said Robert Foney, a spokesman.
A number of midsize broker-dealers are under pressure and looking for more-cost-effective ways to do business, said Barnaby Grist, executive vice president of wealth management for Cetera.
“While Cetera doesn't comment on specific acquisition opportunities,” he said, “we are certainly experiencing rapid growth through the recruitment of advisers and are interested in accelerating this growth through acquisitions, when appropriate.”
Spokesmen for Ameriprise, Ladenburg Thalmann and LPL declined to comment.
In its SEC shelf registration, Investors Capital said that Mr. Charles is proposing the sale of about 3.6 million shares of stock. Mr. Charles, 68, directly owns 44.6% of the company's shares, with family members and foundations controlling another 10%.
SHELF REGISTRATION
A shelf registration would help him sell his shares in a timely manner if the opportunity arose, said Craig Marcus, a partner at Ropes & Gray LLP.
“The typical shelf registration is filed in advance of a sale, so a seller can move more quickly when the selling opportunity comes,” he said.
Mr. Marcus said that the price of $5.28 a share was a formality in the filing process and that the price for Mr. Charles' shares would be whatever they were valued at on the open market or what they were priced at in private negotiations.
Despite the success of LPL's public offering in November, publicly listed independent broker-dealers remain a rarity in the business.
Industry executives, who asked not to be identified, said that Mr. Charles has discussed selling the firm over the past couple of years and even hired a leading investment bank as an adviser.
In the end, Mr. Charles hung on to the business — until now.
The stock has been climbing steadily in the last year. On Friday, it closed at $5.75 a share, up from a 52-week low of $1.35 and down from a high of $6.27.
In a recent
InvestmentNews survey that ranked broker-dealers based on the number of reps, Investors Capital ranked 49. On average, its reps generated $145,000 in fees and commissions last year, an increase of 12.5% over the prior 12 months.
Over the past year, firms with 500 brokers or less have been under pressure for a variety of business and legal reasons.
Historically low interest rates have cut deeply into profits on such lucrative businesses as lending on margins to clients. In addition, compliance costs and legal fees have been mounting.
Two independent broker-dealers that closed in the past year — Gunn-Allen Financial Inc. and QA3 Financial Corp. — were in discussions to be acquired before they were shuttered. Respectively, they had about 500 and 400 reps.
Investors Capital Holdings, which includes investment advisory and insurance units along with its broker-dealer, had revenue of $21.4 million for the three-month period ended in Dec. 31, with net income of $345,674 in that quarter. For the nine-month period ended Dec. 31, the company reported revenue of $62.8 million and a loss of $309,000.
The firm had working capital of $6.7 million at the end of last year, up slightly from last March. Investors Capital Corp. had net capital of $2.99 million for excess net capital of $2.51 million.
In announcing the company's third-quarter results, Timothy B. Murphy, president and chief executive of Investors Capital Holdings, said: “Our net-capital position remains strong; the markets and economy are improving; trading volume is increasing. We know where we want to go and how we want to get there. All we have to do is execute.”
E-mail Bruce Kelly at [email protected].
