Foothill Securities Inc. an employee-owned broker-dealer based in Mountain View, California, is merging with Cue Financial Group Inc., a smaller independent firm based in Phoenix.
The deal, expected to close on Monday, will add 79 Cue employees to Foothill's roster of about 140, most of whom are registered representatives operating as independent contractors, said Christine Flynn, chief operating officer of Foothill.
The deal will be slightly dilutive to Foothill's shareholders since the top executives of Cue are receiving shares.
The merger continues a rapidly increasing decline in the number of large and small firms in the securities industry, as they combine to achieve efficiencies or simply succumb after almost two years of declining markets in an enervated economy. About 190 firms have dropped their registration with the
Financial Industry Regulatory Authority Inc. since the end of 2007.
“We're just happy to be in the game,” said Steve Chipman, chief executive and president of Foothill.
“Great firms are leaving the industry all the time.”
Foothill booked $26 million of revenue in 2008 and hopes that the combined group will generate between $35 million and $40 million annually, Mr. Chipman said.
The combined broker-dealer will operate under the Foothill name, he said.
Michael Melby, one of two Cue partners serving as co-presidents and co-CEOs, will join the Foothill board and serve as the combined entity's chief investment officer, conducting calls and client presentations for advisers and their clients.
“We've been talking [about] doing this with Foothill for two-and-a-half to three years,” said Mr. Melby, who said that Cue has been approached by “everybody and his brother” in the last five years with takeover offers. “We didn't want to be owned or controlled by an insurance company or a
venture capital firm or the like, where you don't know what the long-term prognosis will be.”
The deal offers Mr. Melby's two older partners in the firm — president and CEO Jim Sollenberger and executive vice president Judy Kuplic — an eventual exit strategy, he said, and gives Cue's approximately 60 advisers an opportunity to buy shares of Foothill, adopt better technology and continue to operate as either direct employees or independent contractors.
No one will be laid off, both companies said.
"We absolutely see these mergers among independents as a continuing trend," said Matt Bienfang, senior research director at Tower Group in Needham, Mass., citing revenue, regulatory and operational pressures at the firms, which typically operate on razor-thin profit margins.
He said the number of independent firms in the United States is likely to shrink by 15% over the next five years.
Ms. Flynn said the deal is not driven by the need for capital, although Foothill is currently trying to double its $1 million capital base through an offering to its owner-reps that will be extended as well to Cue's advisers. Neither firm has outstanding debt.
“We're well above our regulatory net capital requirements,” she said, “but we want to be safe rather than sorry.”
Rex Gardiner, who founded Foothill in 1962, sold the firm to advisers between 1996 and 2006.
The shares haven't paid dividends in recent years, said one adviser, who paid about 1% of his annual revenue for his shares.
The firms have similar business profiles, offering brokerage products,
financial planning and insurance. Cue, founded in 1985 by Mr. Sollenberger, a former insurance agent at The Equitable Life Assurance Society of the United States in New York, also offers brokerage services and financial products through credit unions and small banks.
After the merger, Cue will give up its registration with Finra of New York and Washington and essentially operate as Foothill's largest branch office — or office of supervisory jurisdiction, in the regulatory lingua franca of independent broker-dealers.
Both it and Foothill also are registered investment advisers, and Cue will continue to run its RIA and life insurance agency under Mr. Sollenberger and Ms. Kuplic in Phoenix.
About 40% of Foothill's revenue is fee-based, compared with about 25% at Cue, which also generates more of its flow from insurance.
Foothill will benefit from its variable-rate and equity-index annuities, Ms. Flynn said.
The firms also expect to benefit from their relations with Pershing LLC, the correspondent clearing firm that they both use for most of their brokerage transactions.
Foothill's contract with Pershing is more favorable than Cue's, and the combined firm will benefit from reduced commission charges relating to volume and for some asset-based pricing relationships, Ms. Flynn said.
Foothill has more than 60 branch offices clustered primarily in California and Hawaii, according to its website, while Cue's smaller network of branches are heavily concentrated in Arizona, with 10 brokers in California and fewer than a handful each in New Mexico, Texas, Tennessee, Oklahoma and Utah.
Advisers who work as independent contractors with the firms generally retain more than 90% of the revenue they produce, in line with industry standards.
But Cue has a complex set of grid and payout arrangements to deal with the multiple insurance, banking, employee and independent platforms of its reps, which will remain in place.
“Getting in place the payroll side of this was probably the biggest hurdle to getting this done,” said Mr. Melby.
Neither firm used an investment bank on the deal, executives said.
