Morgan Joseph & Co. was dealt a heavy blow when it lost founder Fred Joseph in late 2009 to multiple myeloma at age 72. The former Drexel Burnham Lambert Inc. CEO, who with a group of partners acquired Morgan Lewis Githens & Ahn in 2001 and renamed it Morgan Joseph, brought decades worth of invaluable corporate relationships to the New York midmarket investment bank. Replacing those contacts by hiring a couple of senior bankers seemed a Herculean task. Instead, Morgan Joseph opted to add 65 new operating partners to its roster through the acquisition last year of New York merchant bank and advisory shop Tri-Artisan Partners LLC for an undisclosed price.
Thanks to that purchase, current and former CEOs such as Playboy Enterprises Inc.'s Scott Flanders, Westpoint Home's John Piazza and Blockbuster LLC's John Antioco have ownership stakes in Morgan Joseph TriArtisan LLC and serve as consultants or advisers to the firm.
They have helped Morgan Joseph expand its reach into sectors such as consumer products, retailing, restaurants and leisure to cement relationships with private equity firms. And they have helped the firm, which has historically focused on transactions valued at less than $300 million, move into TriArtisan's $300 million-plus territory.
For instance, in April Morgan Joseph advised a Japanese consortium including Sumitomo Corp., Sumitomo Light Metal Industries Ltd., Furukawa-Sky Aluminum Corp. and Itochu Metals Corp. on its $680 million acquisition of Arco Aluminum Inc. from BP Corp. North America Inc.
One year after the TriArtisan purchase, The Deal magazine spoke with Morgan Joseph TriArtisan executive chairman John Sorte, 64, and the firm's co-president and TriArtisan co-founder Gerald Cromack, 51, about life after Fred Joseph and what's next on the firm's plate.
The Deal magazine: How did the loss of Fred Joseph affect Morgan Joseph? How did TriArtisan help to fill the gap?
John Sorte: The loss is what really drove us in 2010 to try to find something to replace Fred -- and I always say something as opposed to someone, because I don't think we could find a banker of Fred's stature and relationships to join our platform. We explored merging with a number of other firms during 2010, and TriArtisan was the perfect fit because with the addition of Jerry [Cromack] and Rohit [Manocha, co-founder of TriArtisan] and the 60 operating partners we figured that we replaced Fred.
In fact, those 60 operating partners have the kind of relationships Fred had. Jerry and Rohit are the next generation of bankers -- they are both in their 50s. I'm in my 60s and Fred was in his 70s, and a lot of Fred's relationships in the last couple of years were getting to the point of retirement. Now we've got the next generation of bankers and operating partners who will sustain us into the next decade.
The merger was intended to enable Morgan Joseph to increase its transaction size. Has that happened?
Gerald Cromack: Morgan Joseph worked on the lower middle market up to $300 million, and TriArtisan really started at that -- $200 million to $300 million on the low side all the way up to multibillion-dollar transactions. There was a little bit of overlap, but primarily it was a fairly easy transition in which we could continue to focus on lower midcap companies and fulfill their full-service needs. We bolted on the capability to do larger capitalization transactions and added an investing product.
How did you streamline the firm's sector coverage post-merger?
Cromack: We essentially reorganized the firm going forward in a very focused fashion to concentrate on four primary industry sectors. The firm is now focused on four industry verticals: [technology, media and telecommunications]; healthcare; consumer-facing businesses including consumer, retail, gaming, lodging and leisure; and multiple verticals within industrial.
Was that sector focus a change from the old Morgan Joseph?
Sorte: We had some one-man bands and one-person offices. As part of this strategy, we decided that having one cleantech banker or an oil and gas banker sitting alone in Dallas was not effective. We have shut down all of our one- or two-person offices and got out of businesses where we didn't have enough depth to be effective. So today we have a New York office and seven- to eight-person offices in Atlanta, Miami and San Francisco.
What areas of coverage have you strengthened following the merger?
Sorte: Consumer and leisure. TriArtisan has made a number of investments in that area such as Harrah's Entertainment [in 2008] and Claire's Stores [in 2007]. The first co-investment transaction that we've done as a combined firm was in cookware retailer Sur La Table, which was purchased by Investcorp in September. [Morgan Joseph also advised Investcorp.] That's a sector that Morgan Joseph did not have as much depth in, and the TriArtisan merger has helped our investment bankers to see more opportunities and do more transactions because TriArtisan's operating partners are heavily weighted towards that area.
How did exiting certain industry sectors impact your top line?
Cromack: While we were going through a productivity review to make sure that we were aligned from a cost and personnel point of view as well as focused on the industry groups, we got smaller along the way. At the same time, we over doubled our revenues last year. We basically retrenched our business and boiled it down to an efficient profitable core.
What's next to expand the business?
Cromack: We want to aggressively add partners. This is a great time to add business producers, since the world is restructuring. Our goal is to hire five to seven productive partners. We announced in the beginning of the year that we hired two very talented healthcare bankers [John Cramer from Gleacher & Co. and Andy Sherman from Madison Williams and Co. LLC].
Has TriArtisan's relationships with private equity firms increased your initial public offering business?
Sorte: We are in discussions with several private equity firms that are thinking of taking advantage of the current market, and I would be surprised if we weren't a co-manager on those offerings before the summer.
What are your expectations for the 2012 IPO market?
Cromack: The IPO market in the past number of years has become a window-driven market. When markets are doing well, people hit the windows when they can, and then, due to volatility in the market, it closes down again. In January we saw great equity performance. This week there were eight offerings that the banks expected to price. You're definitely seeing a resurgence in the IPO market. As long as the window stays open, people will avail themselves of it.
What is your M&A outlook?
Cromack: The M&A markets are picking up. CEO confidence levels are up, stock prices are going up, and liquidity is returning to the system. Also, the growth outlook for most operating businesses is tepid at best -- most companies are budgeting to manage for slight growth. Public companies that need to build a growth pattern for earnings per share have to buy their growth. A lot of them have marshalled a lot of cash, cleaned up their balance sheets and are definitely starting to look. And as the stock market goes up, companies are more likely to use their stock as currency.
Are there any acquisition plans in Morgan Joseph TriArtisan's future?
Sorte: If we can find a group that gets us into a new sector -- a boutique of five or 10 people that wants to be a new group within Morgan Joseph -- we'd be very interested.
Cromack: We're not pounding the table, just trying to get big for bigness' sake, but we are aggressively looking to grow the top line, and if that involves hiring individuals, hiring groups or merging with or acquiring a small practice that fits in with us in a complementary fashion, we'd absolutely consider that.