When Regions Financial Corp. put its Memphis brokerage Morgan Keegan & Co. on the block last year, the highly acquisitive Stifel Financial Corp. topped the list of logical buyers. After all, Morgan Keegan would have given St. Louis-based Stifel an attractive Southeastern brokerage network. But Raymond James Financial Inc. nabbed Morgan Keegan for $930 million in early January. And Stifel is now looking not so much for a big deal -- Morgan Keegan would have been its largest -- but for smaller bites, such as investment banking liftouts and broker recruits.
"Our strategy is not to have a strategy," chairman and CEO Ron Kruszewski says. "Our strategy is to be opportunistic."
That's a change for Stifel, which has been a voracious acquirer since landing Legg Mason Capital Markets from Citigroup Inc. back in 2005 in a $95 million deal that brought Stifel 500 employees and almost doubled its size. Since then, Stifel has made at least one acquisition each year to expand its institutional business, which includes M&A advisory and capital markets, as well as its wealth management business.
These deals include Stifel's $91 million purchase of investment bank and brokerage Ryan Beck & Co. from BankAtlantic Bancorp in early 2007; its $38 million acquisition of St. Louis' FirstService Bank later the same year; and the early 2009 acquisition of 56 branches, 320 brokers and about $15 billion under management from UBS Wealth Management Americas.
More recently, Stifel paid $318 million in early 2010 for San Francisco investment bank Thomas Weisel Partners Group Inc., and last year made a $40 million strategic investment in restructuring firm Miller Buckfire & Co. LLC. Also last year, it purchased San Francisco municipal finance firm Stone & Youngberg Holdings LLC for an undisclosed price.
"I've always liked the muni business," says Kruszewski of that latest deal. "The need for financing infrastructure in this country is going to be huge, as it's an integral part of capital formation. Also, muni bonds are a huge portion of the asset allocation pie for the wealth management business."
All of the dealmaking has helped Stifel realize its goal of becoming a full-fledged middle-market investment bank. Before buying Legg Mason's capital markets unit from Citigroup, approximately 75% of Stifel's $250 million in revenue was wealth management based. In 2011, roughly 60% of the firm's $1.4 billion in revenue came from wealth management and about 40% from its institutional businesses.
According to Morningstar Inc. analyst Michael Wong, it seems likely that Stifel might look for a capital markets acquisition, but "there are more willing sellers" in wealth management. Moreover, Wong notes that by walking away from Morgan Keegan, Stifel, a disciplined and experienced buyer, demonstrated that it "is not willing to go through a bidding war just to acquire an asset."
Indeed, Kruszewski, 53, who took the helm at Stifel in 1997 after a stint as CFO at Robert W. Baird & Co., says he now plans "to be opportunistic in small bites, not large transactions." He expects large banks, operating with less leverage, to shrink businesses such as cash equities, research and investment banking, presenting lots of liftout opportunities for Stifel. On the wealth management side, Kruszewski says Stifel plans to recruit brokers from larger banks who are seeking more of an old-fashioned brokerage model, harkening back to the days of A.G. Edwards Inc., McDonald & Co. or J.C. Bradford & Co. Like those firms, Stifel, he says, places a high priority on its brokerage and investment bank, "unlike the universal banks with their $2 trillion balance sheet and cute little brokerage business on the side."
Overall, Kruszewski says he looks for deals that will "be accretive soon," adding that the "biggest driver of transaction value" is post-merger retention assumptions. (Stifel had 5,097 employees at the end of 2011, up from 1,173 in 2004.) His and the firm's ability to pinpoint accretive transactions has contributed to 16 consecutive profitable years. These days, the opportunities for such transactions may be lessening, but Kruszewski is not ready to give up the hunt just yet.