CONFERENCE CALL: Broker-dealer dominoes likely to keep falling

The shopping spree for small broker-dealers isn’t over. Expect to see more buyouts of regional and independent firms in 2001.

That was the view of many at the Securities Industry Association’s annual conference in Boca Raton, Fla., this month.

The year saw a number of deals of all sizes that fell this summer like so many mismatched dominoes.

In July, Swiss-based UBS AG said it would buy New York’s Paine Webber Group Inc. for $10.8 billion.

In August, the New York-based Mony Group agreed to buy the Northeastern regional firm Advest Group Inc. for $275 million.

And in September, Royal Bank of Canada, Toronto, agreed to acquire Minneapolis-based Dain Rauscher Corp. for $1.46 billion.

There were others. But regional firms are in a bind, executives say.

They can’t keep up with technology costs and don’t have the national brands many investors want.

Owners and executives of many firms have also been in a good position to cash out. Stock prices of public companies and valuations of private companies have been high.

Fewer on the block

Next year will see some deals as well, but they will be harder to land, some say, for a simple reason: There are fewer companies on the block.

“Clearly, the trend is for further consolidation and the joining of securities, banking and insurance functions. And this trend is accelerating,” says E. Stanley O’Neal, president of the U.S. private-client group for New York-based Merrill Lynch and Co. Inc.

Some regional broker-dealers will survive and remain independent, he adds, through hard work and carving out a “unique niche.”

Those firms are battling history. “Clearly, we are moving into the final stages of consolidation here in the United States,” Mr. O’Neal says.

“In just the past few years, 41 securities firms have been acquired by banks. Some, like Paine Webber, have had national franchises. But most were small to midsize firms.

“The regional firms are finding themselves in a two-way squeeze, from the online discounters at the bottom and the broad, national behemoths at the top,” he explains.

Some observers aren’t concerned with the spate of mergers and acquisitions in the securities industry.

“I don’t think it makes any difference,” says Arthur Levitt, chairman of the Securities and Exchange Commission in Washington.

He says innovation often happens in the wake of a buyout. Executives often leave and start their own boutique firm that specializes in a niche service.

Small firms clearly are in a tough spot. They can’t put a lot of money into training or technology, says Richard Woltman, senior managing director of New York-based Sun America Financial Network Inc., the holding company that owns six broker-dealers.

For example, small firms are having a hard time keeping up with the high costs of marketing and computer systems inherent in the booming separately managed account business, he says.

Also, they often can’t compete in the battle for talent.”To be better at running the business, it takes more-talented people,” Mr. Woltman says. “Bigger companies can hire and retain those people.”

The midsize firm is in danger of becoming extinct, he says.

“The option is to be either very small or very big in the business. I think it’s going to be very difficult to be in the no man’s land of $15 million to $100 million in gross commissions.”

Advest, for one, needed more capital. Some brokers were nervous about the guarantee of their deferred compensation. Those packages could be worth as much as $5 million, says Grant Kurtz, president and chief executive officer for Advest in Hartford, Conn.

The firm also wants to be in the position to acquire small boutiques in the future. With Mony’s far more substantial market cap of $2 billion behind it, it will be able to complete those deals, he says.

In comparison, Advest’s market cap before the merger was about $160 million, he says.

One independent broker-dealer sees the consolidation as an opportunity to grow.

Raymond James Financial Services Inc. in Atlanta, for example, is snagging brokers from rival firms, particularly the large firms, says Tony Greene, chairman and chief executive. The firm added 163 branches last year, he says.

Brokers with big firms sometimes don’t like being part of a behemoth, he argues.

“Brokers get disenchanted and uncomfortable with that change that’s going on,” he says.