Stifel Nicolaus Weisel Morgan Keegan anyone?

IFR 1891 9 July to 15 July 2011
7 min read
EMEA

Keith Mullin, Editor-at-large, IFR

Keith Mullin, Editor-at-large, IFR

Ever since Regions Financial, the US bank holding company, announced it had appointed Goldman Sachs to evaluate options for Morgan Keegan, its storied investment bank-cum-broker dealer, the analyst community has been working overtime to come up with suitable takeover candidates.

Attention is starting to focus on Stifel Financial Corp. Analysts reckon Stifel Nicolaus Weisel, the group’s investment bank, would be a good fit.

A Stifel-Morgan Keegan combo would create a sizable US mid-market regional investment bank with extensive research, retail brokerage and private client capabilities as well as nationwide client and product coverage: Stifel is HQ’d in St Louis; Morgan Keegan operates out of Memphis, the Legg Mason business is centred in Baltimore, while Thomas Weisel is in San Francisco.

Beyond the geographical synergies and offering growth opportunities in the lucrative South-east region, Morgan Keegan brings to the table decent fixed-income and public and utility finance platforms. Year-to-date, the firm ranks ninth in US municipal bond underwriting, it is also a leading debt underwriter for airports, higher education, housing, power, water and gas projects, and has an active Federal credit agency business. This would be additive to Stifel.

Beyond its debt business, though, Keegan’s investment bank has been unable to leverage its skills set into ECM or advisory, a stated objective. Rivals such as Stifel, Piper Jaffray, Raymond James, KBW, Robert Baird, PNC, KeyBanc, Cowen etc have all bagged ECM league table position, Morgan Keegan is absent from the top 25.

Analysts say the combination of the two firms could make a US$1bn to US$1.5bn price tag achievable. Taking on Morgan Keegan would be consistent with Stifel’s aggressive M&A-driven build-out. Its transformational purchase of Legg Mason Capital Markets from Citigroup in 2005 doubled the size of the company.

It added Thomas Weisel Partners a little over a year ago, Stifel’s approach has been much more targeted and strategic than Keegan’s, which has grown largely by agglomerating the various brokerage and investment banking units of the businesses acquired by Regions.

At the time of the Weisel takeover, Stifel boasted around 250 investment bankers across DCM, ECM, equity-linked, and advisory arranged around 13 industry groups as well as specialised financial sponsor coverage and private placement groups.

Morgan Keegan says it has some 300 investment bankers. Assuming the overlap is minimised by geographical dispersion, having an operation with close to 500 investment bankers could turn the duo into a formidable presence.

The price Stifel would have to pay now, at a time of low growth in the US economy and generally a slower market for investment banking services, might justify a stratagem of moving now and monetising later.

Four recommendations for rating agencies

Avoiding comment on rating agencies has been impossible in the past week. I’ve been pretty vocal about the impact the rating agencies have been having on the markets. I still find it amazing that they have such a hold over investors and, it would appear, regulators and central bankers as well as other market professionals.

Anthony Peters, my fellow IFR columnist and blogger (and strategist at SwissInvest), put his finger on the issue in a comment he wrote on July 7 (The EU’s sour mood music on Moody’s): “How has it come to be,” he asked, “that the investors in hundreds of billions of eurozone debt repeatedly appear to give more credence to the iterations of the ratings agencies than those of the authorities themselves?”

It’s a great question and perhaps more considered than my version (“Why the hell should anyone care what S&P says or does …” Downside rating actions have a deleterious impact on market stability in a nervous market only because the professional market lets them. It’s absurd. It’s always been absurd. If everyone stopped hiding behind ratings in some sort of back-covering exercise we wouldn’t be in the position.

Politicians haven’t helped (do they ever?). Those same politicians who are now mouthing off about Moody’s rating action on Portugal and about rating agency comments about the Greek debt restructuring proposals are the same bunch that stood idly by and recklessly created a private oligopoly by embedding the raters into the Basel framework, giving them quasi-regulatory status into the bargain. The fact that the ECB bases its liquidity provision broadly on a private ratings matrix exemplifies the scale of the problem.

The media is full of vitriol, talking of “financial vandalism”, of the rating agencies “driving states into bankruptcy and destabilising the global system”; there’s talk of “breaking the oligopoly” (Wolfgang Schaeuble), of rating agencies being “dissolved before they can do more damage” and being banned from rating countries (UN official Heiner Flassbeck). Great soundbites but typically overdone and missing the point.

A key element in all of this was highlighted by EC president Jose Manuel Barroso, who said he regretted the Portuguese downgrade “both in terms of its timing and its magnitude”. Timing is the point here. The timing of S&P and Moody’s announcements of late do seem timed to cause maximum disruption, which speaks to Barroso’s other point about their motives.

Chiming in early and saying they would call default if the German or French proposals for Greece passed as initially proposed; or front-running the results of the European stress test by saying 26 banks would fail, seems to be subject to precision timing.

Their actions are now disrupting the functioning of the capital markets and inhibiting the capital-raising process. Autoroutes du Sud de la France had to cancel its €500m bond owing to market volatility, while BayernLB had to postpone its €1bn Pfandbriefe.

Destroying capital-raising plans is presumably not in the ratings agencies’ mission statements. Why did Moody’s have to announce it had placed BayernLB’s covered bond programme on ratings watch for possible downgrade just as the bank was about to print a new issue? Looks cynical to me. So what are the conclusions?

  1. Rating agencies’ claims that their opinions are just opinions are disingenuous and they should just stop trotting this out at every opportunity.
  2. The agencies need urgently to be decoupled from regulatory and operational process and put back in their place as purveyors of opinion for a fee.
  3. At the consumer end, there needs to be more responsibility. For investors, that means doing your own research making your own decisions and taking accountability for your actions rather than blindly pressing the buy/sell button in the event of ratings changes
  4. Regulators should enforce a quiet period around capital markets issuance, similar to the research blackout around equity offerings, so that the impact of cynical or poor timing can be minimised.