SO JEFFERIES REINFORCED its dramatic and impatient global build-out by beating all-comers to take Hoare Govett off beleaguered Royal Bank of Scotland’s hands. For a nominal fee, the US investment bank is picking up around 50 equity professionals across corporate broking, ECM, sales, trading and research. But will it be worth the effort?
On the plus side, HG continues to have good brand recognition among UK corporates. But as a corporate broker it really hasn’t had the best owners since the UK’s Big Bang deregulation in 1986 and frankly looks past its best. That said, it still has a client list worth plundering. Given the small price paid, the potential acceleration it will offer Jefferies into UK and European ECM and investment banking over and above what existing operations might have afforded it could make the takeover value-accretive.
When Jefferies hired Julian Smith from Collins Stewart in 2010 to run corporate broking, the bank had 10 UK corporate brokerships. Even though Hoare Govett has consistently lost mandates over the past few years, it still has more than 30 across the FTSE 250 (although only eight or nine in the FTSE 100). The fact that Tullow Oil dumped HG and Merrill the day after Jefferies’ HG acquisition in favour of Barclays Capital and Morgan Stanley was coincidental, but it speaks to the highly competitive nature of the facilitative UK corporate broking business.
Poaching corporate broking clients is almost a national sport for those in the business. The phones to HG clients will have rung red-hot ever since RBS announced the HG divestiture. You can only imagine that they will have done their best to petrify nervous corporates about the perils of going with a US firm without a household name.
Jefferies has embarked on a massive expansion in the past couple of years, and I reckon it’s taking a bit of a gamble
I must say, though, that I’ve always had a lot of time for Jefferies. It’s stuck to what it does best in capital markets (high-yield, convertibles) and M&A (where it has stayed focused around a small number of sectors). That has given it a pretty decent overall business.
Jefferies has been and still remains a largely US domestic player in terms of current revenue generation. The firm is hovering just outside the top 10 in US investment banking. While it has some ground to make up to break into the bulge bracket, it’s certainly becoming much more closely associated with the scale players than with the US regionals.
BUT THE FIRM has embarked on a massive expansion in the past couple of years. I reckon it’s taking a bit of a gamble. Headcount has doubled in the past five years and the firm is now building out of the comfort zone of its formerly specialist product lines and increasingly has the look of a full-service investment bank and broker-dealer that’s also increasingly global.
It’s been aggressively hiring senior professionals across all business lines from the major houses. It’s had particularly fruitful plundering missions to Merrill Lynch and UBS where it’s picked up a lot of senior M&A talent, but it’s hired players from right across the Street.
Mind you, even with the harried expansion, the firm’s headcount is still only the region of 3,900 (annoyingly the firm refers to staff as “employee-partners” – ugghhh) and 800 are based in London. That’s small relative to bulge-bracket players, but still… As well as growing in London, Jefferies set up a full-service equity sales, trading and research operation in Asia in 2010, where it now has over 125 professionals. It’s also expanded its global fixed-income business – not a traditional strength – to more than 500 people.
Last year, it spent US$430m buying Prudential Bache’s global commodities group to add scale to its listed derivatives business. Bache posted US$220m of revenues in 2010 and added more than 400 employees to the Jefferies platform. Other initiatives, such as its LoanCore joint venture with the Singapore sovereign wealth fund GIC – which will see a US$600m equity commitment leveraged and invested in commercial real estate debt – speak to the extent of its ambitions.
BUT NOW THAT the firm has fattened up its cost line, it’ll need to see the benefit of that come through in revenues and in business successes, particularly outside the US. Shareholders will – or certainly should – be asking about the returns on the rapid-fire overseas expansion, particularly in Europe. If Jefferies has a creditable position in US investment banking, the same can’t yet be said of its European business from the perspective of league tables or wallet share.
If lack of confidence continues to retard deal-making and trading across the industry, it’s by no means a given that management will be able to come up with credible answers quickly.
All Hoare Govett MDs are moving with the business and will no doubt have been locked in. The lock-up period represents the window available to Jefferies to make the acquisition work. If it’s able to get through the current sticky period in the market without any major mishaps, and is able in parallel to consolidate and create the right internal alignments, it could be a force to be reckoned with. But the firm needs to call a halt now to its huge expansion and focus on making what it has work.