New York – First Horizon National Corporation, formerly First Tennessee National Corporation, closed down its FTN Research unit yesterday, after a pending sale to Point Capital fell through. It is tempting to draw generalized conclusions from FTN Research’s demise, but the reality may be more mundane, according to inside sources. Once a death spiral begins in a people-intensive business like research, it is hard to stop.
First Horizon announced in September of last year the pending sale of FTN Equity Capital Markets Corp to a small asset management and merchant banking firm based in Chatham New Jersey. The proposed acquirer, Point Capital Partners, bills itself as veteran-owned, and was planning to create a veteran-owned securities firm built on FTN’s capital markets capabilities. As we commented at the time, the timing of First Horizon’s disposition seemed odd because most regional brokers have been beefing up their research capabilities, reflecting a trend of regional and agency brokers increasing their commissions business at bulge firms’ expense.
According to inside sources at FTN Research, the deal with Point Capital cratered late last year, and discussions were initiated with another potential purchaser. However, morale plummeted after the Point Capital deal fell through. Internal staff assumed the worst, receiving little information about their status from First Horizon. Trading commissions dropped precipitously during January as staff began to focus on looking for other jobs, and last week the second deal fell through. First Horizon, concluding that the situation was no longer salvageable, decided to shutter the unit and book a $10 million write off.
According to an article the Wall Street Journal, the catalyst for the meltdown was the removal of CEO William Bischoff in October as a result of his relationship with Danielle Chiesi, who was arrested in connection with the Galleon case. Bischoff was replaced by a First Horizon executive that, according to the article, had little experience in capital markets or the research industry specifically. Since Bischoff was slated to lead the new venture with Point Capital, his removal by First Horizon understandably disrupted the pending deal. Ironically, Bischoff was cleared of any involvement with Galleon after his removal by First Horizon.
First Tennessee had built FTN Equity Capital Markets in 2001 with the acquisition of Midwest Research-Maxus Group Ltd., a successful equity research boutique based in Cleveland, Ohio. Prior to the acquisition, First Tennessee’s capital markets group had fixed income capabilities only. Midwest Research was a strong research franchise, frequently named by Institutional Investor as among the “Best of the Boutiques”. Midwest was well regarded by clients for integrating channel checking with its fundamental research.
In September, 2006, forty FTN Midwest Research staffers, including twenty-five analysts, left to form Cleveland Research. A senior spokesperson for FTN at the time cited differences of opinion. Cleveland Research founders indicated that they were chafing at FTN’s emphasis on investment banking. Cleveland Research, like its predecessor, is valued for the quality of its channel checking. Other distinguished offshoots from FTN Midwest include Longbow Research, which was founded in 2003 by the former CEO of Midwest Research, and Wedge Partners, founded in 2002 by the former head of institutional sales at FTN Midwest. All the spinoffs from Midwest have remained true to its original channel checking methodology.
What Went Wrong?
Despite the defections, FTN Midwest remained a credible research operation, with around 100 employees and estimated revenues around $80 million. However, the parent has been reeling from an overhang of toxic mortgage assets generated by aggressive mortgage lending. First Horizon has been slowly writing down $1.2 billion in non-performing assets, and restructuring its business lines. According to a company email provided to Reuters, “We had determined that this business [FTN Equity Capital Markets] was not a strategic fit and, thus, entered into the transaction to sell the business. Unfortunately, this transaction was not able to be completed.” Also unfortunately, the staff members of FTN Equity Capital Markets were also well aware that they were no longer a strategic fit for First Horizon. As one source put it to us, they knew they were ‘toast’.
It is tempting to draw big picture conclusions from the closure of FTN Midwest. There is a glut of fundamental research, much of it undifferentiated. Equity commissions remain tight and investors are scrutinizing carefully how they are being allocated. The research business is tough. All true, but it is more likely that the demise of FTN Midwest is more a lesson in mismanagement. First Tennessee managed to ruin a top notch research boutique, ultimately running it into the ground. Fortunately, the original spirit lives on in its successful offspring, Cleveland Research, Longbow, Wedge Partners, and those firms which benefit from the latest exodus of FTN Midwest refugees.