According to various sources, Stifel Financial Corp. is currently in discussions to acquire Sterne Agee Group – the 14th such deal for the St. Louis-based middle market financial services firm over the past ten years. A definitive deal between these two firms could be announced in the next few days.
Possible Deal in the Offing
Late last week, a report from Bloomberg revealed that Stifel Financial Corp. is in discussions to acquire Birmingham-based brokerage firm, Sterne Agee Group, Inc. Executives from both firms declined to comment on the matter. If the deal goes through, the combined firm would have about 3,000 financial advisors and close to $200 billion in client assets.
Privately held Sterne Agee offers comprehensive wealth management and investment services to a diverse client base including corporations, municipalities and individual investors. The firm employs over 2000 professionals located in 31 offices across the US and in London; 150 of whom are financial advisors in its Private Client Group and 600 independent advisors in its Financial Services unit. Sterne Agee currently manages $26 billion in assets. The firm’s clearing unit works with 90 broker-dealers nationwide.
Stifel Financial provides securities brokerage, investment banking, trading, investment advisory, and related financial services through its wholly owned subsidiaries to individual investors, professional money managers, businesses, and municipalities. The firm generates approximately $2.2 bln in annual revenue and employs 2,100 investment advisors and 150 independent reps. The firm also has $173 bln in assets under management. The middle market financial services firm has been on an acquisition tear in the past decade – closing thirteen deals over this period (see below). Stifel is set to release its 2014 Q4 earnings on Monday after the markets close.
The 14th Deal in the Past Decade
Most analysts explain that Stifel’s potential acquisition of Sterne Agee should not be seen as terribly surprising. Over the past decade, Stifel management has been aggressively capitalizing on acquisition opportunities that have arisen in the financial markets as the brokerage industry has experienced turmoil in the wake of the financial crisis. The list below outlines the thirteen deals that Stifel has closed since 2005.
2005 – Legg Mason Capital Markets
2006 – Miller Johnson Steichen Kinnard’s private client group
2007 – Acquired Ryan Beck, separately purchased First Service Bank
2008 – Purchased 17 offices from Butler Wick
2009 – Acquired 56 branches from UBS
2010 – Thomas Weisel Partners Group
2011 – Stone & Youngberg
2012 – Miller Buckfire
2013 – Knight Capital Group’s bond-trading business, also merged with Keefe, Bruyette & Woods
2014 – De La Rosa & Co., Legg Mason Investment Counsel & Trust
End Of Tumultuous Few Years
The fact that Sterne Agee is looking to sell its brokerage business is not terribly surprising either. Over the past few years the Birmingham-based brokerage firm has been mired in scandal.
Two years ago, a former chief financial officer, Brian Barze, sued Sterne Agee alleging that its CEO, James Holbrook, had misused company assets for personal purposes. According to the lawsuit, Holbrook fired Barze, after he confronted Holbrook about how he was abusing company resources.
Then, last May Sterne Agee’s board of directors voted to fire Holbrook and his son William as the firm’s COO and install new leadership. This was at approximately the same time that the company learned that the U.S. Treasury Department and the U.S. Department of Justice were looking into Holbrook’s affairs. In June, two Sterne Agee shareholders filed a derivative lawsuit on behalf of the company against its board.
Finally, in December Sterne Agee sued Holbrook for allegedly using company assets and resources in activities that were not in Sterne Agee’s best interest but were, instead, in Mr. Holbrook’s personal interest.
As we mentioned previously, a deal between Stifel and Sterne Agee would not be surprising on a number of accounts. However, we also think there are fundamental factors which make this deal sensible. Clearly, the past few years have been challenging ones for the broker-dealer community due to regulatory and competitive pressures. During periods like this, you often see more consolidation as the firms involved gain greater economies of scale for their sales and operations activities.
In addition, a potential acquisition of Sterne Agee by Stifel Financial Corp. would greatly bolster Stifel’s presence in the increasingly profitable independent broker-dealer industry. Stifel currently has approximately 190 independent reps through its Century Securities Associates Inc. subsidiary. Sterne Agee, on the other hand, has about 630 independent reps on board. Adding those reps would enable Stifel to promote an attractive platform to independent reps – a key in expanding into the more profitable and increasingly popular “hybrid” model in the retail financial advice business.
Lastly, an acquisition of Sterne Agee would significantly expand Stifel’s lucrative wealth management business. Approximately 56% of Stifel’s $2.2 bln in annual revenue is generated from its wealth management business. Sterne Agee’s asset management business would would increase Stifel’s AUM by 15% and could help boost overall firm revenue by an estimated 8% – 9%.