Another One Bites The Dust

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New York, NY – In the past few months, a number of small and mid-sized investment banks and broker-dealers have decided that it no longer made sense “going it alone” as unbundling and the proliferation of Commission Sharing Agreements have prompted a significant consolidation of execution partners and a sharp reduction in equity commission revenue.

In fact, yesterday, US investment bank CE Unterberg Towbin was sold to UK brokerage firm, Collins Stewart plc, for $40.65 mln in cash and stock.  Included in this total is $9 mln that Collins Stewart has agreed to repay in shareholder debt.  The group said that, subject to regulatory approvals, the two businesses in the US will be combined and will be renamed Collins Stewart, Inc.

The CE Unterberg deal marks the third such transaction in the past few months, following sales of New Jersey based investment bank Ryan Beck Holdings Inc., and San Francisco-based ThinkEquity Partners LLC.  This is in addition to the market rumors swirling about that Prudential Equity Group is also for sale.

It is clear that CSA agreements, and the move by buy-side investors to choosing execution partners seperately from their choice of research providers, is having a profound impact on small and middle tier brokerage firms and investment banks.

In fact, early indications suggest that many mutual funds and hedge funds are directing more equity commissions to the large bulge bracket firms, who might typically be considered CSA brokers, while they are dong less trading with small and mid-sized brokers.

For example, firms like Piper Jaffray; Raymond James; Thomas Weisel; A.G. Edwards; Friedman, Billings, Ramsey Group Inc.; and Morgan Keegan all reported lower commission revenue from their institutional equities businesses in recent quarters.  Bulge bracket firms like Goldman Sachs, UBS, Morgan Stanley, and Merrill Lynch, posted an average 30% increase in their equities divisions.

Of course, this trend is likely to get even worse in the coming years as institutional investors look to leverage trading technology and low cost execution platforms — systems which the largest firms have invested heavily in in recent years, wheras smaller firms have focused on their full service execution offerings.

Consequently, we expect that the recent spate of mergers and consolidations of small and middle tier investment banks and brokerage firms will continue as smaller execution providers find it harder and harder to attract trade flow.  These consolidations are also likely to have a negative impact on the availability of high quality research as layoffs within the research divisions of these newly merged firms are likely.

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