Evercore Acquiring ISI To Expand Research Offering

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Rumors swirled around Wall Street last Friday afternoon that boutique investment bank Evercore Partners is planning to acquire independent research firm, ISI Group, for as much as $440 mln in an effort to grow its sales and trading business and expand its investment banking revenues.

The Deal

Evercore Partners, Inc. (EVR) a publicly traded New York based boutique investment bank, is expected to purchase International Strategy & Investment Group LLC, (ISI Group) the closely held research firm co-founded by Ed Hyman, in what would be the investment bank’s largest acquisition to-date.

People familiar with the deal say that Evercore has agreed to pay up to 8 million shares for ISI Group, valuing the research firm at between $400 mln and $440 mln, based on Evercore’s recent stock price.

Only 30% of the purchase price is expected to be paid out up front, with the remainder paid out over 5 years, based on the achievement of specific performance targets and the exact structure of the deal.

ISI is expected to be merged into Evercore’s equities business, which is 40% owned by employees, establishing a new unit called Evercore ISI Institutional Equities.  The combined unit is expected to employ about 300 staff and generate approximately $230 million in revenue.  People familiar with the deal say that approximately 15% to 20% of the employees of this group are expected to lose their jobs due to cost rationalization.

Ed Hyman, the founder and Chairman of ISI Group will stay on as chairman of the new unit for at least five years.  Evercore and ISI Group are not expected to announce this acquisition until early this week.

Strategic Rationale

Clearly, one reason for the ISI acquisition would be to help Evercore quickly expand its equity sales and trading business by leveraging the ISI brand and its well-accepted research franchise.    The addition of ISI would more than double the number of research analysts at Evercore, and increase revenues generated by the firm’s research and equity trading business by fivefold.

However, the major driver for the deal is likely to be to boost Evercore’s core investment banking business. In fact, in June, Evercore’s CFO, Robert Walsh explained that expanding their equity research offering would be a priority as it would help the firm generate more stock underwriting business.

“We’ve grown the number of companies we cover, we’ve grown the number of clients we served, and that’s been instrumental in increasing the number and the value of the underwritings that we participate in,” Walsh said, admitting: “It’s been a tough market to do that, certainly much tougher than we had envisioned when we launched it.”

About Evercore

Evercore Partners is a publicly traded New York City based boutique investment bank founded in 1995 by Wall Street deal makers Roger Altman, Austin Beutner, and David Offensend.    On January 1, 2006 Evercore Partners Inc. (EVR) went public on the NYSE by offering 3,950,000 shares at $21 per share.

Evercore operates two main businesses: Investment Banking and Investment Management. The Investment Banking division includes the firm’s Advisory services, where Evercore provides advice to clients on mergers, acquisitions, divestitures and other strategic corporate transactions, with a particular focus on advising multinational corporations and substantial private equity firms on large, complex transactions.

Evercore’s Investment Management segment focuses on Institutional Asset Management, where Evercore manages financial assets for institutional investors and provides independent fiduciary services to corporate employee benefit plans; Wealth Management, through which it provides wealth management services for high-net-worth individuals, and Private Equity, through which Evercore manages private equity funds.

During the fiscal year 2013, Evercore generated approximately $760 million in revenue and earned $104 mln in Net Income, while employing approximately 1000 staff.

About ISI Group

ISI Group, founded in 1991 by veteran Wall Street economists Ed Hyman and Nancy Lazar, is a privately held New York-based registered broker-dealer that provides macro-economic and fundamental research, sales, and trading services.  ISI sells its research products to institutional investors in the United States, Europe, Canada, Asia, Australia, and Latin America; and provides equity, program, and options trading services to these institutional customers.

Ed Hyman, 69, built his reputation as one of the top economists on Wall Street as he won Institutional Investor magazine’s annual survey in this category for more than 30 years.  Consequently, ISI’s initial business was providing macro research and portfolio strategy advice. ISI started adding fundamental stock analysts to expand the firm’s research offering about four years ago after the financial crisis prompted many of Wall Street’s largest banks to scale back on their equity research businesses.

In May, 2013 co-founder Nancy Lazar left ISI Group to form a new macro research shop, called Cornerstone Macro LP, taking with her François Trahan of Wolfe Trahan (a former ISI employee).  In addition, ISI’s highly regarded policy research team, Andy Laperriere and Roberto Perli, also left to help establish Cornerstone Macro.

ISI Group generated slightly more than $200 million in revenue in 2013 from its equity research, sales and trading business and employs approximately 230 staff.  Hyman owns approximately 75% of ISI, according to regulatory filings.

Integrity’s Take

Evercore’s purchase of ISI makes quite a bit of sense to the team at Integrity Research.  Not only will it enable Evercore to gain some scale in their equity sales and trading business (a feat that has clearly been difficult for it to accomplish on its own), but the addition of ISI will give Evercore more extensive research coverage which should help the firm win more investment banking mandates.

Also, the deal looks to be financially quite beneficial for Evercore.  The purchase of ISI for 2.0 to 2.2 times revenue when Evercore earns a multiple of close to 3.0 times revenue means they will get a $600 mln increase in market valuation for a maximum cost of $400 mln to $440 mln over 5 years.

The deal also looks like it makes a lot of sense to Ed Hyman and ISI Group as they have been positioning themselves for a sale for quite a few years.  In fact, a few years ago, ISI’s name was mentioned as a potential acquisition target for Nomura as they attempted to quickly build their equity sales and trading, and investment banking businesses here in the US.

Clearly ISI decided that it was the right time to sell the business now.  We suspect this had to do with the fact that equity commissions have slipped in the last few years, making revenue growth quite difficult for ISI.  More importantly, we think that the uncertainty the recent ESMA and FCA pronouncements have cast on the entire sell-side model of charging for research through bundled commissions probably convinced ISI management they should sell the business as soon as possible.

Of course, it remains to be seen what if anything will happen as a result of the recent FCA and ESMA reports.  In addition, it is unclear what kind of impact a change in European regulations surrounding the use of commissions to pay for research will have in the US where the bulk of Evercore’s and ISI’s sales and trading business currently resides.

This uncertainty may be one of the reasons that 70% of ISI’s purchase price is expected to be structured as an “earn out”.

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