New York-ThinkEquity Partners, a San Francisco-based boutique investment bank, is being acquired by a London-based stockbroker, Panmure Gordon, for multiple just under one times revenue. Given the increasing squeeze on second and third tier investment banks as client commission arrangements (CCA’s) become more popular, the timing of the transaction seems apt.
Background
ThinkEquity’s equity research covers mostly small-cap growth, in the technology, healthcare, internet and alternative energy sectors. Current coverage is around 280 firms with 22 senior analysts. The firm was founded two former Merrill employees, Michael Moe who had headed Merrill’s growth stock research and Deborah Quazzo, who was a banker at Merrill. Revenues have grown nicely, from $12 million in 2002 to $64 million in 2006, with negligible profits. ThinkEquity has strong Silicon Valley connections, and is particularly active organizing road shows and conferences as part of its research offerings.
In stark contrast to ThinkEquity’s left coast, new economy culture, Panmure has deep roots in the City of London, being one of the oldest City stockbrokers-founded in 1871. Panmure has a ‘white shoe’ reputation, although, like ThinkEquity, it tends to focus on the smaller cap AIM listed companies. Panmure’s 2006 turnover is reported to be around ₤41 million ($80 million), so its revenues are not much bigger than ThinkEquity. It is however better capitalized and more profitable, with projected 2006 earnings of around ₤10 million ($19 million).
Valuation
The purchase price of $62.3 million represents just about 1x revenues. ThinkEquity had strong revenue growth in 2006, up 44% on 2005, but was not profitable, making $2.8 million before interest expense of $2 million and undisclosed discretionary bonuses. The other potential issue will be pressure on execution related revenues as CCA’s shift execution flow to fewer counterparties, hurting the smaller investment banks and those research boutiques with trading desks. 50% of ThinkEquity’s 2006 revenues ($32.5 million) came from institutional brokerage. If you assume 60% of institutional brokerage is attributable to ThinkEquity’s research, then $13 million of 2006 revenues is exposed to consolidation under CCA’s.
Conclusion
Panmure has been living with the commission sharing phenomenon since the beginning of last year, when greater commission transparency was implemented in the UK. The acquisition of ThinkEquity gives it a US presence and some additional scale, although the combined firm is still small enough to continue to feel the execution pressure. Nevertheless, the combined firm has a transatlantic footprint and an opportunity to cross-sell clients, with increased capacity to weather any losses of execution-related revenues. The sale of ThinkEquity may be the harbinger of more consolidation among 2nd & 3rd tier investment banks.