Furthering Macquarie's Vertical Strategy

By acquiring a respected financial services industry boutique like Fox Pitt in the current market environment, Macquarie can enhance its positioning across a number of business lines and move closer to a full service operation.  All signs point to higher long term capital requirements across the financial service spectrum, and the distribution of banks and insurers (by asset size) in the US implies that many are too small to merit the attention of the remaining broad line investment banks.

This contemplated merger, if brought to fruition, would be a significant transaction for both Macquarie and FPK.

 

First, Macquarie would benefit from a strong market presence in financial services industry investment banking in the US and, to a slightly lesser extent, Europe.  Fox Pitt is one of  a handful of firms (KBW, Sandler O'Neill, Stifel among the others) who compete effectively in this vertical market niche.  Fox Pitt has a strong research team, which offers coverage of nearly 500 financial stocks.  While the number of US banks is no doubt shrinking, the effects of this shrinking will be offset by the likelihood of higher long term capital requirements for banks to be considered "well-capitalized."  So, the Banks that survive the current shakeout will have a greater demand for investment banking and capital raising services in the short term.  Macquarie would also benefit from access to increased deal flow should it decide to take an active role as an investor/principal in some of the deals as an equity investor, as the industry is sorely in need of news sources of capital.  In addition, FPK's niche speciality in insurance due to its 2007 CCW acquisition should not be overlooked.

 

Bolt on a few more industry verticals to the energy, infrastructure and financial services practices (along with the investment advisory platform) that Macquarie would own subsequent to this transaction, and you have the outlines of a full line investment banking operation. 

 

There may also be some minor synergies with the contemplated purchase of the asset manager, Delaware Management Holdings, which  is known for its focus on dividend yielding stocks.   It is contemplated that one avenue in which regional banks with higher capital requirements (which implies lower ROE) will be able to generate higher stock prices after the industry recovers is to target high dividend payouts (in essence, returning excess capital to shareholders rather than seeking new asset classes in which to deploy them).  The reason for this is that many "riskier" lines of business where marginal capital was previously deployed will have requirements that no longer make their pursuit worthwhile for most institutions.

 

It will be interesting to see if a deal can get done, given the relative uncertainty which exists in the financial services industry today - I'd suspect that it will be difficult to price this transaction for Macquarie as there are little or no opportunities for cost synergies, the revenue picture in the short term (12-24 months) is positive, but somewhat cloudy, and pending compensation issues in the financial services industry as a whole have implications for every business where the true source of competitive advantage (the talent) walks out the door each night.

 

However, given that Stifel Financial just announced a public offering of 1.2 million shares to fund growth, on top of a completed offering of 1 million shares in June, and is trading at a market cap of $1.6 billion, it is not surprising to see the JC Flowers may want to take advantage of the run up in valuations of niche investment banks in the wake of the turmoil in the broad line investment banking firms over the past 24 months. 

This author consults with leading institutions through GLG