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Blazing a trail of growth

Regional brokerage up tenfold as competitors falter

Stifel Financial Chief Executive Officer Ron Kruszewski paused in mid-sentence and asked an employee for the list, a chart showing in red which of the St. Louis firm’s rivals have closed or sold out.

“There’s this huge consolidation,” Kruszewski, 54, said in an interview in his office, referring to the once-crowded field of U.S. regional and local brokerages that vied to serve mid-size companies.

“What’s left is very few firms that ever were in the middle market. We’re one of them.”

About a dozen golf putters lean against a table. Nine floors down, the lobby is being remodeled with glass and white stone, while a bronze bull and bear statue is planned for outside.

The way Kruszewski views it, St. Louis is now the No. 2 U.S. brokerage hub after New York. From his window, he can see the Edward Jones Dome, the stadium named for the city’s other prominent securities firm and home field of the National Football League’s Rams.

Kruszewski is looking to U.S. brokerage-industry turmoil to provide yet more opportunities to grab market share and grow after a decade of acquisitions propelled Stifel ahead of its peers.

Smaller firms including Rodman & Renshaw and WJB Capital are shuttering operations or selling themselves to larger companies as a drop in trading and lower commissions squeeze margins. Meanwhile, so-called bulge-bracket banks such as Citigroup and UBS AG are cutting employees and units as they retrench in the wake of the financial crisis.

Navigating that shakeup is key to reigniting Stifel’s stock, which snapped a nine-year ascent in 2011 as it fell 23 percent, then ended last year little changed.

Kruszewski says his mission is simply to build the firm into a larger version of its current self: a middle-market brokerage and investment bank. The stock is still up tenfold since 2001.

Defying the odds

When Kruszewski became CEO in 1997, Stifel employed 733 people and had annual revenue of $136 million. The company has since spent at least $1.7 billion on 24 acquisitions, according to data compiled by Bloomberg, leaving it with more than 5,000 employees and annual revenue that exceeds $1.4 billion.

“I don’t think anybody in their wildest dreams would have predicted the enormity of his success,” said Stuart Greenbaum, former dean of Washington University’s Olin Business School in St. Louis and a member of Stifel’s board of directors when Kruszewski was hired.

“Every growth opportunity is a failure opportunity at the same time. I think he’s done extraordinarily well.”

Other mid-size brokerages and investment banks have grappled with how to grow.

Cantor Fitzgerald, which has become one of the largest independent U.S. brokerages, has also attempted to push into underwriting and advisory businesses. But Moody’s Investors Service downgraded Cantor Fitzgerald’s credit rating to junk in October, saying the firm’s profitability has weakened even as it diversifies.

Jefferies Group, the New York investment bank run by Richard Handler, has hired bankers and traders and expanded its balance sheet to take on larger transactions. Assets have grown from less than $15 billion in 2005 to about $36 billion at the end of 2012, with staff surging 86 percent in that period.

But in November, the firm agreed to sell itself to Leucadia National, the investment firm that is Jefferies’ biggest shareholder. The announcement came almost a year after Jefferies’ shares plunged after the October 2011 bankruptcy of MF Global Holdings Ltd.

Crucial acquisitions

Stifel runs a wealth-management business and an institutional unit that includes investment banking, research, sales and trading, catering to companies with as much as $5 billion in market value. Stifel has added to both units through hiring and acquisitions, Kruszewski said.

In 2009, the firm acquired about 55 brokerage branches from Zurich-based UBS for $46 million, according to data compiled by Bloomberg. It also bought Ryan Beck Holdings in 2007 for about $100 million, the data show.

On the institutional business side, analysts and investors point to Stifel’s 2005 acquisition of Legg Mason’s capital-markets business from New York-based Citigroup as the key deal. Other deals include its purchase of Thomas Weisel Partners Group in 2010, which added health-care and technology banking.

“Because they stuck to their knitting through the years, they were able to emerge from the financial crisis in an offensive position where a lot of their competitors, larger and smaller, were playing defense,” said Devin Ryan, an analyst at Sandler O’Neill & Partners LP.

In 2011, Stifel had net income of $84.1 million. For 2012, that figure is expected to jump to $138.3 million, according to the average estimate of three analysts surveyed by Bloomberg.

Stifel has posted record net revenue every year since Kruszewski took over as CEO. Analysts estimate revenue to reach $1.61 billion in 2012, a 14 percent increase from 2011.

But Kruszewski’s every move hasn’t been praised. Last year, Stifel agreed to buy KBW Inc., an investment bank focused on the financial services industry, in a transaction valued at $575 million. Randy Loving of Silvant Capital Management LLC is among Stifel investors who are concerned the firm overpaid.

KBW’s shares already were trading at 1.3 times tangible book value – a measure of how much a firm would theoretically be worth in liquidation – when the deal was announced, according to data compiled by Bloomberg.

KBW was “shutting down parts of the business, and had that continued, I think it’s possible that Stifel could’ve picked up whatever expertise they needed somewhat cheap,” said Loving.

Moreover, adding sales-and-trading and investment-banking businesses increases earnings risk and volatility, Loving said. It also makes Stifel more dependent on an upturn in banking volume, something Loving said he’s not convinced will happen.

“When you think about Stifel as a stock, it actually did OK during the downturn because it was devoid of all these issues,” he said.

The firm’s shares have outperformed those of the biggest banks since the financial crisis. Goldman Sachs has declined 32 percent since the end of 2007 and Morgan Stanley has plunged 57 percent. Stifel gained more than 50 percent in that period.

Savvy choices

With global deal volume about half of what it was in 2007, it may be too early to judge many of Stifel’s acquisitions, said Errol Rudman, portfolio manager at Rudman Capital Management in New York. The KBW deal, in addition to other institutional purchases, positions the firm to take advantage of an upswing in investment-banking activity, he said.

“They expanded at a time when others were contracting, and secondly, they’ve paid prices that reflected the failed businesses they were buying,” Rudman said. “When and if the time changes, they’ll be leveraged to that concept of being larger and having purchased the assets at a cheap price.”

Kruszewski’s background as an accountant has been a factor in the firm’s success integrating acquisitions, investors including Rudman say.

A graduate of Indiana University, Kruszewski joined Robert W. Baird & Co. in 1989, where he served as a managing director and chief financial officer of the Milwaukee-based wealth-management and investment banking firm, according to Stifel.

Being based in St. Louis gives Stifel a cost advantage, Kruszewski said; running the same operation in New York would be “a different story” when it comes to expenses.

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