As giants fall, Piper steps out from shadows

From its perch in a downtown Minneapolis office tower, Piper Jaffray Companies may seem far removed from the gunslinger culture on Wall Street.

But lately, Piper has been gunning for big deals and top talent -- and walking away with a fistful of dollars.

Two years of brutal downsizing and consolidation on Wall Street, combined with the disappearance of such storied firms as Lehman Brothers and Bear Stearns, as well as a slew of regional investment banks, have given Piper the opportunity to play on a bigger stage, according to industry analysts.

Over the past year, the firm has landed deals that once might have seemed out of reach for a midsized investment bank. They include:

• A $476 million bond offering for the city of Houston -- the largest public finance transaction ever underwritten by Piper.

• The initial public offering of China-based Duoyuan Global Water, a water-equipment-maker whose stock rose 124 percent last year, making it the top-performing new issue on a U.S. exchange in 2009.

• A $58 million bond issue for the University of Minnesota, the first time the university has hired a non-New York firm as a lead underwriter on a bond offering.

"Piper has definitely taken steps to come out of this crisis much stronger than when they went in," said Michael Wong, an analyst who covers the investment banking industry for Morningstar.

Shares of the firm have more than doubled from $18.73 in March to $46.20 on Friday, as investors bet that the firm will benefit from a surge in dealmaking as the economy recovers.

Piper, which raises capital and advises companies on mergers and acquisitions, is still heavily dependent on global deal activity, which presents a challenge. Last year, global mergers and acquisition deals fell 33 percent, and just 179 firms went public -- down from 554 in 2007, according to Renaissance Capital of Greenwich, Conn.

Some investment banks and brokerages, including Wall Street giant Morgan Stanley, have already announced disappointing results on weak trading volumes and deal activity.

Advantage: Equity

Much of Wall Street relied on borrowed money to bolster returns during the boom and remain heavily in debt. Even now, two years after the credit crunch began, some large investment banks still have leverage (asset-to-equity) ratios of 10-to-1, meaning that for every $10 in assets they have just $1 in equity. Piper, meanwhile, has a leverage ratio of just 1.8-to-1.

Piper's equity gives it flexibility. The firm can borrow against it to make acquisitions. Last month, it bought an upscale money management firm in Chicago, called Advisory Research Inc., for $218 million in cash and stock. The deal tripled Piper's asset management business to 12 percent of revenue -- and helped to diversify the firm against swings in deal activity, analysts said.

"They have a lot of dry powder at a time when there may be some good [acquisition] opportunities out there," Wong said.

And while many investment banks are still shedding staff, Piper is hiring castoffs from rivals, preparing for a resurgence in deal activity. The firm employs about 1,000 people in offices worldwide, including London, Hong Kong and Shanghai. It hired 59 senior staff last year, including investment bankers, analysts and traders. The firm expects to add a similar number this year.

Piper declined to comment for this article, citing a company policy against discussing its financial performance or other material non-public information in advance of earnings. However, they have been unusually open about their desire to pick off talent from rivals. "We are well positioned to capitalize on the turmoil in the competitive landscape," CEO Andrew Duff said in a conference call last year with analysts.

The growing competition for talent could drive up Piper's compensation costs, which currently account for about 60 percent of revenue.

Piper's presence in Hong Kong and China could give it a competitive advantage over other midsized investment banks, say analysts. These markets were the one bright spot last year in the IPO markets. Along with a large number of listings on the Hong Kong and Shanghai exchanges, there were 11 U.S. listings by Chinese companies, up from four in 2008, according to Renaissance Capital.

So far, Piper's overseas operations have not been a big contributor to its results -- accounting for just 7 percent of net revenue in the third quarter. However, the firm only entered Hong Kong three years ago, and now has the ability to take both China-based and Hong Kong-based companies public on that exchange.

"That's where the IPO activity is happening," said Chris Nolan, an analyst at Maxim Group in New York. "If they could really break into the deal pipeline, it could be big."