After two years of cautious growth, Piper Jaffray Cos. is gambling big on the economic recovery.
Piper buys high-end money-management firm
December 22, 2009 at 2:56AM
With a single acquisition Monday, the Minneapolis-based investment firm quadrupled its money-management business -- as many institutions are pouring billions of dollars back into the stock market.
Early Monday, Piper said it reached a deal to acquire Advisory Research Inc., a boutique firm in Chicago that manages $5.5 billion in assets on behalf of wealthy individuals and institutions, for $218 million in cash and stock. It was Piper's first big acquisition since 2007 and signals the firm is serious about investing in its business as the economy rebounds, say analysts.
Shares of Piper surged on the news to $49.69, up more than 6 percent for the day and 31 percent for the year.
"It's a great time to be buying an asset manager if you believe the assets you're buying have some inherent stickiness to them," said Greg Warren, an analyst who covers the asset-management industry for Morningstar in Chicago.
Though a relatively small player in the money-management industry, Advisory Research boasted a high-margin business with a stable base of clients. About 80 percent of Advisory Research's clients are institutions, such as endowments and pension funds; the rest are high-net-worth individuals. Because Advisory Research focuses on stocks, it collects more in fees as a percentage of assets it manages than firms that manage fixed-income investments, analysts noted. The firm's net operating margin, operating income as a percentage of revenue, is about 50 percent -- above the industry range of 25 to 40 percent.
Piper said Monday it expects the deal to add 11 percent to its earnings-per-share in 2011.
The transaction also enables Piper to replace some of the revenue it lost three years ago when it sold its brokerage unit to UBS AG, creating a $500 million after-tax windfall. At the time, Piper's brokerage sales made up more than half of its revenue. The firm relied mostly on its volatile investment-banking business, which generates fees by arranging stock offerings and advising firms on mergers and acquisitions.
"This acquisition makes compelling strategic sense," Andrew Duff, chief executive officer of Piper, said in a conference call Monday with analysts. "It diversifies revenues to mitigate volatility in current capital markets" and builds the firm's asset-management unit "to sufficient scale."
Before the purchase, asset management comprised just 3 percent of revenue, largely from its 2007 purchase of Famco, a St. Louis-based asset manager. With Monday's purchase, that figure rises to 12 percent.
The firm also fits nicely in Piper's increasingly global business, analysts said. Two years ago, Piper Jaffray bought an investment-banking business in Hong Kong, and today about 7 percent of its revenue comes from offices in Hong Kong and London. Advisory Research also has an office in Hong Kong and offers two international mutual fund products.
"It fits like a glove," said Chris Nolan, an analyst with Maxim Group in New York. "Not only are they getting earnings accretion, but they're broadening a business [asset management] that lends itself to scale."
However, a few analysts said they found the $218 million price tag a bit rich. The deal price represents about 4 percent of Advisory Research's assets under management, which is at the "high end of the range" for other asset-manager deals this year, Warren said. However, the higher price might be warranted based on Advisory Research's strong profit margin, he noted.
Financing for the acquisition will come from Piper's available funds and a $120 million one-year note.
Duff suggested he wasn't done doing deals. "We will continue to look at corporate development opportunities that can improve our existing businesses or be complementary to them," he told analysts Monday.
Analysts scrambled Monday to revise their earnings estimates for Piper after the news. Sandler O'Neill, a New York investment bank, upped its 2010 estimate to $2.65 a share from $2.40 to account for the acquisition. "Bottom line," the firm wrote, "we view this acquisition favorably for Piper Jaffray. The firm's capital base has been underproductive, in our view, so deploying capital into accretive deals is a positive."
Chris Serres • 612-673-4308
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