Boutique investment bank Keefe, Bruyette & Woods Inc.'s first two attempts to go public in the late 1990s were quashed by Russia's debt default and an insider-trading scandal involving the then-chief executive officer and a porn star. Now the New York firm is back. And this time, the stock market's infatuation with niche banks that focus on mergers and acquisitions ought to make for a successful debut.
KBW announced its initial public offering in August, hoping to capitalize on the investing zeitgeist that has sent offerings of other boutique investment banks soaring. The most recent IPO was that of Evercore Partners Inc. (EVR), a 10-year-old group founded by Roger Altman, Deputy Treasury Secretary under President Bill Clinton, and Austin M. Beutner, a former general partner of The Blackstone Group. Its roster of blue-chip clients such as AT&T Inc. (T) rivals that of any Wall Street firm. Evercore's shares have jumped 44% since its Aug. 11 initial offering. Other boutiques have pulled off similar successes, handily beating the 4% gain for IPOs overall this year (table). The small energy specialist Petrie, Parkman & Co. (PDP) became the latest to file for an IPO, on Sept. 13.
What's stoking investors' enthusiasm? The small guys are stealing market share from their larger brethren -- frequently the very firms where today's specialty bankers got their start. The big, diversified firms, hit with a bevy of investigations and restrictions over conflicts of interest in recent years, increasingly rely on their trading desks for profits. That leaves fewer resources for the traditional hand-holding that builds long-term investment-banking relationships. Evercore, Lazard (LAZ), and Greenhill (GHL) advised on mergers and acquisitions deals totaling 28% of this year's $874 billion through August, up from 18% last year, according to Thomson Financial. KBW's share doubled, to 3.6%, last year when it advised Bank of America (BAC) on the $35 billion MBNA acquisition, though it has fallen back to 2.6% so far this year.
Meanwhile, the combined market share of Goldman Sachs Group (GS), Morgan Stanley (MS), and Merrill Lynch (MER) is running at 77% through August, vs. 94% in 2005. "There has been a brain drain out of Wall Street," says Frederick C. Lane, CEO of Boston boutique Lane, Berry & Co., which he formed after working at Credit Suisse First Boston.
Founded in 1962, KBW devotes nearly all its attention to the banking, insurance, and brokerage industries, which are awash in consolidation-driven mergers. This specialization has helped drive its revenue up 50% in the first quarter, to $101 million, while net income tripled, to $10 million.
KBW has prospered mainly by focusing on midsize deals and cultivating relationships with hundreds of institutions ignored by the rest of Wall Street. In one typical transaction, KBW advised Fidelity Bancshares Inc. (FFFL), a small Florida bank, on its $1 billion sale to National City Corp. (NCC). National City CEO David A. Daberko credits KBW for bringing the deal to his bank. "They've built up these relationships over time," he says. "The big firms haven't been as focused on doing that."
The merger mania in financial services shows no sign of slowing. Back in 1999, KBW's IPO filing said the industry's consolidation was "far from complete," given the existence of 10,000 banking institutions. The new filing notes that 7,000 remain. "I don't know what the final number [will be], but it's a lot less," says Anton Schutz, manager of the Burnham Financial Industries Fund (BURFX). KBW declined to comment, citing the quiet period for IPO filers.
The market's love affair with M&A banks may be short-lived, since such niche players are by nature less diversified. For example, slow times for technology offerings have weighed on recent IPOs by Cowen Group Inc. (COWN) and Thomas Weisel Partners Group Inc. (TWPG) Still, all the dealmaking in financial services bodes well for KBW -- and its new shareholders.
By Aaron Pressman