Evercore Partners Inc. dropped for a second day after buying International Strategy & Investment Group LLC in an all-stock deal that dilutes the value of existing shares and moves the merger-advisory firm deeper into the equities business.
Evercore, which fell 8.1 percent on Aug. 1 after Bloomberg News reported the planned transaction, declined as much as 8.2 percent earlier today and ended down 1.2 percent at $49.52 in New York. The shares have fallen 17 percent this year.
ISI specializes in equity research and trading, which isn’t as profitable as Evercore’s main business of advising on mergers and acquisitions, according to Jeff Harte, an analyst at Sandler O’Neill & Partners LP.
“The institutional equities business is not nearly as high-profit-margin or attractive a business,” Harte said in a telephone interview.
Evercore said yesterday it would issue as many as 8.1 million shares to buy ISI and the 40 percent of its equities research and trading unit it doesn’t already own. That would total $406 million at the firm’s Aug. 1 closing price. Almost 70 percent of the payout is contingent on five-year profitability targets.
The decline in Evercore’s stock price erased $211 million from its market value, based on the 41.9 million shares outstanding on a fully diluted basis under generally accepted accounting principles cited in the company’s July 23 earnings statement.
“In some stock deals, you do see some slippage initially but not as big a drop as this stock has seen since Friday,” Sachin Shah, a special situations and merger-arbitrage strategist at Albert Fried & Co. in New York, said in a phone interview. “The market is basically saying that this is value destructive.”
Brad Hintz, an analyst at Sanford C. Bernstein & Co., said the deal will boost Evercore’s equity capital markets business. Publishing research on more companies will make Evercore more likely to get hired to underwrite those firms’ stock offerings, he said.
“The ISI deal provides the opportunity to jump-start the firm’s ECM franchise,” Hintz said in an e-mail.
Evercore plans to buy back about half the shares it will issue to fund the deal over the next five years, reducing the potential dilution for investors, Chief Executive Officer Ralph Schlosstein said today on a conference call with analysts.
Schlosstein said that the transaction will boost earnings per share by as much as 15 cents next year and between 30 cents and 50 cents in 2016.
“What the market is missing is that it’s so incentive-laden,” Harte said. “I think they set themselves up with the opportunity to generate meaningful profits and some pretty good downside protection.”