Piper Jaffray wants to be taken seriously as an advisory firm.
The investment bank's stock slid as much as 4.2 percent on Tuesday after it announced a $139 million deal for energy-focused investment bank Simmons & Co., mainly because the acquisition is 25 percent dilutive to tangible book value per share.
But Piper Jaffray plans to buy back stock to offset that dilution, and the firm’s willingness to strike a deal with the Houston-based specialist firm shows it’s committed to reshaping itself into a company that is valued on a multiple of earnings, rather than a multiple of tangible book value.
Wall Street has traditionally measured the Minneapolis-based firm's worth using book value because of its fixed-income trading and public finance businesses. But it's been diversifying for some years now: its annual advisory fee more than doubled to $186 million in 2014. The deal gives Piper Jaffray a helping hand -- or an estimated $85 million -- toward its goal of $500 million in annual investment-banking revenue (it finished 2014 with $371 million from advisory, debt and equity financing).
Though the cash-and-stock deal factors in a so-called "scarcity premium" because pure-play, industry-specific, closely held investment banks of scale are few and far between, Piper Jaffray still expects it to be 10 percent to 15 percent accretive to earnings in its first full year. That’s baking in the conservative assumption that Simmons will pull in similar revenue to what it generated in the trough of the last energy cycle.
Also, Piper Jaffray bankers in restructuring and debt markets could bump revenue higher once they’re introduced to Simmons’ suite of clients, most of whom are feeling the squeeze from slumping oil prices. And when energy-related secondary issuance and initial public offerings eventually return to favor, the new Piper Jaffray -- already an established bookrunner -- will be set to pounce. The fact that the energy sector tends to run counter-cyclical to growth sectors such as health care and consumer, where Piper Jaffray has traditionally focused, adds weight to its diversification tale.
By moving from a highly balance sheet-intensive operation toward a capital-light M&A boutique, Piper should begin to receive some recognition from investors. It's trading on forward P/E multiple of about 9, well below the sector median of about 13, according to data compiled by Bloomberg. Surely, the only way is up.
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