Duff & Phelps IPO Scores a Hit

Amid trying times for financial sector, an offering from the advisory and investment banking outfit found plenty of buyers Friday

This wouldn't seem to be the ideal time for an initial public offering (IPO) from a financial firm. Financial stocks have been pummeled by this summer's credit crunch, losses on bad mortgage debt, the recent slowdown in mergers-and-acquisitions, and worries of worse news to come.

Despite all this, Sept. 28 saw the successful premiere on the stock market of financial advisory and investment banking firm Duff & Phelps (DUF). The IPO was priced at $16 per share, but the stock opened at $17, surged to $18.90 and ended the day at $18.51 per share. The offering of 8.3 million shares raised about $132.8 million.

Is this a sign that financial stocks are coming back into favor? Or did the Duff & Phelps IPO succeed despite the troubles in the rest of its industry?

The latter is probably closer to the truth. The S&P 500 financial sector is still off 3.84% in the last six months, according to data provider CapitalIQ, while the entire S&P 500 is up 7.19%.

Investors might have ignored the sectors' woes because of Duff & Phelps' strong fundamentals, says Philip Stiller, a research analyst at Renaissance Capital.

No one knows how Duff & Phelps might have priced if times were better. "If there wasn't some turmoil on the credit markets, the IPO might have been better received," Stiller says.

Duff & Phelps is a profitable and well-established (founded in 1932) firm that specializes in, as one company filing puts it, "highly technical and complex assessments of value." The company's 690 professionals value firms for the purposes of financial statements, taxes, M&A activity and other transactions, and for litigation and other disputes.

The firm saw revenues of $246.7 million last year, up from just $28.9 million in 2004. That reflects acquisitions, including the purchase of Standard & Poor's Corporate Value Consulting business in 2005.

A key question for Duff & Phelps in this environment is whether the rapid pace of M&A activity continues. If not, its investment banking practice could suffer.

However, investment banking made up just 23% of the firm's revenues in 2006, with the rest coming from its financial advisory business. Also, Stiller says, Duff & Phelps' investment banking revenues are less volatile than other firms because it tends to make the same amount of money on each deal, regardless of its size.

Plus, Stiller says, the firm benefits from several "trends that are driving growth in their business outside of M&A."

For example, independent financial firms are in demand as many corporate boards look for advisors without the conflicts of interest of larger players. Also, new accounting standards are expected to add to the demand for third-party valuation services. Many expect hedge funds to increasingly rely on firms like Duff & Phelps to value their assets.

Plus, the firm says in a recent filing, Duff & Phelps may be needed even if the economy turns south. Its expertise can come in handy in bankruptcies and restructurings, or to offer evidence in disputes.

So it's not clear if a good opening day for Duff & Phelps means that other financial players will be jumping into the stock market.

One of the biggest IPOs of the year was the private equity giant Blackstone Group (BX). Its strong debut in April inspired other private equity players to consider IPOs. But Blackstone shares are now off 34% from their high.

Investors are now waiting to hear whether initial public offerings from KKR & Co. and Och-Ziff Capital Management Group will proceed as planned. If those IPOs get off the ground, it could be a real sign that the financial sector is returning to health again.

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