There are more than a few similarities between EVEREN Capital Corp.'s recent purchase of the ailing Dallas-based Principal Financial Securities and its own employee-led buyout of Kemper Securities in 1995. For one, the purchase price, $75 million, is the same. The amount represents 1.2 times Principal's book value, a definite bargain considering that Piper Jaffray, another regional, just sold at 4.2 times book to U.S. Bancorp.
Furthermore, Principal, like Kemper Securities, is spinning off from a large insurance firm--The Principal Financial Group--that some say had struggled to mesh its securities and insurance cultures. And Principal, like Kemper, faced massive broker erosion. Principal Securities has lost nearly 40% of its producing reps in the last year, dropping from 659 to 400, according to the 1996 and 1997 SIA yearbooks as well as a press release from the firm.
So did EVEREN get a deal? Maybe. But former Principal reps note that broker morale had suffered. There was a feeling of apprehension, says one rep, now with Dain Rauscher. "It was a feeling that something's wrong--call it women's intuition. I wanted to be with a regional, and we were getting further away from that." This same rep says she's glad she got out before the EVEREN acquisition, which is likely to displace local management.
Other industry experts say Principal had slipped below the critical mass to be a profitable operation. "Principal didn't have enough account executives to exist as a firm," says a rep at a competing regional. "Critical mass on a clearing operation appears to be 500 investment counselors--below that, it falls apart."
Within the last year, Principal had switched from self-clearing to clearing through Wexford Clearing Services Corp.
And other brokerages were making irresistible deals for the disgruntled Principal reps, reportedly offering "50-50-50 deals" where reps could earn 50% of their trailing 12-month up front, and 50% commission payout for 50 months. According to some broker reports, Prudential Securities was paying 70% upfront bonuses to lure away Principal's brokers. Officials at Prudential Securities, however, declined to comment.
While brokers at EVEREN muse if the firm got a bargain or a stinker, the firm is hoping success will repeat itself. EVEREN has rebuilt its broker base significantly in the last few years, and its stock price has soared from an opening of 18-1/2 in 1996 to close '97 at 46.
"Did we get a steal or a piece of junk?" asks one EVEREN rep. "Only 20 of their [Principal] brokers do over $500,000 in gross. I don't know what they bring to our firm."
In a press release announcing the Dec. 15 buyout agreement, EVEREN Capital CEO James Boris said, "The acquisition will further advance our progress by solidifying EVEREN's competitiveness in several key markets. Principal Financial Securities' well-established presence in its home state of Texas, for example, will provide us with an enviable position in one of the fastest-growing state economies in the nation."
EVEREN plans to offer retention incentives to the 400 Principal investment consultants. "It will be tiered, based on production levels," says an EVEREN spokesperson. "We would expect to grow Principal like we've grown EVEREN. We believe we will be able to duplicate our success with Principal."
The combined firms will employ more than 1,700 reps.