It is by now old news that Linsco/Private Ledger sold a 60 percent stake in itself to two private equity firms in late October, after years of talk about taking the firm public. The deal values LPL at $2.5 billion, a very nice price indeed: The two PE firms paid around 2.5 gross revenues, a high multiple by historical standards. Mergers and acquisitions experts say it offers proof that it’s a seller’s market for independent broker/dealers. Moreover, many more b/d deals are on the way, they say.
“Two times the gross revenue is the highest purchase [price] we have seen here, and if this all works out, you’re looking at a deal close to 2.5 times the gross revenue, which would be the highest ever for an independent b/d,” says Mark Harris, president and CEO of Fort Lauderdale, Fla.-based Broker Dealer Market, a financial services acquisitions intermediary. LPL generated revenues of $1.1 billion in 2004.
On Oct. 27, LPL announced to employees that Texas Pacific Group of Fort Worth, Texas, and Hellman & Friedman of San Francisco agreed to purchase the 60 percent stake, with the deal expected to close at the end of the year.
Harris says the multiples are so good right now that some b/ds that approached him to buy another firm turned around and became sellers. So why are buyers willing to pay so much? Well, it doesn’t hurt that private equity firms have a lot of cash on hand. That’s because investors, unimpressed by stock market returns, are putting their money in alternatives like hedge funds and private equity, says Eric Fitzwater, senior analyst at SNL Financial, in Charlottesville, Va.
But more importantly, all of the big b/ds out there are in a buying mode, according to Harris. Insurance b/ds—such as ING, AIG, Royal Alliance and The Hartford, as well as big independent b/ds like Financial Network, Commonwealth, Securities America, Woodbury and MultiFinancial—are all potential buyers, he says. “If they can find a good company that meets their needs and it’s a good property, they’ll buy it,” agrees Fitzwater.
One major insurance company that is looking to buy one of the largest 15 independent b/ds recently told Harris not to worry about its usual spending limits. “We will go above that price limitation,” executives at the firm told Harris after he pointed out that one of their acquisition targets was too expensive for their budget.
Why? Because, in the end, it may be cheaper than recruiting these days, Harris explains. Fierce competition for successful reps has meant that many firms have to offer huge recruiting packages to bring a big broker on board. And whereas a b/d acquisition can be accretive to earnings within as little as two years, according to some sources, some research shows top brokers that get fat pay packages can take up to five years to start making good money for their firms.
Firms are particularly interested in buying b/ds that focus on managed money and fee-based business and turn their noses up at those that get more than 25 percent of their revenues from stock trading, according to Harris. “There are more buyers for companies that will generate fees as opposed to companies tied to the securities market,” Fitzwater says.
For LPL, the deal gives it fast access to cash without the expense and time commitment of going public—of course, private equity deals often do use IPOs as an exit strategy.
“We find this is a helpful transition between being private and going public,” adds Marshall Haines, principal at Texas Pacific Group, although he declined to comment on whether Texas Pacific plans to take LPL public.