From the June 2006 issue of Research Magazine • Subscribe!

June 1, 2006

UBS-Piper Jaffray Deal: 'It's a Terrific Deal'

UBS is buying Piper Jaffray, which could bring it 800-plus advisors and put it more solidly in fourth place behind Merrill Lynch, Wachovia Securities and Morgan Stanley -- with up to 8,140 advisors in the U.S. alone. Research asked industry onsultant Chip Roame, head of Tiburon Strategic Advisors, to give his opinion on what the deal means for UBS' rivals and what the next big deal could be.

What's your take on UBS' purchase of Piper Jaffray and the fate of regional brokerages?

Broadly speaking, it's a terrific deal for UBS and, absolutely, it signals the continuing decline of the regionals.

The wirehouses have been relatively stagnant in their number of reps over the last five or seven years. As for the five wirehouses, plus the other two nationals -- A.G. Edwards and Edward Jones -- those seven firms have 68,000 brokers. That number really hasn't budged in the last five or six years; they have been adding brokers, but they have been losing brokers.

Since the wirehouses really haven't been growing their number of reps, an acquisition opportunity in which a firm could pick up nearly 1,000 reps is a very big number -- a very nice addition. There are not many firms out there that can be bought and bring in that many brokers. It's a large number of reps.That's what makes it such a terrific deal.

What does this deal mean for other regionals?

Think of the number of stand-alone regionals now. Over the past decade, it has plummeted. Recall, Legg Mason just sold out, combining with Smith Barney. And now Piper Jaffray is gone. Wachovia includes Everen, Wheat First and Interstate/ Johnson Lane. A lot of the regionals have disappeared in the past decade.

It's very difficult to compete as a stand-alone regional and go up against the budgets of the Merrill Lynches and the Morgan Stanleys. The regionals must pay the same huge compliance, marketing and other costs with a much smaller revenue base.

For UBS, the deal is good for them. Piper Jaffray is a great firm, with lots of good reps and a great number of reps. For the regionals, though, it's another nail in the coffin.

Aren't such large acquisitions plagued by problems, as have been reported in the recent Merrill Lynch-Advest deal and the 1997 Morgan Stanley-Dean Witter deal?

In general, brokers can overreact in these situations, and recruiters can benefit from that.

Yes, mergers and acquisitions are very difficult things. They may look bad at the outset in 95 percent of all cases. But they don't necessarily end up bad in all cases.

Maybe 80 percent of brokers involved in such a deal say they won't want a big change; that doesn't have to mean the deal won't work out well -- the Smith Barney-Legg Mason deal has proved successful, for instance.

Can you expand on why you think the UBS-Piper Jaffray deal is a good one?

UBS has its eyes wide open. Some people at Piper Jaffray may not fit in, some UBS will not want to hang on to, and others will not want to go over to UBS -- not because UBS is a 'bad company' to work for, but given the fact that it isn't a regional firm, etc.

UBS has a good track record in acquisitions, for instance, in buying Paine Webber after it had just bought the regional firm J.C. Bradford in 2000. People screamed bloody murder and all, yet it worked OK. My guess is that executives at J.C. Bradford would say, overall, it was a pretty good deal; and J.C. Bradford, of course, was a regional firm, based in Nashville. Look at UBS today. The company just announced profits, incredible ones in private client. It is clearly doing something right, and we should give credit where it is due. UBS is creating a worldwide private-client group in Europe, Australia, Asia and the United States. They have a 12,000-broker force worldwide and are aiming to go well beyond Merrill Lynch.

Why is the deal good (or bad) for Piper Jaffray advisors?

First, Piper Jaffray's advisors in the Midwest and elsewhere are going to enjoy the buying power of a larger brokerage force, in terms of information technology, separate accounts and more. This means that they can offer clients lower-cost products and services. It's about scale, pure scale -- buying power, in other words.

Second, Piper Jaffray brokers should find that UBS is a hands-off parent, which can work to their advantage. The situation could prove to be more advantageous than what they enjoyed with U.S. Bancorp as a parent; that relationship didn't work out. With UBS, they will have the capital of a major financial-services firm, but a hands-off firm -- a distant and well-capitalized parent firm.

Third, UBS is a bank. And that means advisors have access to products like savings and checking accounts, mortgages, etc. There's a lot on the plate to work with, as the PJ advisors know from their work with US Bancorp. This includes trust accounts: Who better to set it up and manage it in-house than a UBS employee?

So, if you were a PJ broker you would be optimistic?

Yes. UBS will not be taking the Swiss culture to the Midwest. But it will be bringing its

global financial services there. Piper Jaffray advisors can take advantage of this new arrangement and share its benefits.

Are more acquisitions in store for the brokerage industry?

The number of broker-dealer choices is plummeting. UBS got one of the few remaining terrific properties.

What do you expect to happen with Edward Jones and A. G. Edwards?

They are recruiting aggressively. I don't expect them to make acquisitions. They are survivors.

How about RBC Dain Rauscher?

It is a survivor, too. But it's likely, since the firm is owned by the Royal Bank of Canada, that it will be doing more acquisitions itself. If you include the number of advisors RBC has in Canada, this is a big firm, similar in size to Merrill Lynch.

And Raymond James?

The firm has 3,500 independent advisors and 1,000 other advisors. It will be a seller at some point -- and a good prize to get. But right now, its stock price is very high, making it expensive from a potential buyer's point of view.

What's your view on Janney Montgomery Scott?

It is owned by an insurer, Penn Mutual Life Insurance. But there's a chance it could be sold to a large brokerage firm.

And Oppenheimer? Ryan Beck?

Oppenheimer is owned by a financial-services firm, which used to be known as Fahnestock Viner Holdings. Ryan Beck is owned by BellAtlantic Banconp.

So what other deals should we expect to see?

Pacific Life Insurance Company could sell some of its broker-dealers, as could AIG and ING.

And if you had to put money on something?

The most likely deal should come in the independent world. My top pick would be that LPL buys some of the Pacific Life broker-dealers.

[These include Associated Securities Corporation, M.L. Stern and Company, Mutual Service Corporation, an equity stake in Sorrento Pacific Financial, United Planners' Financial Services of America and Waterstone Financial Group for a total of 2,900 reps.]

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