August 17, 2011

Securities America Sale: ‘Amazingly Low Price,’ Expert Says

But, recruiters note, Ladenburg Thalmann will need to stop attrition

The news Wednesday that Ladenburg Thalmann is buying Securities America, for what some call a bargain price, resolves some issues for the independent broker-dealer’s 1,700 advisors, but raises a good number of questions, as well, experts say. Most important, they note, is the need for aggressive retention packages and other steps to stem the tide of departing advisors.

For the deal, Ladenburg will pay $150 million in cash up front to Securities America parent company Ameriprise Financial and possibly more if certain performance targets are met by Securities America in 2012 and 2013; the deal is being financed by an affiliate of Dr. Phillip Frost, Ladenburg’s principal shareholder and chairman. Securities America should add about $450 million annual sales to Ladenburg’s results and up to $50 billion in assets, according to the company.

Securities America will continue to operate as a stand-alone business and keep its current headquarters in La Vista, Neb. The combined entity, based on trailing 12-month results, should have about $675 million in sales, $70 million in assets, and 2,700 financial advisors.

chip roame“This is a very smart move for Ladenburg Thalmann,” said Chip Roame (left), head of the consultancy Tiburon Strategic Advisors in an interview. “The risk here is that Securities America reps continue to exit, making it worth less and less, and making the $450 million revenue run rate not realistic.”

The price at about one-third of annual revenue is “an amazingly low price,” Roame shares. “Often firms sell for around three-times revenues (or nine times more than this),” he said. 

Considering the fact that a $150-million deal typically involves paying three-times yearly sales for a $50 million-revenue firm, this means that Ladenburg Thalmann is “allowing Securities America to potentially lose 85% of its revenues before it’s a bad deal, so there’s very little risk for them.”

As for how many advisors and what level of sales and assets are in play, “By the end of September, there will have been 10-15% of assets having left since January,” said recruiter Jon Henschen of Henschen & Associates. “By yearend, that can climb to over 30% but can be diminished if Ladenburg is aggressive at convincing reps to stick around. But, poor market conditions also can be the biggest factor in reps not wanting to make a change out of fear of poor transition retention during difficult markets.”

To him, though, the upfront nature of the deal is surprising. “I thought the upfront amount was high, causing Ladenburg to take a leap of faith that retention will be high,” Henschen explained. “Usually, the upfront would be perhaps around 25-50% of the purchase price, with the rest paid over two to three installments, based on assets retained over the first year or two.”

Also, he says, paying 30-40% of trailing revenue for firms in the independent broker-dealer space is typical. Other experts, however, says broker-dealers are being sold today for about 50% of fees and commissions.

Future Payments

The arrangement for the deal is interesting, notes Roame, since the incentives should allow for a much higher payment if the Securities America reps stay. 

These additional payments, he assumes, will go to Ameriprise, “but its former subsidiary's executives will likely determine how much is paid by Ladenburg and collected by Ameriprise,” he explained. 

“So Securities America executives, who are now going to be working for Ladenburg, will work hard for their new bosses at Ladenburg to pay more to Ameriprise?” Roame asked. “It sounds funny, but Ladenburg will be happy to retain more reps and pay more–but it is a funny outcome.”

Further details about the future payments should be outlined in an upcoming SEC filing, according to Ladenburg Thalmann.

Retention Packages

Experts say that retention of advisors should be a top concern for Ladenburg Thalmann.

“Securities America will need to offer advisors some incentive retention, or it will be tough to hit the boogies,” said Mindy Diamond of Diamond Consultants in an interview. “Any Sec America rep has been anxiously waiting, some will be thrilled about the news, and some will not. As in any transaction, you cannot please everyone.”

A representative for Ladenburg said in a phone interview that a retention plan should be in place soon, with “certain criteria tied to production, advocacy and business growth.”

“It’s a great rep force,” said Roame, “and upgrading through training and/or recruiting is a lot easier when you have a base of 2,700 than when you do not.”

Good for Ameriprise, Great for Ladenburg?
Philip Palaveev, the former Moss Adams consultant who is now president of Fusion Advisor Network (and commented on the deal in the lead story on the acquisition), suggested that from the perspective of a Securities America advisor, the ”positive” development is that Securities America will apparently “stay intact in terms of operations and platform,” though he points out that most of Securities America’s clearing business is with Pershing while the two BDs clear through Fidelity’s National Financial.”

Philip Palaveev, president of Fusion Advisor Network.As for possible retention packages for Securities America reps, Palaveev (left) wonders if there will “be any money left to offer to advisors” following the $150 million payment. “Through eyes of Ameriprise and its shareholders, this is a pretty good deal—this is a larger down payment than other deals,” he argues. And for Ladenburg shareholders,” this may be a great deal—you don’t see BDs this size up for sale.” While Securities America’s annual revenue is substantial, he points out that “some of that revenue is already leaving,” and that while the BD was rapidly growing in the past, their “troubles took it off the rail, putting it more on the defensive than offensive. Will they be a force again, or perpetually in stagnation?”

After previous acquisitions of BDs, he concludes, “you could see up to 20% of advisors leave, so it will be interesting to see who stays.”

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