From the October 2011 issue of Research Magazine • Subscribe!

September 29, 2011

Ladenburg Thalmann to Buy Securities America

Ladenburg Thalmann said that it planned to pay Ameriprise Financial $150 million in cash for Securities America in late August. In addition, the Miami-based broker-dealer says it will pay up to $70 million in 2012 and 2013 in so-called earn-outs, as the firm explained in an SEC report. Plus, Ameriprise continues to be responsible for any costs related to the sale of certain private-placements.

News has also been reported about the size of retention bonuses being offered to Securities America’s 1,700 advisors, who are led by Jim Nagengast. (Ladenburg Thalmann says it cannot comment on matters other than what is said in the 8-K filing.)

As for the additional $70 million being promised to Ameriprise, this amount is generous, several sources say, as it pushes the total price tag to about 50 percent of Securities America’s yearly revenue.  “I see this as a large amount,” said Chip Roame of Tiburon Strategic Advisors in an interview. “That’s substantial.”

Others agree. “I thought the initial $150 million was a reasonable price (worked out to around 34 percent of trailing revenue), but any more for a firm with their history etc., would be more than I feel is reasonable,” said Jon Henschen of Henschen & Associates in an interview.

While Henschen says that adding another $70 million is “overly generous, it also depends on what kind of production hurdles they’ve set [for the earn-outs], and if they are realistic. Ameriprise may see little if any of that $70 million,” the recruiter explained.

Overall, says Roame, the arrangement seems to be “a fair price range,” with a caveat. “The price is low if Securities America has rep attrition and cannot get the kicker. The price is average to high, if they keep their reps. It seems like a fair deal all around.” 

Litigation Coverage

In its recent filing, Ladenburg Thalmann explained, “Ameriprise has agreed that, following closing of the transaction, it will indemnify Ladenburg for … any and all losses arising out of substantially all claims pending.” This clause includes claims related to the sale of certain securities issued by Provident Royalties and Medical Capital Holdings, which prompted Ameriprise to take a $77 million charge in the first quarter and put Securities America up for sale.

These provisions are earning the acquiring firm praise. “Ladenburg was wise to shield themselves from future liability of those particular products,” said Henschen.

 “This is great for Ladenburg Thalmann,” shared Roame, “and it’s literally a perfect agreement. For Ameriprise, though, it’s risky. They know the claims they have on the table now, but maybe more claims will come. I am sure Ameriprise did lots of due diligence on this risk, though, and knows what might happen.”

Retention Bonuses

To help stem any further attrition of advisors, Securities America is said to be offering bonuses to FAs that agree to stay on of about 15 percent, according to Roame. “This seems low, though the cash component is 75 percent, which seems high.”

The consultant adds that the bonus has a four-year time horizon. It pays half now and the other half when the Securities America-Ladenburg Thalmann deal closes. “This seems generous towards the FAs,” Roame explained.

In other words, a $1 million producer would get $150,000, he says. This represents $50,000 in cash now, about $25,000 in stock now and the remainder (with the same amounts of stock and cash) when the deal closes.

“I think that is a nice gift, but a $1-million producer will still move if he thinks the new firm is a bad fit,” said Roame. “Still, it’s a good move by Ladenburg.”

Recruiters like Rick Peterson of Peterson & Associates generally have the same thinking. “It’s a fairly rich deal, but anything and everything that’s better than zero is rich for an independent advisor,” he said in an interview.

Usually retention bonuses would be tiered to the level of fees and commissions, Henschen notes. “Offering 15 percent to all reps is generous, especially for smaller producers that may normally get nothing in retention dollars,” he said. Also, at least one bigger-producing rep is being offered a slightly higher amount to stay, the recruiter notes.

Nonetheless, “A quick cash infusion doesn’t mean much over the long term,” Peterson added. “It makes an advisor ask, if Ladenburg is throwing money at me now, could this mean less money down the road for long-term items like information technology and practice management?”

In his mind, Securities America and Ladenburg Thalmann have to show advisors more than money. “They have to show a long-term growth plan to advisors. Their huge producers have left [Securities America] due to a lack of clarity about the future. They need to show remaining advisors what’s in it for them and their clients in the long term. Advisors want to know how can they translate what’s being offered into future business.”

 

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