St. Petersburg, Fla.-based Raymond James Financial (RJF) said late Wednesday that it would buy Memphis-based Morgan Keegan from Regions Financial (RF) in a $930-million stock transaction. The deal, expected to close by March 30, could boost Raymond James’ advisor force by some 1,000 to roughly 6,000 worldwide.
“While our preference is generally organic growth, we have used strategic mergers to grow throughout our history when the timing and pricing are right and, most importantly, when there is a strong cultural fit and clear path for integration,” said Raymond James CEO Paul C. Reilly, left, in a press release.
The final purchase price is subject “to adjustment based on the closing tangible equity of Morgan Keegan and retention of Morgan Keegan associates in the immediate post-closing period,” Regions said in a press release. The price, experts say, roughly equates to $1 million per advisor, plus the firm’s fixed-income business; Morgan Keegan, they add, has yearly sales of about $1 billion, which is close to the purchase price, and an anticipated $700 million tangible book value the closing.
In the past few years, Morgan Keegan has contributed profits of $95 million in 2007, $64 million in 2008 and $43 million in 2009; it generated a loss of $71 million in 2010, when a $125 million settlement charge was taken. In the first three quarters of 2011, Morgan Keegan produced $63 million of profits, including a $27 million tax benefit tied to the settlement charges.
“Raymond James was one of the most natural buyers of Morgan Keegan,” said Chip Roame, right, head of Tiburon Strategic Advisors, in an interview with AdvisorOne. “The reason being is that Morgan Keegan is a Southeast captive-broker retail brokerage business plus a capital-markets business. Few buyers would have wanted both businesses. Picking up 1,000 advisors is a big deal to Raymond James; there are so few of these acquisition opportunities remaining.”
As part of the merger, Morgan Keegan CEO John Carson will join Raymond James as president and will oversee its fixed income and public finance operations, which will be based in Memphis. Other senior leaders from Morgan Keegan will be joining the firm in roles to be determined.
“We are excited to be joining Raymond James. I see it as a firm that provides the resources of a major Wall Street firm while maintaining the client-first culture of a regional,” Carson said in a statement. “I am confident the expanded services and deep expertise at Raymond James will benefit our clients and allow us to continue providing the highest levels of service.”
The news of Morgan Keegan’s fate comes after more than six months of speculation which focused on its likely purchase by a private-equity firm or partnership. In June, Regions Financial agreed to pay about $200 million to settle fraud charges related to Morgan Keegan and Morgan Asset Management’s sales of mutual and closed-end funds tied to subprime mortgage-backed securities in 2006 and 2007. That same month, Regions hired Goldman Sachs to help it find a buyer for Morgan Keegan.
In September, Raymond James then-COO Chet Helck, left, said the firm did consider acquisitions as a means for growth. However, when asked specifically about a potential purchase of Morgan Keegan, he said Raymond James’ operations overlap with those of Morgan Keegan in the fixed-income arena. “And we have to account for that,” he stressed, loosely implying that Raymond James wouldn’t likely move to acquire the broker-dealer, which is now for sale.
As part of the deal, Morgan Keegan is set to pay Regions a dividend of $250 million before closing, pending regulatory approval, resulting in total proceeds of $1.18 billion to Regions, subject to certain adjustments, the Birmingham, Ala.-based company says. Morgan Asset Management and Regions Morgan Keegan Trust are not included in the sale.
Regions says it expects to realize “revenue opportunities … through a strong partnership with Raymond James for deposits, loan referrals and processing relationships.” It also is set to receive “the benefit of previously established reserves by Regions at Morgan Keegan.”
Industry experts are cautiously upbeat about the deal, though they also felt both firms faced tough issues in the months ahead.
“The mantra of the Morgan Keegan brokers fits the Raymond James’ image, and Raymond James has [decided] that if it can get a reduced price then it kind of makes sense,” said Houston-based recruiter Rick Peterson in an interview. “I’m sure Raymond James put out feelers to the brokers about joining them and must have had some positive feedback or they probably wouldn’t have proceeded with the purchase.”
Raymond James has not been a big acquirer, so they need to show the Street that they can execute now,” stressed Roame.
For its part, Raymond James says its acquisitions history began with the addition of Financial Services Corporation in the ‘70s, which became the basis for its independent advisor network; and the additions of Roney and Company to establish its Midwest foothold, Goepel McDermid to expand in Canada, and Killik and Company to move into the wealth-management market in the United Kingdom.
Like other broker dealers, Morgan Keegan has some lingering liability issues, experts say. Raymond James, though, says Regions will indemnify it “for any and all claims related to certain matters … and for all post-closing litigation arising from pre-closing events, subject to a $2 million annual deductible for the first three years.”
“This may have been the hold up in getting a deal done,” said Roame, whose firm has some 300-plus industry clients, including Raymond James. “A deductible as high as $2 million implies that they worry about awards [related to] potential liability higher than that.”
Recruiters and others also pointed to the attraction some Morgan Keegan advisors might have to joining a firm that would allow them to go independent. The general terms of the deal announced on Wednesday, though, stated that the reps would join Raymond James’ employee-advisor division.
“We expect that some FAs may consider the independent option,” said Raymond James COO Dennis Zank in a statement. “However, the anticipated retention amounts paid to FAs will be very fair, and the Morgan Keegan management team expects very high retention of FAs within the existing platform.”
“Morgan Keegan advisors have been ‘captive,’ and if the package is good, I’d assume most will stay as employees,” shared Roame. Such retention results, of course, will be watched closely by recruiters and other industry observers.
“The fun really begins” after the deal is announced, Peterson explained. “Raymond James has to come up with a package that is very, very competitive, show the Morgan Keegan advisors that the Raymond James’ platform and environment make sense for them, and then go head to head with the wirehouses, which have lots more money and strong brands. That’s why the ultimate cost to the buyers can end up being as much as 200 percent of the reported purchase price.”