Analysts said they were unsurprised that New York-based Cowen Inc. is a rumored acquisition target, but they are unsure whether a deal would ultimately come to fruition.
Bloomberg reported July 1 that Toronto-based The Toronto-Dominion Bank is working with advisers to weigh a potential acquisition of Cowen, which has faced some headwinds in 2022. Cowen reported first-quarter revenue of $410.6 million, which was down 45% year over year.
"We're not surprised to see a buyer kicking the tires on [Cowen] during a period where its earnings estimates are at trough levels given the current capital markets backdrop," Piper Sandler analyst Sumeet Mody wrote in an email.
During the first quarter, its brokerage business was Cowen's largest revenue line, but during the previous two years, the company's biggest producer had been investment banking. In 2021, investment banking accounted for about half of the company's $2.11 billion in total revenue, while the brokerage business produced 27.7%.
In a July 4 report, JMP Securities analyst Devin Ryan said Cowen's investment banking business has become more diversified in recent years with less than half of the revenue coming from healthcare, which was historically the company's strongest sector. Ryan added that Cowen's investment bank has pursued new opportunities, becoming an early entrant into such areas as cannabis and special purpose acquisition companies, and it has grown through acquisitions with deals that include middle-market sponsor-driven M&A adviser Quarton International AG and technology M&A adviser Portico Capital Securities LLC.
"We are not surprised Cowen's name would come up in acquisition interest from larger banks looking to expand their U.S. capital markets presence," Ryan said.
Others made similar comments. In a July 4 report, Keefe Bruyette & Woods analyst Michael Brown noted that he sees the strategic merits of a deal for Cowen because there is scarcity value in the full-service U.S. investment bank and broker/dealer space.
"For the right price, we believe Cowen could be a seller," Brown said.
However, Brown noted that "the high premium we believe that [Cowen] would require to sell" could be an "impediment that is simply too hard to overcome to consummate a deal in current market conditions."
Aside from the high premium serving as a potential impediment to a transaction, multiple analysts mentioned that TD Bank is also in the middle of finalizing its $13.68 billion acquisition of First Horizon Corp., which may also preoccupy the company from further pursuing the acquisition of Cowen.
"It is not clear why pursuing a deal at this time is optimal, given the pending acquisition of First Horizon coupled with a backdrop of ongoing market volatility and recession risks," Veritas Investment Research Corp.'s Nigel D'Souza wrote in an email.
JMP's Ryan said he did not think Cowen was actively looking for a partner and does not see any pressure for Cowen to sell. But the analyst said the company's leaders have not always been happy with the way Cowen has been viewed by investors, and partnering with a larger company could provide some strategic benefits.
"Covering the stock since its 2006 IPO, we do think a frustration has built internally around the valuation as a standalone investment bank," Ryan said. "As a result, we understand the rationale around why contemplating a combination with a larger firm could even better position Cowen's business for the future."
