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Sandler O'Neill deal 'big bet' on FIG for Piper Jaffray

After dabbling in the financial institution sector, Piper Jaffray Cos. decided to take the plunge with a deal for Sandler O'Neill & Partners LP.

Over the years, Piper Jaffray has tried to build an investment-banking financial institutions group mostly through hires and the acquisition of River Branch Holdings LLC. But on July 9, the company announced the pending acquisition of Sandler O'Neill, a financial services-focused investment firm typically near the top of the bank M&A league tables each year.

Piper Jaffray is an experienced acquirer, but the Sandler O'Neill deal will mark the buyer's largest acquisition, as the total consideration could reach $600 million when factoring in up-front and retention payments. Some $100 million of the consideration is based on tangible book value on Sandler O'Neill's balance sheet, but even without that, the value of the deal could end being more than half of Piper Jaffray's approximately $930 million market cap.

"It's a big bet on a FIG boutique," said Richard Lipstein, a managing director in the financial services practice at the recruiting firm Gilbert Tweed International.

However, an acquisition of this size may have been Piper Jaffray's best opportunity to gain significant scale in the financial institutions space. JMP Securities LLC analyst Devin Ryan said financial services has been an area that Piper Jaffray has been "determined to expand," and others in the industry have not had great success in trying to build a financial institutions group.

"An organic build did not appear to be a viable path, and sub-scale acquisitions in the space have been mixed at best," Ryan said in a July 9 report.

On a 2018 pro forma basis, the acquisition would make financials — along with healthcare — one of the top two revenue-producing investment banking verticals at Piper Jaffray. Before the transaction, the financial sector ranked no better than fifth, according to a presentation.

While the Sandler O'Neill deal would weight Piper Jaffray more toward the financial sector, the transaction marks the second acquisition in recent years to diversify the firm away from healthcare. In 2016, Piper Jaffray expanded its energy presence with a deal for Simmons & Co. International.

Retaining top talent is a key concern in investment bank mergers. Piper Jaffray said Sandler O'Neill's key personnel have signed retention agreements, but retention is only one of the risks in an i-bank deal, said Michael Lipper, president of the money manager Lipper Advisory Services. Lipper said sometimes employees from the target have a difficult time adjusting to the acquirer's new culture.

"They're not as productive as they were," Lipper said in an interview.

For Piper Jaffray, keeping Sandler O'Neill's employees productive is important. Sandler O'Neill operates a capital-light business model, and its value and earnings stream are derived by its people, similar to advisory-focused investment banks, JMP's Ryan said. He added that something to monitor is the adjustment of Sandler O'Neill's employees make in a few years as their deal consideration and retention awards vest.

"Combinations of people and culture can always be tricky and create points of friction," Ryan said.

Piper Jaffray is taking steps to ease the transition. Sandler O'Neill senior managing principal Jonathan Doyle will lead the combined financial services team, and the buyer even made the symbolic gesture of changing the name of the company to Piper Sandler Cos. In an interview, a Sandler O'Neill partner said the name change was important to the leaders of the company because it helps preserve the legacy of a founder, Herman Sandler, and the company's other 65 employees who died in the Sept. 11, 2001, terrorist attacks.

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If Sandler O'Neill's production level does not drop off after the deal, Piper Sandler Cos. is in a position to become a clear market share leader in depository M&A financial advisory work. Combined, the two companies have worked on 99 bank and thrift M&A deals since 2018. Keefe Bruyette & Woods Inc. has the second-highest number of deals, at 53.

While Sandler O'Neill employs a host of investment bankers who cover banks, a top producer on the company's largest assignments is also its top executive, Senior Managing Principal James Dunne III. Since 2018, Sandler has landed roles on nine M&A deals valued above $1 billion, and Dunne was an adviser on seven of them, according to S&P Global Market Intelligence data.

Media contacts for Piper Jaffray and Sandler O'Neill declined or did not respond to requests for comments. But in a memo to employees, Piper Jaffray called Dunne one of "the preeminent dealmakers on Wall Street."

Dunne is set to become vice chairman of Piper Sandler and senior managing principal of Piper Sandler's financial services business. But many around the financial services investment banking industry are wondering how engaged Dunne will remain after the sale of Sandler.

"Will he just say, 'I'm going to play golf every day?'" said one financial services investment banker who asked not to be identified.

During an investor conference call, Dunne said he is "completely committed" to the transaction. He added that the talk of the deal has energized Sandler O'Neill in recent days.

"I think every sort of decade or so a firm needs a real jolt," Dunne said. "This is going to be a great jolt."