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Turning bronze into gold, part 3


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Turning bronze into gold, part 3

A high-stakes game of musicalchairs is taking place in the depository investment banking space as a numberof firms have ramped up coverage by hiring away from competitors. This is thethird article in a series on the state of the depository investment bankingindustry. The firsttwo examined thedifferent growth initiatives investment banks are employing in an effort togain market share in the space.

and Keefe Bruyette& Woods Inc., the depository investment banking leaders, aren'tflinching as competitors make moves to gain market share.

Severalcompetitors have been building investment banking coverage of banks andthrifts, but since the credit crisis, Sandler O'Neill and Keefe Bruyette &Woods have increased their lead in the rankings of financial advisers by numberof depository M&A deals. On U.S. bank and thrift M&A deals announcedfrom 2008 through June 30, 2016, Sandler O'Neill and Keefe Bruyette & Woodseach worked on more than 3x as many transactions as any other investment bank,and in the five years before that, the twoworked on about twice as many deals as the next highest ranking investmentbank, according to SNL Financial data.

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Consolidationby Keefe Bruyette & Woods' parent, Stifel Financial Corp., has helped take out somecompetition. Stifel's 2013 acquisition of Keefe Bruyette & Woods essentiallyremoved a competitor from the marketplace. Stifel's depository i-banking teamfinished third in SNL's 2012 number-of-deal rankings, but that business wasmerged into Keefe Bruyette & Woods. Stifel's 2015 for Sterne Agee Group Inc.removed the 2014third-place finisher in SNL's number-of-deal rankings.

Stifeldidn't purchase Sterne Agee's i-banking business because of overlap concerns,and as a result, Sterne Agee's depository i-bankers joined different companies.The availability of Sterne Agee i-bankers sparked growth initiatives atPiper Jaffray Cos.and Stephens Inc.Other competitors such as D.A.Davidson & Co., FIG Partners LLC, Hovde Group LLC and Raymond James & Associates Inc. have also continuedto steadily grow their depository coverage in recent years.

Butthe competition is nothing new to Keefe Bruyette & Woods and SandlerO'Neill. Keefe Bruyette & Woods Chairman, President and CEO Tom Michaudsaid competitors change as different companies increase or scale back coverage,but the space always has many players.

"I'min my 30th year with the firm, and I can never remember the year where I said,'Where did all the competitors go?'" Michaud said.

SandlerO'Neill Senior Managing Principal James Dunne III said he focuses on clients,not on the competition. Still, he acknowledges that plenty of competitionexists and said it can come from large companies or one-man shops that havegreat relationships and "are myopic in their focus, which is what we are."

KeefeBruyette & Woods and Sandler only cover the financial services sector, andthey are most active with depositories. Keefe Bruyette & Woods has around35 managing directors in investment banking, while Sandler has a total of 35managing directors and principals in investment banking. By comparison, RaymondJames, one of the largest competitors in the space, has 11 managing directorsand a vice chairman on its financial services i-banking team, according to thecompany's website.

Thebig teams help Sandler O'Neill and Keefe Bruyette & Woods coverdepositories across the U.S., while competitors are strong in certain regionsand absent in others. Dunne said he doesn't think his company needs to getbigger, and Michaud said he's happy with Keefe Bruyette & Woods' position.

Concentratingon one sector does make the business vulnerable to downturns. As a stand-alonepublic company, Keefe Bruyette & Woods reported of $31.7 million in 2011. SandlerO'Neill is a private company, but Dunne said his company's performance"will ebb and flow with financials."

Butthe companies are known as experts in their space, and each had to rebuild thatreputation after 9/11. Both had their headquarters in the World Trade Center,and on Sept. 11, 2001, Sandler O'Neill lost 66 people, or 39% of its staff, andKeefe Bruyette & Woods lost 67 people, or 30% of its staff.

Whileeach of them rebounded and remain ahead of the competition, SandlerO'Neill has been winning more and larger M&A deals in the depository spaceof late. During the four-quarter period ended June 30, Sandler O'Neill advisedon 62 U.S. M&A deals with a total value of $20.16 billion, while KeefeBruyette & Woods advised on 45 deals with a total value of $6.24 billion,according to SNL data.

Michaudnoted that rankings fluctuate, and sometimes Keefe Bruyette & Woods advisespossible buyers that elected to not take part in an announced transaction. Headded that few bank mergers in the country occur in which Keefe Bruyette &Woods didn't have a client that was a potential participant.

"WhatI care most about is: Are we in the dialogue? Are we in the flow?" hesaid. "We're essentially in the dialogue and the flow almost everywhere."

Inequity underwriting for U.S. banks and thrifts for the four-quarter periodended June 30, the rankings are close, with Keefe Bruyette & Woods landingspots on 24 deals for a total value of $736.1 million and Sandler O'Neilllanding spots on 20 deals with a total value of $759.7 million.

Withunderwriting, Michaud noted that Keefe Bruyette & Woods can have anadvantage because of Stifel's global wealth management business, which providesretail distribution. Being part of Stifel has also given Michaud more time tofocus on Keefe Bruyette & Woods' business. "I've probably taken backtwo hours a day of admin work that I was doing as a CEO of a publiccompany," he said.

Dunne,too, has reduced the amount of time he spends on administrative work as SeniorManaging Principal Jonathan Doyle has taken on day-to-day operations. Now, Dunne said, he cansolely focus on clients, and he believes this helps Sandler compete.

"Ihave the flexibility to help every client that is interested in us helpingthem," he said.