Stifel is growing as crash hits rivals
The great crash of 2008 turned Wall Street into a financial disaster zone, as big firms tumbled and employees by the thousands found themselves out of work.
But when the going got tough, Ron Kruszewski went shopping.
Kruszewski is chief executive of Stifel Financial, parent of the Stifel Nicolaus & Co. brokerage. The firm, based in downtown St. Louis, is on a growth spurt at a time when much of the industry is shriveling up, selling out or dying off. The misery of its rivals gave Stifel a chance to pick up people and businesses on the cheap.
In May, Stifel picked up 320 stockbrokers and 54 offices from the struggling Swiss-based giant UBS. Last fall, it bought 23 offices in Ohio and Pennsylvania and hired 75 brokers from Butler Wick & Co. Last month, it hired Victor Nesi, Merrill Lynch’s former head of investment banking for the Americas.
Those moves continue a four-year run of acquisitions that is turning Stifel from an obscure Midwestern brokerage to a firm with national name recognition. Revenue more than tripled in four years to about $889 million.
"His target is pretty obvious — to become one of the big boys," said Juli Niemann, a Stifel analyst in the 1990s who now works at Smith Moore & Co.
Stifel was in the right place at the right moment, analysts say. It avoided bad investments that crippled Merrill Lynch, Wachovia and Citigroup and toppled Bear Stearns, AIG and Lehman Brothers.
When other firms held fire sales, and employees fled for the exits, Stifel’s Kruszewski was standing by with a checkbook.
"I don’t spend a lot of time trying to read the future," says Kruszewski. "I spend time reacting to what comes my way."
Stifel’s stock is up 42 percent since the recession began in December 2007. That’s the sharpest advance among 17 other large and mid-sized publicly traded investment firms.
While Stifel’s stock is up, its profits are down by 8 percent in the first quarter to $13.2 million. Investors seem to be betting that Stifel will come back stronger than the pack when good times finally return.
"Oh, it’s definitely a buy," says Michael Flanagan, an independent brokerage industry analyst in Philadelphia, who says he has no business connections with Stifel.
"Stifel since 2004 has been the best in class."
BOND CONTROVERSY
There have been boos mixed with the applause for Stifel. Much of the booing comes from Missouri Secretary of State Robin Carnahan, the state’s main securities regulator. She blasts the company for refusing to immediately buy back $180 million in "auction rate" securities sold to small investors as a low-risk place to stash cash.
Those investments have been frozen since the auction rate market collapsed in February 2008.
A buyback would stick Stifel with bonds that can’t be sold except at a steep loss. The company says it plans to buy back the bonds over three years, which might be time enough to find a market for them. Carnahan calls that plan "drawn-out and inadequate."
While Carnahan and auction-rate customers complain, financial industry analysts are cheering.
They say Stifel sidestepped the mistakes that brought down the giants. It largely stayed out of the mortgage meltdown, but its saving grace was that it avoided heavy debt.
Wall Street investment firms inflated their balance sheets with borrowed money in the good years. Then, they made big bets on mortgage securities and other risky investments. When the economy slumped and the housing market crashed, those securities plummeted in value and big firms drowned in their debt.
Stifel has an assets-to-equity ratio of 3 no fax payday loans.2, compared with 30 at some larger firms before the crash.
"You have to credit Stifel management with using the most powerful word in business, which is ‘no,’" says Joe Stieven, who worked as a banking analyst for Stifel for 21 years before quitting to start his own firm. "They were disciplined enough to say no when others were jumping off the cliff."
Stifel’s growth began before the recession. In 2005, it bought Legg Mason Capital Markets from Citigroup. The firm, based in Baltimore, quadrupled Stifel’s investment-banking business and gave it a bigger presence in capital markets.
Retail brokerage — Stifel’s traditional bread and butter — dropped from three-quarters to about half of the company’s revenue.
Legg Mason also brought a big stock research operation, which Stifel lacked. The company now has 61 analysts, and Stifel analysts started popping up on CNBC and in the financial press.
STAYING LOCAL
After the Legg Mason purchase, Stifel had as many employees in Baltimore as in its St. Louis hometown. But Stifel opted not to move the headquarters from downtown St. Louis, where it’s been since 1890.
"St. Louis has a natural talent pool of people who know the business," says Kruszewski.
That stems from the large number of brokerage firms operating here, including two big national full-service firms in Edward Jones and Wells Fargo Advisors and national discount broker Scottrade. All those experienced people give brokerage firms a reason to stick around.
Stifel now has 900 employees in St. Louis, up from 480 in 2005.
"I don’t think I have the right to move a St. Louis institution somewhere else," said Kruszewski.
Stifel still plans to move to Ballpark Village, which is now an empty lot next to Busch Stadium. Despite repeated delays, Kruszewski is convinced the project will be built. "If we can’t get it built, we ought to push the city into the Mississippi and let it float to Memphis," he jokes.
Stifel held on to 320 of the 340 UBS brokers at offices it acquired. That 6 percent loss is below the 8 to 12 percent loss common in takeovers.
"They are able to hire excellent people off Wall Street. They come from firms that essentially imploded through the steroid of leverage," says analyst Stieven.
In 2007, Stifel bought tiny FirstService Bank in Crestwood. Stifel probably didn’t need a bank; brokerage houses had been getting along without them for decades.
But many banks were buying brokerage houses in an effort to become a one-stop shop for customers seeking investments, credit cards, bank accounts and loans. They have had only limited success at cross selling, but they keep trying.
"My competition thought they’d sell out to a bank," Kruszewski said. "I thought, ‘Why not buy a bank?’"
Meanwhile, Kruszewski says, he will continue to avoid heavy risk. For instance, he won’t set dollar goals for his employees out of worry that they will take too many chances.
"Once you set quantitative goals in financial services, you’re in trouble," he says.
By keeping the firm healthy, Kruszewski said, he will be ready when opportunity arrives, wherever it happens to come from.
"We’ll be a bigger, more influential firm in the market place," he predicts.
"How we’ll get there, I have not a clue."