Piper Jaffray’s pending $218 million acquisition of Chicago-based Advisory Research (AR) caps the Minneapolis-based financial services firm’s acquisition strategy and puts it on a path to achieving its long-term financial goals, according to Piper CEO Andrew Duff.
While not categorically ruling out future purchases, Duff in a recent teleconference outlining the deal told analysts: “We don’t anticipate proactively looking for additional acquisitions.” He added that the firm “will continue to look at corporate development opportunities that can improve existing businesses or be complementary” but will also consider using excess capital to buy back its own stock.
Once completed, the acquisition is expected to deliver nearly 25 percent of Piper’s pre-tax income, up from about 1 percent currently and is expected to boost 2010 earnings per share 10 percent from the company’s previous guidance of $2.40. Longer term, Duff believes the acquisition makes “our target of 10 to 12 percent return on equity 30 months out fully achievable.” Current ROE is 3.6 percent.
In addition to improving profitability, AR will nearly double the institutional asset management business and broaden the kinds of investment strategies it can offer institutional clients. Institutional clients “are looking for a specific product at a specific time, and our objective is to make sure we have the best product to deliver,” he said.
Piper’s existing asset management approach at St. Louis-based Fiduciary Asset Management Co. is “top down,” investing in industries, markets and asset classes based on large macro-economic expectations. AR takes the opposite research-intensive, bottoms-up approach, looking at individual stocks, primarily in small and midsize firms to find undervalued companies in both the United States and overseas.
Brien O’Brien, CEO of Advisory Research, who will join the Piper Jaffray senior leadership team and report to Duff, told analysts he is enthusiastic about the growth leverage Piper’s global sales and marketing heft will give his team, particularly for its international and global investing products. Both executives emphasized that AR would continue to operate independently, and they do not anticipate any job cuts.
“In the asset management business, you don’t make money by cutting back on back-office or support staff. You make money by delivering terrific research and investing in the right companies at the right time … As [a Piper] shareholder, the very best thing you could see … is that our marketing expense goes up because that means our marketing force is selling a lot of our international and global product, and that’s making us a lot of money and making the shareholders a lot of money.”
The transaction, expected to close in the first quarter, is composed of $178 million in cash and $40 million of restricted stock. Piper intends to take out a $120 million, one-year note to fund part of the cash payment. Employee owners of AR will receive about 40 percent of consideration in restricted stock.