Monday, December 21, 2009

Big bet on asset management by Piper Jaffray (PJC)

Minneapolis-based investment bank Piper Jaffray (PJC) made a transformational acquisition by buying Advisory Research.

Along with the press release, Piper also put together a presentation showing its rationale for the acquisition. Total consideration is about $218million, a sizable amount of money considering Piper's own market value of $973million. Of critical importance when buying an asset management form is retention of the founders, whoa re the moneymakers. Piper structured the deal appropriately, with much of the employee owners windfall consisting of restricted PJC stock.

"Assuming the transaction occurred on Sept. 30, 2009, asset management would have comprised approximately 12 percent of Piper Jaffray total net revenues and 24 percent of pre-tax operating income for the nine months ending Sept. 30, 2009. The transaction is valued at $218 million, payable at closing, composed of $178 million in cash and $40 million of restricted stock. Employee owners will receive approximately 40 percent of consideration in restricted stock."

The deal takes asset management from a negligible contributor to operating income to a very meaningful portion of the business:

Advisory Research has about $5.5billion under management, so at an assumed 1% management fee they'd generate $55million in revenue. The purchase price implies a Price-to-Sales of just under 4, versus Piper's own P/S of 2.34. While surprising to some that they'd pay more than their own multiple for another business, it makes quite a bit of sense. Asset management revenue (and profits) is MUCH more stable that Piper's investment banking and trading income. Piper has likely increased it's own attractiveness as a takeover candidate with this deal.

Copyright 2009 AlphaNinja

1 comment:

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