Inside Financial Services

At KBW, One Last Disgrace

Print Friendly, PDF & Email

I can’t say I was disappointed last week when I read that KBW, the financial services investment banking boutique whose business model essentially consists of whoring its research in return for banking business, had agreed to sell itself for a price not much above its all-time low. Serves ‘em right. For years, KBW has been a disgrace: in my opinion, the firm would essentially do whatever it took-initiate nominal coverage on a given company, raise its rating, you name it-to get in on a deal. Providing investment advice to help clients make money seemed to always come in last, last, last on KBW’s list of priorities.

And sure enough, the firm is going out with its hallmark classlessness. This is from its just-released S-4 filing related to the Stifel/KBW merger.

Stifel on Oct. 25th told KBW it was prepared to provide a cash and stock offer to an aggregate consideration per share equal to $17.29, with a separate retention pool of $40 million. Senior management on both sides had several telephone calls to discuss the deal from Oct. 26th to Oct. 28th. KBW indicated that the proposed terms were unacceptable and broke off conversations at one point. Stifel eventually restarted the discussions by increasing its proposal, and the two sides agreed to continue the talks at a revised consideration per share equal to $10 in cash and $7.50 in stock, as well as a retention pool of $57 million. [Emph. added.]

Let that sink in a little. By dint of its hard-headed negotiating, KBW’s board was able to get Stifel to raise its offer by $20.8 million. But of that, only $3.8 million will go to shareholders, while the rest-the $17 million boost in the retention pool-will go to KBW employees. Of course! I believe the company has been screwing its commission-paying customers for years, so it’s only natural that the firm’s management is going out with a bang by apparently screwing its shareholders, too.

I’m having trouble coming up with quite as stark an example of self-dealing by the management of a public company. Under what fiduciary laws of the universe, for example, should KBW’s board even care about the size of Stifel’s retention pool at all? Employee retention is Stifel’s problem, not KBW’s. The first, last and only concern KBW’s board should have had in negotiating was maximizing value for KBW shareholders. This the board manifestly did not do. Actually, it did the opposite. The board agreed to a deal that included an extra $57 million in cash that Stifel was willing to part with that was funneled away from shareholders, to employees. This is outrageous! The SEC needs to give this deal a long, hard look.

KBW has seven Board members consisting of three internal and four outsiders: Dan Healy, Kip Condron, Jim Schmidt, and Mike Zimmerman. I know the first three; they are stand-up guys. But in my opinion, these individuals failed at their fiduciary responsibility. I’m appalled. But in truth, I can’t say I’m surprised.

What do you think? Let me know!

15 Responses to “At KBW, One Last Disgrace”

  1. anonymous gator

    Key KBW employees were taken care of when they went public and again on the way out. No surprise but they did even care enough about appearances to make the optics look good. Good idea for the leaderless SEC.

  2. Ian Arnof

    Sorry, I disagree with you on this one. I always felt that KBW had primary loyalty to its regional bank base, where others would market regionals at prices to curry favor in hopes of getting investment banking business from the buyer. Your comments re: coverage and ratings could apply to all of Wall St at that time. In case of FCOM, they represented us and got a price of 4X book, the 12th highest DOLLAR price ever paid for a U.S. bank at that time. They were tops in my book!

  3. rivvir

    You’d know best on this one so i’ll defer to you. I do remember the kbw analyst was none too fond of fmd and hurt both of us, you and me, but i guess he was correct in the end. I have to disagree with arnof though, if he disagrees the sale $$$ should not benefit the owners of the company (the shareholders), of which i’m not one, rather than the employees of the company. Looks to me like an extra 3.8 million should have gone to the employees and 17 million to the owners, not the other way around.

  4. Heinz Geyer

    When company executives (and company boards) look after their own interest rather than the interests of the shareholders no one should be surprised if shareholder capitalism – and as a consequence capitalism itself – gets a bad name. When naked self-interest is perpetrated by the ‘leaders’ of companies that are supposed to serve the interests of investors (the US brokerage and investment banking outfit Keefe, Bruyette and Woods in this case) it is an even more egregious slap in the face of ordinary investors.

  5. tom brown

    i couldnt agree more with Heinz Geyer! The actions of one bad apple like KBW bring disgace on all of corporate America.

  6. All too well informed !!

    Your point re: the retention pool versus the overall consideration, was, while dead on, not even close to their most egregious breach of their fiduciary obligations to shareholders. Simply put, they were serial diluters. (unable to make easy decisions and patently dishonest on every front). That said, the real focus should be on how those retention dollars were allocated. Over half of the money (and the likely impetus to increase the pool during negotiations) went to the legacy frauds at the heart of the ponzi scheme ! Hopefully, Ron will come to the conclusion in 14 months that there is virtually no loyalty (rather acute resentment) to the “top” guys and send them packing. Justice may just require a slightly longer investment horizon.

  7. elephant12

    This is not the only example of boards snubbing their duty to shareholders. Is the shareholder / board / management system broken in our public companies? If so, doesn’t make the case for Private Equity? Where the sponsors interests are more aligned with LPs through their large stake in the outcome?

  8. XL

    In essence how does that differ from the Hostess deal? The chutzpah level is way beyond too much>


    while no doubt the major players were treated to an obscene payday, I have one question-If the value of a financial firm is in its clients and its employees, would the shareholder price have been as high without making arrangements for employee retention?

  10. Escapee

    Anyone who has spent any time around this current CEO should not be surprised by this latest larceny. This culture of us first entitlement and blind disregard for rule of law was homegrown and encouraged at KBW.

  11. Phantom Gremlin

    If you want a bigger example of egregious self dealing, just google for “Aubrey McClendon”. 🙂

  12. bankclient33

    I don’t ever post on boards such as this, but I can’t let this article stand without another opinion. I have to point out that the KBW you have described over the years in your periodic rants bears no resemblance whatsoever to the firm I know, and we have been a client since the late 1990′s. I never once witnessed the firm connect research and investment banking business, and its compliance policy on research/IB was more strict than any of the roughly dozen firms that covered our stock. On the IB side, KBW was the only firm I dealt with whose advice could be trusted (i.e. their answer was the right answer even if it cost them a fee.) As to this specific transaction, I do not know the specifics, so I cannot comment with knowledge about the transaction negotiations. However, to the extent that departing key employees (most of whom would not have been on the board) would impair both the deal and KBW’s resultant value or damage the post-transaction Stifel (KBW shareholders are to receive ~43% of their consideration in the form of Stifel shares), there may be a perfectly reasonable explanation for the agreement above – but none of us will know without talking to the KBW board. (The nature of the value of an investment bank’s dependency on its key employees is one of the reasons I would not own stock in one.) While I generally find your analysis thoughtful and well-researched, you should admit that you are not without your own biases – as is true of all of us. The problem is when you allow these biases to come out in the kind of character assaults you release. If you want to question this decision, you should do so without all of the extra (and, I believe, completely unfounded) accusations (and your poor choice of vocabulary.)

  13. Just Curious

    What about the IBs rendering fairness opinions on the transaction?
    BTW, way to take the high road Tom.

  14. Just Curious

    What about the IBs rendering fairness opinions on the transaction?
    BTW, way to take the high road Tom.

Comments are closed.