Keefe, Bruyette & Woods has a sophisticated business hobbled by a simple reality: If banks and their investors are losing money, then KBW has a hard time making money.

As CEO, Thomas Michaud is responsible for seeing that KBW stays in the picture even as the slow pace of bank mergers and capital offerings weighs on the bottom line of the New York investment banking boutique, which turns 50 this year.

Michaud has spent his entire 26-year career at KBW, and was head of equity sales on 9/11. The firm lost 67 employees and its headquarters that day, and Michaud was on the three-person team in charge of its rebuilding effort afterward.

Though he was just promoted from chief operating officer to CEO in October, it has been a busy nine months. Under his watch, the firm already has cut staff by 100, consolidated office space in New York, exited the asset management business and reduced its investment banking operations in Europe.

Michaud also has been hiring bankers strategically in places such as Chicago and California to head off market share grabs from rivals fighting for the handful of deals to be had.

After losing $32 million last year, KBW returned to profitability in the first quarter thanks to cost cuts and a longawaited pickup in bank mergers and acquisitions and capital markets activity. With the second quarter winding down, Michaud shared his perspective on the market environment with American Banker M&A reporter Matt Monks. An edited transcript follows.

American Banker: Last year was the slowest for bank M&A since 1980. What do you see on the horizon for the second half of 2012 and into 2013?

Thomas Michaud: Things are absolutely better, and they're better on a variety of fronts. Prices are up for banking and financial services stocks; they're outperforming the market. There's more M&A activity than there was last year. We're forecasting a pretty good size improvement year over year in terms of number of deals.

The banking industry now has had nine straight quarters of improving non-performing assets. When credit quality becomes less of a burden, usually more things happen in terms of capital raising and M&A.

However, I would say that the macro forces still are really important. [When] big things happen around the world, like concerns about the European banking industry, it does have an impact on the United States and North America, where our market shares are greatest. So that can slow things down. And unfortunately those are factors that are out of our control. [But] to the extent that the European banks need to do different things with their U.S. subsidiaries, that could be an opportunity for us.

So this year is better than last year, [but] the world still is a challenging place. And this near-zero interest rate environment is difficult for everybody.


AB: How does this compare with what KBW has contended with in previous cycles?

TM: I think that the challenges that our clients and that we face right now are probably greater than what is typical. And I think it's because there is so much change going on around the world.

However, I think that this is also an opportunity. And historically during moments of crisis we have emerged stronger and in a better position than when the crisis started.


AB: You mean "we" as an industry?

TM: As a firm. We've gone through all these challenges over at least the 25 years that I've been here and in the 50 years that the firm has been here. We've survived and we have [the] confidence and resolve that we can do it again.

By far the hardest thing I've ever done in my career was rebuilding after 9/11. The personal impact of that was extraordinary. The fact that we had to rebuild our company in terms of its facilities, in terms of its mental capacity and its emotional capacity from scratch-that was by far the hardest thing I've ever done.

In terms of a business perspective, this is one of the harder moments. But I get a lot of strength from that 9/11 moment. It goes back to [the idea] that you get stronger from some of these adverse moments.

And I say if we didn't panic and we didn't give up then, then we're clearly going to get through the next couple of years.


AB: Can you talk about what kind of impact 9/11 has on the firm today?

TM: When you think about culture, and you think about our 50th anniversary and you think about what makes our firm so special, you have to consider 9/11, because I think what we achieved is remarkable given so many of the emotions and challenges of the period. It has really brought us together as a firm.

Even though many of [our employees] joined after that period, it's just part of our DNA and who we are. And I have to tell you, I do think about that moment quite often during a year, and it gives you better perspective to make decisions when you think about the firm in that regard.


AB: The work KBW does is very specialized; it could be a valuable business for someone else. There aren't many independent investment banks anymore. How do you think about KBW's future in that regard?

TM: Well, I'll tell you how I've gone about that for my whole career and how I go about it as CEO of the company. I want to build the most valuable company I can. And if somebody chooses to acquire the company, I want to make sure they pay the highest and fairest price possible to our shareholders.

So I feel as if the decisions you make are the same regardless.

It's the same advice we give our clients: Do a really good job running your company and everything else will play out, and you'll control your own destiny. So I spend all of my time focused on building a very profitable, independent company. But we have a fiduciary obligation to our shareholders. We have no extra-special poison pill.


AB: Can you talk about some of your strategies for staying competitive with Sandler O'Neill, and what you're doing to make sure your main rival doesn't widen the gap on the league tables?

TM: First of all, when we think about our competitors we think about all of our competitors, not just any one firm. I also would challenge the [notion] of a widening gap. It all depends upon what period of time you wish to measure and what particular business.

I think you're referring to one particular business (M&A). [But] we can talk about the equity business where, relative to that particular firm, we've widened the gap.

You're talking about the M&A business. That is one specific league table in one specific part of our business. But there may be instances where we gave advice to our client not to pay a price and not to do a deal. And just because that deal doesn't show up in the league table, does that mean we failed? By giving really good advice to a client?

There could be deals that others were on that we were not on, [where] we had a great client who was in the race to buy the target company but didn't, that we may not necessarily think of as a failure. We may have told the client that our advice to you is to stand down and not do that deal.

If you measure M&A in very small increments, in a market which has no deals, which was essentially last year, you could get a false reading.

So I'm unwilling to make the case that half a dozen transactions is going to make any long-term statement about the value of a market position, or our franchise, because that's just not true.


AB: What do you make of the argument that the threat of higher tax rates will prompt some bank owners here in the United States to sell?

TM: That actually isn't just the banking industry. That is across corporate America. We're in a short period of time here where capital gains tax rates are perceived to be low from a long-term perspective, and most market participants think that regardless of who wins the elections in the fall, we're likely to see higher tax rates going forward. If you want to take advantage of this tax rate environment you ought to consider selling now rather than later.

I don't know if that will be the single most primary driver but I think it will be a recognizable factor.


AB: So what are the primary drivers? And are you sensing that more banks are ready to sell?

TM: What we're getting is that we've entered a new phase where banks-and I'm speaking in general now-are no longer able to grow earnings per share because of credit improvement. That story has essentially played out.

So now the debate is: What do we do to grow earnings per share on an organic basis, and in a near-zero interest rate world, with, albeit, improving loan growth but still not stellar loan growth? How do you go about doing that? And I think a lot of banks don't have an answer to that question.

So, strategically they're going to make the decision to marry up with a company that has already solved for that equation. And the way they may have solved for it is they have a broad base of products. They've got a broad business mix. They have better technology. They can take costs out to make the target business more profitable. And I think that story is going to play out again and again.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.