In a deal that begins to put new chief executive officer G. Kennedy Thompson's stamp on First Union Corp., the banking company announced Wednesday that it would buy Forum Capital Markets LLC of Old Greenwich, Conn., for an undisclosed amount.
Forum, a boutique firm that specializes in trading and underwriting convertible securities, fills in a gap in the Charlotte, N.C., banking company's capital markets platform, said Steve Kohlhagen, managing director of First Union's fixed-income division.
This move is a good example of Mr. Thompson's growth strategy, said Marni Pont O'Doherty, an analyst at Keefe, Bruyette & Woods Inc. "He said that First Union would look at product niches where the company had some holes, and is also taking a fresh look at all of their businesses."
Indeed, First Union noted that it reorganized its public finance operations earlier this week, in a move that could reduce the workforce by as many as 79 people. The public finance department, which acted as senior manager for about $4.3 billion of municipal bonds last year, will be shifted into the company's new public-sector group.
First Union considered hiring experts in the convertible securities business, but decided to acquire Forum, one of several companies it looked at, because it already had the sales, trading, and research in place, Mr. Kohlhagen said. He said that First Union plans to "grow the business dramatically by the end of the year and become a major player in the business."
The top three in convertible securities for the year are Goldman Sachs & Co., which has underwritten $5.1 billion; Merrill Lynch & Co, with $3.7 billion; and Credit Suisse First Boston, with $3.3 billion, according to Thomson Financial Securities Data.
In 1997, Forum underwrote $115 million in convertible bonds, but its business plummeted to $25 million last year as competition with the larger firms became fiercer.
Hal Purkey, president of Forum Capital Markets, will retain responsibility of the firm's convertible bond business, which will be handled through First Union Securities' equity derivatives department in the fixed-income division.
There will be no layoffs, said a First Union spokesperson. Forum has 30 employees, who will continue to work in Old Greenwich. The deal is expected to close in the third quarter.
Mr. Purkey said that Forum's deals, which were between $75 million and $100 million, were becoming too small and illiquid for many institutional investors who have significant amounts of money under management to spend.
"We couldn't compete with the bigger firms," Mr. Purkey said. "That's why we sold to First Union, which gives us a much bigger platform to work from."
Analysts said that First Union's foray into convertible securities will stabilize market-sensitive revenue. Unlike equities, convertible securities perform better when interest rates go up.
And since the junk bond market has dried up, many telecommunication, biotechnology, and Internet companies have been turning to convertible securities for cheaper financing.
A 12-year junk bond usually has a coupon of 9.5% to 12%, but a convertible security has one between 5% and 7.5%, Mr. Purkey said. "People will take lower coupons to get the equity feature."
The market for convertible securities has grown to $39 billion in 1999 from $14 billion in 1995. This year $24 billion of the securities have come to market.
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