Talk about a generation gap. The 133-year-old broker-dealer Jesup & Lamont, which helped raise money for John D. Rockefeller's Standard Oil Co., is merging with Tri-Artisan Capital Partners, an eight-year-old merchant bank.
The deal, which calls for Jesup & Lamont to give stock to the privately held Tri-Artisan, is the latest step in the older firm's campaign to reshape its business from a retail brokerage to a full-service investment bank. Both outfits hope to broaden their sources of income with the merger and improve their ability to raise money in the capital markets.
The proceeds from those financings would be used to hire professionals and buy other businesses, said James Fellus, chief executive of Jesup & Lamont's broker-dealer, Jesup & Lamont Securities Corp., who spoke with Investment Dealers' Digest last week in the firm's midtown Manhattan offices. "We don't want to be a one-trick pony. These are top-notch bankers" at Tri-Artisan who "bring a lot to the table."
Jesup & Lamont began its transformation two years ago when it hired Fellus, who is 51, from Sterne Agee. As a senior managing director at Sterne Agee, Fellus built its fixed-income and capital markets businesses. Before joining Sterne Agee, he started the fixed-income division at the hedge fund Platinum Partners LP, where he was senior managing director.
To date Jesup & Lamont has specialized in sales and trading and provides equity research to retail and institutional clients. It wants to expand its investment banking practice to include merger and acquisition advisory work and restructuring. Jesup & Lamont hopes to achieve this with the help of counterparts at Tri-Artisan, which specializes in M&A dealmaking and has coinvested with private-equity firms in some businesses.
"We're looking at companies worth $20 million to $150 million that might be good add-ons for … private-equity firms," Fellus said.
Jesup & Lamont's investment banking clients include small companies in the energy sector, such as the oil-and-gas explorer and producer Brigadier Energy Inc., formerly known as Direct Response Media Inc., which has land in central Oklahoma. Jesup & Lamont is advising the firm on efforts to raise capital to develop its oil and gas properties.
Jesup & Lamont was founded in 1877 in New York by Lansing Lamont and James Jesup to underwrite capital for railroad and oil companies. It started focusing on institutional brokerage services and equity research after World War II.
Tri-Artisan is best known for its work in the consumer products and real estate industries, but it has advised firms in other industries. The privately held firm, which has offices in New York and London, is owned by 65 operating partners, who are current or former senior executives at companies from industries such as health care, industrial, media and communications, consumer and retail, technology and financial and business services.
This breadth has allowed Tri-Artisan to operate in a diverse range of industries.
For example, it advised Goff Capital on its joint acquisition, with Barclays Capital, of Morgan Stanley's Crescent Real Estate Equities Co. subsidiary in November (Morgan Stanley had purchased Crescent for $6.5 billion in August 2007). In May 2007, Tri-Artisan was the sole adviser to Primedia Inc. on its sale of the educational video provider Facts on File Inc. to Films Media Group.
In January 2008, Tri-Artisan coinvested alongside TPG and Apollo Management in Harrah's Entertainment Inc., which TPG and Apollo acquired for $31 billion. The merchant bank also coinvested with Oaktree Capital Management and was the firm's sole adviser on its $575 million acquisition, with Smithfield Foods Inc., of Sara Lee Corp. in August 2006. In October 2006 Tri-Artisan advised NRDC Equity Partners on its $1.2 billion purchase of Lord & Taylor from Federated Department Stores Inc. In November 2005 it was the sole financial adviser to Sumitomo Corp. of America on its $1.1 billion acquisition of TBC Corp., a tire marketer.
Fellus said Tri-Artisan's bankers "bring a lot to the table when it comes to banking and [upsizes] the companies we do business with." At the same time, he said, Jesup & Lamont brings its investment banking presence in energy and other sectors, its retail brokerage distribution ability and research.
Fellus added that merging with Tri-Artisan would give Jesup & Lamont access to potential clients such as Apollo Management, Sumitomo Corp. and Oaktree Capital Management. He said he hopes the merged firm will be able to provide advisory work for these businesses.
Tri-Artisan was established in 2002 by managing directors Gerald Cromack and Rohit Manocha. Cromack was previously a senior member of the M&A and corporate finance departments at Lehman Brothers. Manocha was a founding member of Lehman's private-equity coverage group and a founding partner of Thomas Weisel Partners. The pair were principals in the 1994 leveraged buyout of Furman Selz, a privately held securities boutique, and spearheaded its 1997 sale to ING Group for $600 million.
In addition to building out a presence in M&A and PE, the merged company likely would want to advise corporate restructurings. Activity in the area has cooled because the credit markets reopened in the second half of 2009, but that could change. In recent weeks credit markets have been on shaky footing because of renewed investor concerns about risk, much of it stemming from Greece's credit crisis.
"There is a lot of low-hanging fruit. If a company's been leveraged and its bonds were issued at par and are now trading at 20 cents on the dollar," Fellus said, Tri-Artisan "would advise them to buy back bonds and debt and they'd give that task to another firm, whereas we'll be able to take on that task and make fees on that."
Making It Work
Jesup & Lamont and Tri-Artisan announced the deal Feb. 11 and expect it to close in the second quarter. They expect to build a firm with over $200 million in revenue over the next three to five years — in the first three quarters of last year, Jesup & Lamont posted $26.6 million in revenues. But observers say it will not be easy to grab market share at a time when large investment banks are increasingly looking to provide services to smaller and midsize businesses.
"The business model for small firms is tough, because more and more larger firms are dominating all of the various businesses," said Jonathan Biele, head of capital markets at Cowen Group. "Bulge brackets are dipping into the midcap space."
Biele pointed out that "while the idea that boutiques have deeper domain knowledge or provide a different perspective is true, it's very hard to unseat a bulge-bracket firm when boards and managements decide that's the route they want to go."
Fellus said he and his colleagues at Jesup & Lamont considered a number of other deals before going with Tri-Artisan but he said the other "boutiqueish" banking shops did not offer the same accretive value.
A senior manager with a boutique firm, who declined to be named, said the deal with Tri-Artisan is a godsend for Jesup & Lamont. The senior manager said Jesup & Lamont approached his firm in hopes of selling itself or finding a strategic investor.
"They were desperate for capital and shopping themselves with a book for a while," the senior manager said. "They were consistently losing money, they had raised capital by selling debt so they had a high interest expense, and they didn't have any particularly interesting business. Their plan was to get more capital so they could build a big fixed-income business."
(Jesup & Lamont posted a 2008 loss of $15.8 million on $38.1 million in revenue; for 2007 it reported a loss of $10.7 million on $50.7 million in revenue. In the first three quarters of last year, it lost $2.97 million.)
Fellus disputed this assertion, saying the firm is actually in acquisition mode and has looked to purchase the retail brokerage businesses of other firms. He noted that Jesup & Lamont recently hired 30 professionals for its fixed-income desk and related groups.
Mergers between non-bulge-bracket firms with different platforms are not unusual on Wall Street.
In November, Cowen Group and the alternative investment shop Ramius completed a deal that has Ramius running the combined company's alternative investment management division while Cowen operates the investment banking, research and brokerage businesses. The acquisition brought mostly back-office synergies, but Cowen saw adding an asset management division as a stabilizing force, according to market participants familiar with the deal.
Cowen has since added a financial institutions investment banking group and a real estate investment trust research business. "A number of firms look at opportunities to tuck in specialist firms to make a bigger footprint and garner more revenue, whether from adding different sales or trading verticals or research verticals," Biele said.
In December, Cowen raised more than $76 million via a stock offering; the net proceeds were used for general corporate functions, working capital and repayment of $25 million under its $50 million credit facility.
The stock offering "gave us an opportunity to get in front of investors and show the world our vision for the future, which was that we have two businesses that together make a more cohesive business model and a stronger balance sheet," Biele said.
