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Raymond James (RJF)
Can Raymond James Make up Ground on Bulge-Bracket Banks?
Raymond James, the mid-sized financial services conglomerate known mostly for its army of financial advisers, is looking to make a bigger mark in the investment banking business and yesterday's acquisition of Lane Berry, a boutique investment bank with 21 employees, is a step in that direction. With the bulge-bracket banks under tremendous scrutiny from the government and weighed down by risky assets on their balance sheets, boutiques and regionals are in fashion and Raymond James is looking to capitalize on that trend.
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| Stock Analysis |
Raymond James (RJ) consists of multiple subsidiaries which provide financial services (e.g. financial planning, underwriting, equity research etc.) on the individual and institutional levels. Though financial advisors represent the core business, RJ also has a footprint in investment banking. The company has advised on deals in sectors such as consumer products, health care and technology. Lane Berry's acquisition is aimed at getting more assignments in the business services sector, an area where Lane's co-founders, Fred Lane and Robert Berry, have a lot of experience. Lane Berry was only founded in 2002 so Raymond James is not getting an established brand name but they are acquiring a team of senior bankers who can hopefully drum up business with their extensive rolodexes.
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Terms of the deal were not disclosed so we can't tell whether Raymond James got Lane at an attractive price. However, fundamentally the deal does make sense. M&A activity is sure to rebound with the economy. There is pent-up demand among executives of corporate America to do deals and there is also a fair amount of corporate debt that has to be refinanced. So even though the banking sector is slow right now, things should pick up and RJ needs to do whatever is possible to steal some future business away from the bulge brackets. However, buying Lane & Berry is just a small step. RJ needs to integrate the new bankers into its existing investment banking division of about a 100 people and make sure that they can attract a greater amount of business now that they have RJ's balance sheet and resources to provide financing and underwriting support for deals. Executives at Raymond James also need to look for more acquisitions of boutiques to bring in bankers with expertise in new areas.
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Other parts of the Raymond James business are struggling right now. The firm reported last month that second quarter net income fell 90% due to writedowns in the firm's banking portfolio. RJ also conducted its own internal stress test and found that another $251 million in loan losses and $17.5 million in securities losses are to be expected over the next two years. Those are big numbers for a regional bank such as Raymond James but not enough to significantly impact liquidity. Over the long term, RJ should definitely make it out of the credit crisis.
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The key for the firm is to capitalize on the weakness of its bigger rivals who are in even worse shape right now. RJ applied for TARP money last fall but then withdrew its application without taking in any funds, signaling its capacity to raise money by itself. It is using its freedom from TARP restrictions such as employee compensation limits to hire top-producing financial advisers from the likes of Goldman (GS: Charts, News, Offers) and Merrill (BAC: Charts, News, Offers). As the Lane Berry acquisition indicates, RJ is expanding that strategy to hire top banking talent too. However, it remains to be seen whether it will be able to manage this expansion responsibly and prudently. The stock is down about 50% from the fall of last year and at this level, could be an attractive bet over the next few years.
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Profile |
Click here to view a detailed profile of Raymond James.
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