Merger and acquisition activity in the financial services sector permeated the municipal securities market in 2003 through a number of transactions in industries ranging from investment banking to financial advisory services.
The reasons for the mergers varied from an intent to acquire economies of scale to a need to diversify revenue streams and reduce earnings volatility.
J.P. Morgan Chase & Co.'s proposed $58 billion acquisition of Bank One Inc. mostly represents a case of the latter. Although the merger was announced in mid-January, serious merger talks got off the ground in November 2003, four months after J.P. Morgan agreed to purchase the corporate trust unit of Bank One for about $722 million. The merger is scheduled to close in the second quarter of 2004.
For the municipal securities market, Bank One brought a huge Midwest portfolio to the table, further strengthening J.P. Morgan Chase's presence in the market. This merger also impacted the letter of credit market in the municipal securities industry.
In 2003, J.P. Morgan Chase ranked number three among letter of credit providers, backing 20 deals totaling $1.93 billion, according to Thomson Financial. Meanwhile, Bank One ranked 11th as it served on 29 deals totaling $534.4 million. The combined entity would rank second behind Bank of America Securities, which backed 105 issues totaling $3.28 billion in 2003.
Last year started out with a bang as Wachovia Corp., parent of Wachovia Securities, agreed in February to merge its brokerage unit with Prudential Financial Inc., creating one of the largest retail financial advisory organizations in the country. That deal, which closed in July, placed the combined entity in third position behind Merrill Lynch & Co. and Citigroup Global Markets Inc. in magnitude of retail distribution.
Alex Wallace, managing director and co-head of the municipal group at Wachovia Securities, said in a recent interview that the merger was "very positive for the municipal securities business from the standpoint of retail distribution."
"Investors are increasingly demanding retail order periods," Wallace said, adding that Wachovia is now in a better position to meet that need. As issuers demand retail order periods more frequently, it's only logical to provide them with a broader investor base to increase the demand for their paper, Wallace said. That will hopefully drive down their yields, he added.
The merger allowed the resulting entity to have a combined client asset base of $603 billion at year-end and 2002 estimated combined net revenue of $4.2 billion. It also had a national footprint of more than 3,500 brokerage locations, including 791 dedicated retail offices in 48 states and the District of Columbia.
That deal was the first major deal of the year, but was by no means the only one. In October, Charlotte-based Bank of America Corp. agreed to acquire FleetBoston Financial Corp. in a $47 billion transaction. Bank of America's priority in forging a deal with FleetBoston represented a desire to amass business in the New England area, where Fleet has a major presence.
That merger, scheduled to close in April, will enhance Bank of America's municipal sales through FleetBoston's Quick & Reilly distribution outlets. Spokesman Charles Salmans said recently that Quick & Reilly houses FleetBoston's municipal underwriting unit, which has a strong presence in the region. He noted that there have not been any final decisions yet on how to run the municipal groups of both firms. However, no significant changes are expected.
Brock Vandervliet, a Lehman Brothers analyst who covers large-cap banks, said in a recent interview that he does not expect to see "a tidal wave of deals" among banks going forward. The issue is that the valuations for the bank group currently are "right on top of each other," he said.
That's in stark contrast to the environment in 1998 when a big separation in valuation contributed to a flurry of merger and acquisition deals, he added. In the current environment a strategic deal makes the most sense as in the case of J.P. Morgan and Bank One where the latter was able to take a low premium, he said.
Vandervliet noted in a January report "a rise in interest rates may be the catalyst that breaks up the valuation log jam."
In 2003, one merger that brought about the end of an independent municipal heavyweight that had deep roots in the Florida market came in early December when RBC Dain Rauscher Inc. announced an intention to acquire municipal bond investment banking firm, William R. Hough & Co. That deal, which was touted to cost up to $100 million, is scheduled to close in the spring.
Owner and chairman emeritus William Hough, 71, said in a December interview with The Bond Buyer that he opted to sell the firm primarily because on its own it was limited in its expansion possibilities. He noted that RBC Dain would be able to capitalize the firm with the money it needed to reach those goals.
Mergers and acquisitions in 2003 were not limited to the banking industry. General Electric Corp. in December closed on its agreement to sell the majority interest in Financial Guaranty Insurance Corp. to an investor group led by PMI Group for $2.2 billion. PMI Group indicated in December its desire to acquire a controlling interest in FGIC at a later date by upping its stake to 50.1%, from 42.2%.
Earlier in the year, a few players in the insurance industry moved to create a new reinsurance company instead of purchasing one because of the limited number in existence. MBIA Inc. announced in October that it had partnered with RenaissanceRe Holdings Ltd., Koch Financial Corp., and PartnerRe Ltd. to create a new reinsurance company called Channel Re.
Channel Re is expected to debut in the upcoming weeks as the owners seek high credit ratings for the entity. That entity is expected to have about $350 million in capital and about $750 million in claims paying resources, according to MBIA, and would bring a new star to the dwindling reinsurance market, which has seen players exit over the past year because profits dwarf those in the primary markets. Reinsurers also opted to exit the market after suffering losses from exposure to collateralized debt obligations, most notably on WorldCom, which filed for Chapter 11 bankruptcy protection in July 2002.
AXA Financial Inc., France's largest insurer, proposed in September to buy MONY Group, the parent company of Advest Inc., a regional broker that focuses on fixed-income products for retail investors. That $1.5 billion deal is expected to close this quarter. With the new ownership, the acquisition is not expected to have a dramatic effect on the business operations of the brokerage firm.
Other smaller deals last year include Wachovia's announced intent in October to acquire Los Angeles-based Metropolitan West Securities, which it expects to fold into its corporate trust group. Continuing the consolidation in the corporate trust industry, the Bank of New York, the number-one ranked corporate trustee in the municipal industry, agreed in November to purchase the corporate trust group of Fifth Third Bank in a bid to expand into the Midwest.
Among financial advisers, there was one merger of note. In May, Public Financial Management, which ranked number two nationally among financial advisers in 2003, announced it acquired Evensen Dodge Inc., an independent Minnesota-based advisory firm.
On a much smaller scale, 25 members of Livingston, N.J.-based GMS Group Holdings Corp. in November agreed to a $22.6 million management-led buyout from Ryan Beck & Co., which is also based in Livingston, N.J. The firm will now remain private and independent.
On the reorganization front, U.S. Bancorp finalized its spin-off of Piper Jaffray on Jan. 1. The spin-off had been on the drawing board since 2002.
There was even some movement in the ever-changing world of online trading platforms, which have seen a significant drop-off in players in recent years. California-based eBondTrade last spring sold its assets to San Francisco-based brokerage firm Stone & Youngberg LLC.
Among law firms, there was one instance in which one firm wiped out the entire public finance practice of a competitor by hiring its people. In June when Fulbright & Jaworski LLP hired all five of the attorneys that made up O'Melveny & Myers LLP public finance practice in New York. At the time, a spokesman for O'Melveny & Myers said that despite the loss, the firm still had a thriving project development and real estate practice.
