The different growth trajectories of two Missouri-based broker-dealers ultimately led to the deal in which St. Louis-based Stifel Financial Corp. will buy Kansas City-based George K. Baum & Co.
Stifel
Both set up shop as local firms that grew their regional presence and pushed outward into new territories, but for more than a decade St. Louis-based Stifel’s footprint has swelled into a national firm. Baum’s growth was more modest as a boutique firm with some specialties and strongholds in a handful of states, notably its Missouri home base, Kansas, Colorado and Utah.
The acquisition gives the publicly-traded Stifel more banking prowess as broker-dealers hunt for volume and it’s an easy fit for a firm that’s been built up through a steady stream of acquisitions across business and sector lines, said market sources.
Being absorbed by a larger parent ends the cost pressures on the privately-held Baum from regulatory demands and allows its bankers to bring a greater capital position to the table, but the deal also means another stalwart name in the municipal market goes away.
Stifel ranked 11th last year in municipal primary volume with 590 deals valued at $10.6 billion compared to Baum at 23rd with 144 deals valued at $2 billion, according to data from Refinitiv. So far this year, Stifel ranks 10th with 370 deals valued at $7.5 billion and Baum is at 23rd with 90 deals valued at $1.2 billion. Both firms also offer advisory services. The firms say the combination will result in the largest muni platform ranked by number of deals.
"George K. Baum is a fabulous firm that has been around since 1928 and really compliments us regionally and in the western half of Missouri, Kansas, and Utah and on the specialty side too with their strong independent schools business and secondary institutions, and a housing group that is very complementary to ours," Stifel chairman and chief executive officer Ronald J. Kruszewski said in an interview. "From a business perspective this deal is like hand and glove.”
George K. Baum’s regional- and sector-focused practices provide a unique fit with Stifel’s existing public finance structure and a strong foundation to grow Stifel’s businesses, he added.
“Stifel brings numerous strengths to our clients, including wealth management, retail distribution, a strong capital base and diversified business lines,” Baum’s president and CEO Jonathan E. Baum said in a statement.
Terms were not disclosed. The deal requires regulatory approval and is expected to close in the fourth quarter. Keefe, Bruyette & Woods, a Stifel company, acted as financial advisor to Stifel on the transaction.
The acquisition does not include George K. Baum Capital Advisors or Baum Capital Partners. Baum said in an interview Monday he would continue to run those firms while exiting his role in the firm’s municipal operations.
The 128-year-old Stifel will fold the 91-year-old Baum into its operations. Peter Czajkowski will remain head of public finance, sources said. He previously was co-head with Stephen Heaney, who recently retired. Betsy Kiehn was recently elevated to head capital markets under a reorganization that began last year.
Andy Sears and John Crandell are co-heads of public finance at Baum. Edmund Steinauer and Liz Barber are co-heads of capital markets.
Baum employs about 55 bankers and another 36 that work in the larger capital markets group as traders, sales professionals, underwriters, and in taxable fixed income and a specialty group. It operates 24 offices nationally. Stifel employs about 160 in its public finance group about 125 bankers in 26 offices.
Baum
“This is definitely a bittersweet decision for sure,” Baum said. “I’m proud of what we built and excited for the future of our employees and clients.”
Baum’s grandfather launched the public finance business with five employees. He purchased the firm from his father in 1994 and has built up its operations. While he declined to provide details on the origins of the deal, Baum said, “I have long had a very great amount of respect for Ron Kruszewski and what’s he’s built over the years.”
Baum said he was not necessarily looking to sell the business because he was happy with the firm’s platform, footprint, and business operations, but the acquisition presented a good opportunity on all those fronts for the firm’s employees and clients.
Baum describes itself as a privately held investment-banking firm focused on public finance and taxable fixed income sales and trading that’s “recognized as an industry leader in the structuring, underwriting and marketing of taxable and tax-exempt municipal securities.” It maintains national practices covering housing, higher education and independent schools and reports provided underwriting or financial advisory services to more than 7,796 municipal bond issues totaling more than $320 billion since 2000.
Stifel
Stifel is a financial services holding company that conducts its public finance business through subsidiary Stifel, Nicolaus & Co. Inc. and other operations through acquired firms that have retained their names including Keefe Bruyette & Woods, Inc., Miller Buckfire & Co. LLC, and Century Securities Associates, Inc.
The firm’s expansion has been fueled by at least a dozen acquisitions since 2010, many of which have expanded different facets of its public finance practice.
Stifel's build-up dates back to at least 2000, when it merged with Hanifen Imhoff. In 2005, it acquired Legg Mason Capital Markets. In 2006, it bought Miller Johnson Steichen Kinnard's private client group. In 2007, Stifel acquired Ryan Beck and separately purchased First Service Bank. It picked up a bond-trading business in 2013 from Knight Capital Group Inc.
Stifel carved a healthy niche in California with its acquisition Stone & Youngberg in 2011 and De La Rosa & Co. in 2015. It acquired Indiana-based City Financial Corp. in 2017.
Kruszewski said the acquisition would result in some layoffs and accelerated retirements but he described the number as minimal as he sees little overlap with some exceptions like the Colorado office. “We are combining” so it’s not about cutting costs, he said. “We are thrilled that they selected Stifel.”
Kruszewski, who has run over 30 mergers and acquisitions in his more than two decades at Stifel, said some top Baum managers would also assume leadership posts.
Stifel remains in expansion mode and committed to public finance, he said. “I believe there will be continued opportunities for the boutique firms to look at Stifel as a great partner,” Kruszewski said, adding that he would like to expand the firm’s business in the Northeast.
Motives
A driving factor is the increasingly difficult road "specialty municipal finance firms" face due to industry-wide pressures, said one industry source.
For Stifel, “it's an opportunistic acquisition. It's not about cost savings” said one industry source familiar with the transaction. “A lot of smaller firms don't have the scale to manage the regulatory burdens. This is an easy acquisition because the cultures are similar. Baum has a good number of productive bankers and the acquisition supplements Stifel’s growth.”
Municipal market participants say the dwindling supply of municipal paper following the 2017 tax reforms that eliminated advance refundings is pressuring firms — especially smaller, regional ones, and those that focus on just municipals — to cut staff or exit the business while the regulatory costs are adding to those strains.
The regulatory costs are really weighing on balance sheets and that could be a driving factor, said John Hallacy, contributing editor at The Bond Buyer. “I think it’s a good move for both firms,” Hallacy said. “It spreads the costs over a bigger platform and allows them to pick a bigger share of market share.”
“I think this is about regional consolidation,” said John Mousseau, CEO of director of fixed-income at Cumberland Advisors. “What do you do when there’s a lack of supply, you buy supply. You are buying relationships. You are basically setting the stage for when” volume eventually rises. “You will have one heck of a franchise,” he said.
The downside is the loss of another name in the municipal business.
“I understand the reasons for doing this but another name now goes into the dustbin of history and the bad thing is how that impacts liquidity at the margins with one less bidder to bid on your Midwest bonds,” Mousseau said.
The impact is not as great during a time of low volume and low interest rates but when the market enters a new cycle that’s when the effect of fewer firms is noticed on bidding. “I hate seeing names go away,” he said.
The Bond Dealers of America reported in a member survey published in June that members had spent an average of more than $17 million on regulatory costs since the beginning of the 2008 credit crisis. BDA members, primarily middle-market and regional broker-dealers, reported spending about 20% more money and time on regulatory compliance than they did before 2010 as they have had to adjust to a raft of new regulations from the 2010 Dodd-Frank Act and rules imposed by the Municipal Securities Rulemaking Board and the Securities and Exchange Commission.
By region, Stifel ranks sixth in the Far West so far this year and finished seventh last year while Baum ranks 24th this year and finished 25th last year.
In the Midwest, Stifel ranks fifth this year and was fourth last year compared to Baum which ranks 17th this year and finished 21st last year.
In the Southeast, Stifel ranks 11th so far and finished 9th last year. Baum is not ranked in the top 25. In the Northeast, Neither firm is ranked in the top 25 so far this year. Stifel finished last year at 24. Baum was not ranked in the top 25. In the Southwest, Stifel ranks 8th so far and was 12th last year. Baum ranks 20th so far and ranked 15th last year.
