However, the company does see how it can leverage the expanded research platform that the deal will create and believes it will prove synergistic with Weeden & Co. Piper Jaffray will likely need to reallocate some existing research resources given the overlap with Sandler O'Neill. A lack of hiring is leading many analysts to look for different positions such as those in investors relations departments, Bragg said.
That said, not many are expanding in the business. Investment banks often have a hard time cutting research since it can lead to more equity underwriting business.
The challenges have led to some consolidation in the research industry, but "not to the degree that you would expect," Bragg said. In an August investor presentation, Piper Jaffray noted that low volatility along with a shift toward passive strategies and away from active trading has hurt the equity sales and trading business. Longer term market trends have also created a negative backdrop for trading. One of the more recent factors for the drop in research-related revenue is Europe's Markets in Financial Instruments Directive, or MiFID II rules, which requires buy-side clients to pay for equity research separately rather than bundle the expense into trade commissions. "After a deal is done, they want the research coverage because that creates liquidity in the stock," Bragg said.īragg added that investment banking revenue is increasingly subsidizing analysts because sales and trading commissions attributable to research have dropped significantly since the financial crisis. Having equity research helps win underwriting mandates because the coverage can increase interest in a company's stock, which corporate clients appreciate. "The tendency is to give bankers the research support they need so that they can be effective," Bragg said. Retaining the target's research is also important when equity underwriting revenue is part of the rationale for an acquisition. When the seller has expertise in a certain area, buyers usually strive to preserve that knowledge by retaining the target's team of analysts, Bragg said. But the Sandler O'Neill sale is different because the firm is not a generalist and focuses on financial institutions. In deals involving equity research, cost saves often drive the decision-making when the buyer and seller are both generalist firms, according to Integrity Research Associates Principal Sandy Bragg, whose firm analyzes the global investment research industry. Often when M&A leads to overlap, companies reduce expenses by eliminating redundant positions. Sandler O'Neill's website indicates that the company covers 341 stocks, and nearly 24% of the companies its analysts cover are also followed by Piper Jaffray analysts. "In equity research, it adds new subsectors and meaningfully broadens our FIG coverage," Piper Jaffray Chairman and CEO Chad Abraham said during a July investor conference call.īut there is also meaningful overlap. The Sandler O'Neill acquisition will increase Piper Jaffray's research coverage by 31% to 850 stocks from 650 stocks, boosting bank research and adding coverage in real estate, insurance and other financial institution group sectors, Piper Jaffray said in a July investor presentation. Media contacts for Sandler O'Neill and Piper Jaffray, along with heads of the companies' research teams, did not return phone calls seeking comment. The potential overlap was even greater when the deal was announced in July before Piper Jaffray analysts Matthew Breese and Broderick Preston departed for Stephens Inc. While Piper Jaffray Cos.' equity research coverage will expand when its pending acquisition of Sandler O'Neill & Partners LP closes in January 2020, combining the platforms will create some overlap in a business facing industrywide headwinds.Īnalysts at both firms cover roughly 80 of the same financial institutions, primarily depositories.
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