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VOL. 127 | NO. 10 | Monday, January 16, 2012

Trading Hands

Morgan Keegan sold to Raymond James in blockbuster $930M deal

By Andy Meek

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It’s been something of a roller coaster ride for a little more than six months in the drawn-out process by Regions Financial Corp. to sell Morgan Keegan & Co. Inc., its Memphis-based investment unit.

Employees work in the institutional area on the equity trading floor at Morgan Keegan & Co. Inc.

(Photo: Lance Murphey)

Employees worried about jobs. Business and civic leaders worried about whether the city was poised to lose a major corporate headquarters if a competitor bought the firm and decimated it with job cuts – or completely moved it out of town.

But when Raymond James Financial Inc. CEO Paul Reilly stepped in front of the camera late Wednesday, Jan. 11, to tell CNBC’s Maria Bartiromo why his firm was buying the 43-year-old Memphis financial institution for $930 million, his comments generally struck a positive note.

“It’s a firm with an almost identical culture to ours,” Reilly said in the interview about Morgan Keegan, which Regions put up for sale last summer. “It’s just a great fit. … They’ve got a great fixed income division that’ll meld in well with ours. They have a very strong public finance business, which we’ve been wanting to grow, and they’re well ahead of us.”

Reilly told Bartiromo that there will be some degree of job cuts but that he thinks “for most of the people, there’s plenty of room.”

He said it’s a much larger transaction than usual for Raymond James, which is based in St. Petersburg, Fla., and has about 5,400 financial advisers. The addition of more than 1,000 advisers from Morgan Keegan will boost the combined firm’s force to more than 6,000 and make it one of the largest wealth management and investment banking firms in the country not based on Wall Street.

The deal is expected to close on or about March 30. The combined firm’s fixed income and public finance businesses will be based in Memphis, and the firm intends to keep a “regional support center” in the city. Morgan Keegan CEO John Carson is joining Raymond James as president and will oversee the firm’s fixed income and public finance businesses. Many details remain to be worked out, such as where Raymond James will put other senior leaders from Morgan Keegan that it expects to bring on board. All of that is why Reilly said in the TV interview, “I think, even for the local community, we’re probably one of the best outcomes they could have had.”

Talk about starting off its golden anniversary year with a bang – 2012 also is the 50th anniversary of Raymond James.

In a letter to clients about the Morgan Keegan acquisition, Reilly and Raymond James executive chairman Thomas James wrote: “While additions of this size are a departure from our focus on organic growth supplemented by individual hires and small acquisitions, it is not a departure from our overall strategy. Throughout our history, Raymond James has used strategic mergers to grow, but only when the timing and pricing are right and, most importantly, when there is a strong cultural fit that we believe will benefit clients.”

The heads of two of Morgan Keegan’s smaller rival firms in Memphis were less rosy upon initial word of the deal Wednesday. Duncan Williams, president of Duncan-Williams Inc., said he believes there’s at least some satisfaction among Morgan Keegan employees that there’s now some finality to the ownership situation, which has dogged the firm for months and led to a small exodus of advisers who took some business with them.

Williams said there also will be an opportunity for his Memphis-based investment firm to pick up at least a small amount of talent from Morgan Keegan as a result of the deal. Then he turned his attention to the inevitable jobs question.

“Raymond James is a great firm. Morgan Keegan is a great firm. What you hope is two great firms make a better firm.”

– Duncan Williams
President, Duncan-Williams Inc.

“I think in the short term in Memphis, you won’t see it,” he said. “But the only way these deals work is through the merging of – the consolidation of services and the consolidation of overlap. You have to cut overlap. You can’t carry two of everything. And the plain truth is this: this is a Florida firm. I will tell you that, unfortunately, a majority of the support-type roles may well be in Florida, not in Memphis.

“Raymond James is a great firm. Morgan Keegan is a great firm. What you hope is two great firms make a better firm.”

Gary Wunderlich, CEO of Memphis-based Wunderlich Securities Inc., agreed in general with Williams’ expectations.

On the whole, Wunderlich said the deal presents positives for his firm, too, which was competing within the last few days for an energy underwriting deal with Morgan Keegan and Raymond James. That led Wunderlich to point out the obvious – that the announcement takes one of those competitors off the playing field.

“Raymond James is a well-thought-of firm, and I think the deal makes a lot of sense,” Wunderlich said, adding that the ability of the combined firm to say it’s one of the largest such investment shops in the country not based on Wall Street will make for “a great marketing pitch that will resonate with clients.”

Still, he thinks Morgan Keegan could have fetched at least a moderately higher price in a normal market environment.

“I’m not saying they got it cheap, just that they got a good value,” Wunderlich said. “As far as employees, a lot of the advisers have been seeing what else is out there during this (sale process). I think a lot of them have a Plan B. I think we’re Plan B for some of them.”

David Waddell, president of Waddell & Associates Inc. in Memphis, included his firm in that mix of other local shops that will be interested in talking with Morgan Keegan employees displaced by the deal.

Paul Morris, president of the Downtown Memphis Commission, tweeted his thoughts as soon as the news was announced Wednesday. He’s been following the news closely, given that Morgan Keegan is a major employer, a big presence Downtown and occupies a building that’s a key feature of the city skyline.

“Um, welcome to @DowntownMemphis, Raymond James,” Morris tweeted. “Hope you’ll get comfortable and stay awhile. Look forward to talking with you.”

From Raymond James’ perspective, the deal has plenty of upside.

Regions agreed to indemnify Raymond James for all pre-closing litigation matters – which means Raymond James isn’t buying the fallout from lawsuits and arbitrations that have dogged Regions and Morgan Keegan for the last several years largely related to fallout from a segment of Morgan Keegan’s mutual fund business.

Also, it would otherwise have taken Raymond James years of organic recruitment and major up-front incentive costs to grow to the point it’s now reached in one fell swoop because of the two companies’ marriage. Regions executives held a presentation about the deal for analysts Wednesday, and Raymond James followed with a presentation of its own the next day. Among the details Raymond James shared: it will offer up to $215 million in retention payments to keep Morgan Keegan employees in place. Also, the purchase price for Morgan Keegan is subject to change if the revenue retention picture also changes.

Regions CEO Grayson Hall said Wednesday benefits of the deal for Regions include the fact that cutting Morgan Keegan loose “lowers the overall risk profile of the company going forward.”

As of mid-week, it wasn’t immediately clear what would happen to the Morgan Keegan name as a result of the deal. For example, in a frequently asked questions page on Regions’ website, in response to the posted question “Will Morgan Keegan still be headquartered in Memphis?” the answer instead refers to Raymond James.

“Memphis will be the headquarters of Raymond James’ Fixed Income and Public Finance businesses,” the answer reads. “Additionally, Raymond James will continue to operate a regional support center in Memphis.”

Regions will get total proceeds of $1.18 billion by selling the Memphis firm it bought in 2001 for $812 million, which included a retention bonus pool of $23 million.

PROPERTY SALES 68 162 2,781
MORTGAGES 60 97 1,880
BUILDING PERMITS 148 769 6,470
BANKRUPTCIES 61 172 1,149