Published November 22, 2011
As he battles rumors that the brokerage company he runs is the next firm to fail, Jefferies & Co. (JEF) Chief Executive Richard Handler is weighing whether the firm can remain independent, investment banking sources tell the FOX Business Network.
Selling out to a larger player would be a bitter pill for Handler to swallow since he took pride in Jefferies' independence -- and until recently, success at remaining independent -- but according to people who know him, he is weighing whether a sale to a larger player is inevitable.
The problem for Jefferies isn't necessarily whether the firm has exposure to troubled investments, such as sovereign debt issued by Italy and Spain, which sparked MF Global's recent implosion. Jefferies recently published a point-by-point letter of rebuttal to clamp down on speculation swirling about its balance sheet problems.
The bigger problem for the firm is that investors sentiment has soured on the business model of a mid-sized brokerage firm that makes money taking risks in various markets, even if that risk taking is hedged as Jefferies claims is the case. Mid-sized firms unlike giant banks don't have access to large amounts of capital to cover bad bets and are forced to borrow in more risky short-term lending markets. As a result, such firms have to reduce risk but also accept lower profits and share price if they want to remain independent given the current market environment.
Rochdale Securities analyst Dick Bove told FOX Business that Jefferies is an "acquisition target" and the most likely acquirers are capital rich Canadian banks, which include Royal Bank of Canada and TD Bank Group.
"I think that Canadian banks want to expand their presence in U.S. markets an that Jefferies is an acquisition target," Bove said.
Bove added that Jefferies has also told him "it wants to remain independent." (An RBC spokesman had no comment; a spokesman for TD Group had no immediate comment)
Another investment source with knowledge of the firm's activities says Handler may also merge with an asset management firm.
A spokesman for Jefferies had no comment on the matter, though he pointed out that in its recent quarter, Jefferies generated most of its revenues through investment banking. But trading revenues have slowed recently with some firms even posting trading losses. And trading revenues are cyclical and often provide fatter profits than investment banking fees, which have shrunk in recent years.
Meanwhile, Handler is coming to grips that Jefferies is suffering from what one investment banking source called "the curse of Bear Stearns and Lehman." After the demise of both firms during the financial crisis, investors began to look at similar mid size firms as vulnerable to market swings.
That sentiment has only grown following the recent demise of MF Global. After falling dramatically, shares of Jefferies have stabilized at a little above $10, particularly after the firm published its rebuttal letter on Monday. But people who know Handler say the letter is a delaying tactic to buy time and figure out what to do next.
"Those guys are smart they know there won't be a Jefferies in its current form two years from now," said another investment banking source who has knowledge of the company's activities.