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At KBW, One Last Disgrace

 December 03, 2012 03:00 PM


(By Thomas K. Brown) I can't say I was disappointed last week when I read that KBW, the financial services investment banking boutique whose business model essentially consists of whoring its research in return for banking business, had agreed to sell itself for a price not much above its all-time low. Serves 'em right. For years, KBW has been a disgrace: in my opinion, the firm would essentially do whatever it took—initiate nominal coverage on a given company, raise its rating, you name it—to get in on a deal. Providing investment advice to help clients make money seemed to always come in last, last, last on KBW's list of priorities.

And sure enough, the firm is going out with its hallmark classlessness. This is from its just-released S-4 filing related to the Stifel/KBW merger.

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Stifel on Oct. 25th told KBW it was prepared to provide a cash and stock offer to an aggregate consideration per share equal to $17.29, with a separate retention pool of $40 million.  Senior management on both sides had several telephone calls to discuss the deal from Oct. 26th to Oct. 28th.  KBW indicated that the proposed terms were unacceptable and broke off conversations at one point.  Stifel eventually restarted the discussions by increasing its proposal, and the two sides agreed to continue the talks at a revised consideration per share equal to $10 in cash and $7.50 in stock, as well as a retention pool of $57 million. [Emph. added.] 

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Let that sink in a little. By dint of its hard-headed negotiating, KBW's board was able to get Stifel to raise its offer by $20.8 million. But of that, only $3.8 million will go to shareholders, while the rest—the $17 million boost in the retention pool—will go to KBW employees. Of course! I believe the company has been screwing its commission-paying customers for years, so it's only natural that the firm's management is going out with a bang by apparently screwing its shareholders, too.

I'm having trouble coming up with quite as stark an example of self-dealing by the management of a public company. Under what fiduciary laws of the universe, for example, should KBW's board even care about the size of Stifel's retention pool at all? Employee retention is Stifel's problem, not KBW's. The first, last and only concern KBW's board should have had in negotiating was maximizing value for KBW shareholders. This the board manifestly did not do. Actually, it did the opposite. The board agreed to a deal that included an extra $57 million in cash that Stifel was willing to part with that was funneled away from shareholders, to employees. This is outrageous! The SEC needs to give this deal a long, hard look. 

KBW has seven Board members consisting of three internal and four outsiders:  Dan Healy, Kip Condron, Jim Schmidt, and Mike Zimmerman.  I know the first three; they are stand-up guys. But in my opinion, these individuals failed at their fiduciary responsibility. I'm appalled. But in truth, I can't say I'm surprised. 

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