Wachovia's$6.8 billion agreement to buy A.G. Edwards is likely to spur more acquisitions of independent brokerage firms, analysts say.
The reason: banks are trying to bulk up on brokerage services, while traditional outfits like Edwards are dwindling in number and losing clients to cheaper online competitors.
“The deal demonstrates that full-commission brokerages (serving) the mass market segment is very challenging,” said David Trone, a securities industry analyst at Fox-Pitt Kelton. “The smaller clients are increasingly price-sensitive and are moving to places like Schwab or Fidelity,” he added, referring to clients with less than $500,000 to invest.
A.G. Edwards is currently the biggest independent brokerage firm, with nearly 7,000 brokers. Wachovia’s acquitision will create the second-largest retail brokerage behind Merrill Lynch.
The most likely takeover targets among independent brokerages, analysts say, include Raymond James Financial, with has about 5,000 brokers, as well as Stifel Financial and Oppenheimer, which each have roughly 1,000 brokers. Jefferies and the privately-owned Edwards Jones are also potential candidates.
The most likely suitors are larger financial institutions with existing brokerages that want to increase their scale, including UBS, Morgan Stanley, and Citigroup’s Smith Barney. Companies that want to get into the mass-market brokerage business – like Bank of America and J.P. Morgan – may also make a bid, analysts say.
It’s become increasingly difficult for smaller full-service brokerage players to survive. Though the stock market continues to climb to new highs each day, many retail investors are less active than they were during the go-go days of the late nineties.
Instead, they’re opting for the cheapest way to invest, which often translates into mutual funds and other diversified investments that can be purchased at less expensive investment outlets online. Many online brokerages also offer some level of advice.
And the independent full-service brokerages are having trouble lowering their costs.
“You can’t pay (the brokers) less because they’ll leave, so you can’t lower your primary cost of doing business,” Trone added. “So clients keeping leaving.”
The transaction values A.G. Edwards at $89.50 a share, a 16% premium over Friday's closing price. The deal price is equivalent to 1.8% of client assets, which is slightly higher than the average 1.5%, the analyst said.
"In today’s world of M&A, the deals you never thought would get done are getting done,” added Tim Ghriskey, chief investment office of the New York-based Solaris Asset Management. “And I’d say A.G. Edwards is one of them. This one surprised us.”