D.A. Davidson Finds its Perfect Match
D.A Davidson and McGladrey are the latest middle-market investment firms to team up in the wave of consolidation
February 21, 2012
By the time D.A. Davidson & Co. came to the realization that it was time to grow its investment banking business, McGladrey Capital Markets had already been looking for a way to maximize its core values.
And so, on Feb. 1, D.A. Davidson found its ideal match and spent an undisclosed amount to acquire McGladrey, a subsidiary of New York Stock Exchange-listed H&R Block.
“We began exploring opportunities in the third quarter of 2011 and we spoke to a number of different firms,” says McGladrey COO Scott Ryder in an interview with Mergers & Acquisitions.
By the fourth quarter, the firm narrowed the list down to a few. “When we landed on D.A. Davidson, it just seemed to be a perfect fit,” Ryder says, adding that the deal moved rather quickly and effortlessly with “little to no hiccups.”
Husch Blackwell LLP handled legal matters for McGladrey on the deal. Elie Sprung and Gary Gilson acted as the lead attorneys.
The pairing of D.A. Davison and McGladrey follows a trend that has been taking shape in the middle market over the last few years. Collins Stewart Hawkpoint formed a 50/50 joint venture with investment banking firm Morgan Joseph TriArtisan in November. Stifel Financial Corp. acquired Thomas Weisel Partners the summer of 2010, and within the same year, Signal Hill Capital Group merged with information technology M&A specialist Updata Advisors to form Signal Hill Updata. In 2008, Revolution Partners and Morgan Keegan came together to form Morgan Keegan Technology Group.
Doug Woodcock, who heads up D.A. Davidson’s equity capital markets division, is convinced that the trend will continue. “I do I think that we are going to see some more consolidation in the industry,” he says, explaining that full service broker dealers had some structural headwinds in the institutional equity business.
The compression of commissions and the unbundling of execution from research payment put a lot of pressure on the margins in the sales trading research industry. Like D.A. Davidson and Morgan Keegan, full service middle-market brokers want to grow their investment banking business, particularly in M&A, Woodcock says.
Even though brokers wants to grow their investment banking business, Woodcock says there’s a shortage of deals. One would think that there would be an influx of M&A transactions given the record amount of cash corporations have on their balance sheets and reasonable valuations. Woodcock blames the scarcity of deals on the lack of visibility, the state of the economy, as well as tax structure and policy. He says that things may start to look clearer once we get through this election year.
“Right now the prospects of higher capital gains tax are driving some M&A activity. But the consolidation of investment banks will be aided by some better visibility into policy and tax structure.” He added that scale is another driver that may lead to the consolidation of middle market investment banks especially with regulatory pressures, higher spending in information technology and other fixed cost areas at the helm. “The whole notion of scale is becoming more important. That was certainly a consideration for us in the McGladrey transaction,” he noted.
McGladrey’s well balanced M&A practice and its industry expertise, which stems across 11 sectors, also made it more attractive to D.A. Davidson. McGladrey ended 2011 with a 60 percent increase in average deal size from the previous year. The firm had its hands on a number of transactions last year including the recapitalization Kiosk Information Systems by Alerion Capital Group as well as the recap of Victoria Packing Corp. by Huron Capital Partners. In September, McGladrey acted as the exclusive financial adviser to Trivec-Avant in its cross-border $144 million sale to Cobham, a UK-based national security and satellite communications equipment provider. The majority of McGladrey’s transactions fall within the middle market, with deals circling up to $500 million.
“They look a lot like us,” says Woodcock, who noted that the two firms are the same in size and direct competitors. The two may share similarities, but McGladrey’s clients didn’t have the opportunity to take part on initial public offerings, like D.A. Davidson’s patrons.
