Stifel Financial and Thomas Weisel Join Forces

From 2008 to 2009, deal volume for mergers and acquisitions (M&A) and initial public offerings (IPOs) was brutal. While it looks like things are heating up this year, it is still not easy for smaller investment banks to compete against the giants like Bank of America (BAC), Credit Suisse (CS), Morgan Stanley (MS) and Goldman Sachs (GS). This is why a merger between the two investment banks Stifel Financial (SF) and Thomas Weisel Partners (TWPG) makes a lot of sense.

The merger is an all-stock deal that values TWP at $318.2 million or $7.60 per share (the firm went public in 2006 at $15 per share). The transaction is expected to close by June 30, which is definitely an aggressive deadline.

A Tech Rainmaker

When it comes to deal-making in technology, Thomas Weisel is one of the top players. He was the CEO of Montgomery Securities, which was a fast-growing investment firm in Silicon Valley. He eventually sold the operation to NationsBank in 1997 for roughly $1.2 billion in cash and stock.

But Weisel still had big ambitions, and less than a year later he created TWP. It was great timing as tech continued to boom. However, TWP struggled during the dot-com bubble and more recently during the financial crisis. In fact, the firm has posted losses for the past eight quarters.

There was concern that TWP would not be able to benefit from the tax losses. After all, would the firm even make a profit in 2010? But since Stifel has been profitable for the past 14 years, the tax losses should be available. Moreover, it has essentially made the purchase price cheaper and the deal is actually expected to be accretive to earnings.

Still a Growth Story

Since 2000, Stifel has pulled off seven acquisitions. Some of the deals include brokerage offices of UBS Wealth Management, Butler Wick and Ryan Beck. Stifel has a great track record in retaining top talent and clients. As a result, the firm has grown nicely over the years, despite the problems in the financial sector and the economic downturn.

As for the deal with TWP, there is little overlap in business. For the most part, Stifel focuses on traditional businesses like banking and real estate. In other words, a deal will be additive and result in overall revenues of $1.5 billion to $1.6 billion.

With its larger scale, Stifel will certainly be in a position to snag more engagements and benefit from the expected surge in M&A and public offerings -- highly lucrative businesses. In other words, it's a good bet that the firm's share price will continue to be strong.