Stock Market Predictions

Jefferies eyes big deals in ambitious growth drive

Stock Market Predictions

The bank is hiring aggressively and has ordered its bankers to focus on bigger, more profitable deals to move up the Wall Street pecking order.

Founded almost 50 years ago as a firm that facilitated trading of large blocks of stock by institutional investors off traditional exchanges, Jefferies employs some 3,200 people -- 40 percent more than just four years ago.

While Jefferies is boosting staff levels, the bank is also telling its bankers to focus on bigger deals and clients.

The change has accelerated since Jefferies hired healthcare banker Benjamin Lorello from UBS AG (UBSN.VX) in 2009 and named him head of investment banking and capital markets businesses.

Under Lorello, Jefferies has imposed a minimum fee requirement of $2 million for a banker to be allowed to advise a company on a merger deal, sources familiar with the matter said. That's nearly double the minimum previously in place, and the new rule is more strictly imposed now, one source said.

Its bankers can ask for exceptions, such as when there is an expectation of more business from the client or the deal would help build relationships, the sources said.

"It is more of a message that we are moving upmarket, and we want all of our bankers to focus on moving upmarket and focus on larger transactions," one source said.

Jefferies declined to comment.

MOVING UP -- AT A PRICE

In another sign of this change, the firm in recent months disbanded the Putnam Lovell team that focused on asset management deals that tend to be smaller, the sources said.

It has been hiring from larger rivals instead. They include Michael Tedesco, a former Citigroup Inc (C.N) banker who became global head of technology M&A and U.S. head of M&A, and Frank Cicero, who came from Barclays Capital (BARC.L) to become global head of financial institutions investment banking.

The hiring has come at a cost. In its second fiscal quarter, Jefferies paid 59 percent of its revenue as compensation, well above the industry standard of about 50 percent and higher than its own pre-financial crisis level of about 54 percent.

By comparison, Goldman Sachs, which pays some of the best salaries on Wall Street, spent 44 percent of its revenue on pay and benefits during the first quarter.

Jefferies says new hires will bring in more deals and its pay ratio will fall as revenues rise. Analysts wonder though whether it can grow fast enough to recoup the investment.

"When you make one of these bets on growth, you better hope the growth continues," said Brad Hintz, a former Lehman Brothers CFO who is now an analyst at Sanford Bernstein.

The churn is not unusual for Jefferies. The firm hired aggressively, for example, in the downturn after the tech bubble burst at the turn of the century, boosting headcount by 15 percent in 2000 and 18 percent in 2001.

"Better people cost more money," said Richard Lipstein, a recruiter at Boyden Global Executive Search. "You don't always hire people who then generate money immediately. So there are times when the compensation ratios will go up before the revenue starts to kick in."

In the fiscal quarter to the end of May, Jefferies reported a 9 percent rise in net revenue. But higher costs like banker pay drowned those gains and profit fell 3.8 percent.

Jefferies shares are down 21 percent so far this year, lagging the Thomson Global Markets U.S. Investment Banking & Brokerage Services Index .TRXFLDUSPINBK, which is off 17 percent.

MOVING UP THE RANKS

While Jefferies has already come a long way from its roots as a trading house, it still has a long way to go to fulfill

its ambition of playing in the top league.

Jefferies came in at No. 24 in the worldwide rankings of M&A advisers in the first half, up one notch from the same period last year, according to Thomson Global Markets data.

Hiring appears to be paying off in some areas. In U.S. healthcare M&A deals -- a Lorello forte -- Jefferies moved up to No. 12 in the first half, compared with No. 47 in the same period in 2008 and No. 16 in 2007.

In league tables for equity capital markets, Jefferies went up one notch to No. 11, the data shows.

The average size of M&A deals Jefferies advised on increased to $368 million in the first half, compared with $235 million in 2008 and $214 million in 2007, before Lorello took over. Goldman Sachs' (GS.N) average deal size in comparison was $1.8 billion in the first half of this year.

Jefferies' minimum for fees for merger advisory is lower than the $3 million that is typical for the biggest banks. Banker fees are set as a percentage of the deal size. In a $1 billion deal, for instance, fees would typically be 0.75 percent to 1 percent.

The M&A transactions on Jefferies' list are still mostly below $1 billion, but there are some multibillion-dollar deals, such as bankrupt Nortel Networks Corp's (NRTLQ.PK) $4.5 billion sale of patents to a group of tech giants on July 1.

It can take several years for the transformation to take place, Hintz said.

"We don't know whether that wager is going to work out," Hintz said. "But it's certainly a management team that's not being shy about its aspirations."

(Reporting by Paritosh Bansal and Nadia Damouni; additional reporting by Dan Wilchins and Lauren Tara LaCapra. Editing by Knut Engelmann and Robert MacMillan)