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WIKI ANALYSIS
Jefferies Group, Inc (JEF) is a full-service investment bank and asset management firm focused on growth and middle-market companies-- those with revenues between $25 million and $1 billion. The firm advises its clients on merging with or acquiring other companies, assists in raising capital, facilitates client equity and fixed income trading, and manages assets for institutional investors. Since Jefferies works mainly with middle-market firms, their transactions are typically smaller in value and more US-centric than those of larger competitors such as Goldman Sachs Group (GS) or Morgan Stanley (MS). However, unlike boutique investment banks which often specialize in a specific area, Jefferies offers a full range of services to its smaller clients.
The company has further strengthened its service offering by building its industry focused advisory groups through the acquisition of various boutique investment banks, including Quarterdeck for Aerospace, Defense, and CleanTech, Randall & Dewey for Energy, Financial & Business Services, and Broadview for Technology and Transportation, Oil Service & Infrastructure[1].
Business Overview
The company’s two main business segments are Capital Markets and Asset Management.
Capital Markets
The Capital Markets division provides corporations and institutional investors with sales, trading, and research. [2].
- Investment Banking
The Investment Banking Division offers a full range of financial advisory services, as well as debt and equity underwriting. The advisory division works with senior management on middle-market companies and advises them on mergers and acquisitions, restructurings, and other transactions. The Investment Banking Division also assists clients in raising money through debt and equity.
- Sales, Trading, and Research
The clients for this part of the firm include domestic and international investors such as investment advisors, banks, mutual funds, insurance companies, and hedge funds. Jefferies helps these clients purchase and sell a variety of securities.
Asset Management
Jefferies also provides investment management services and products to various private investment funds through Jefferies Asset Management (“JAM”). It operates several private investment funds including Victoria Falls CLO, Summit Lake CLO, Diamond Lake CLO, Jefferies RTS Fund, Jefferies Paragon Fund and Jefferies Buckeye Fund[3].
Business Financials
The firm's revenue increased 31% in 2006, from $1.5B in 2005 to nearly $2B in 2006. The increase was due to 27% increase in equity, fixed income and commodities sales and trading revenues, a 34% increase in asset management fees and investment income, a 9% increase in investment banking revenue, and a 74% increase in interest revenues[4]. Jefferies, along with many of its peers, benefited from a strong stock market and an active M&A market.
Over the past few years, the firm has substantially diversified its revenue base. In 2000, over 75% of the firm’s revenue came from its Sales and Trading operations, but by 2006, revenue from Sales and Trading operations dropped to about half of the firm’s revenue, with a substantial growth in financial advisory and other areas of the firm.
Trends and Forces
- Business Cycles
Jefferies is highly impacted by both global and US economic conditions. During periods of rapid economic growth, companies typically pursue more mergers and acquisitions, leading to greater demand for Jefferies’ Mergers and Acquisitions advisory services. Also, the stock markets typically move in the same direction as the overall economy. If the market is up, then the demand and performance of Jefferies' sales and trading operations, as well as its asset management services will likely increase. Conversely, if the economy is depressed, demand for the firm's Mergers and Acquisitions advisory services can decrease substantially and the value or performance of the sales and trading division and the assets in the asset management business could also be affected adversely.
- Management
Jefferies' CEO Richard Handler [7] is crucial to the performance of the company. He has been at Jefferies for over 16 years. Apart from running the firm, he also actively manages three investment funds for Jefferies. This poses the question if the CEO is stretched too thin and has enough time to focus on the key issues facing the firm.
- Subprime Lending
Subprime lending refers to the practice of extending credit or loans to borrowers who fail qualify for prime or market rates due to their less than optimal credit scores. For the past decade, the interest rates associated with subprime mortgages have been about 2% higher than those associated with prime loans; the rationale is that borrowers with lower credit scores carry a higher risk of default and must therefore pay a considerable risk premium. Subprime borrowers can be extremely sensitive to interest rates. As rates rise, these borrowers, many of whom have adjustable-rate mortgages, find themselves unable to meet their debt obligations.
Jefferies is affected by the impact that worries about subprime lending are having on the overall market. In particular, the subprime fallout has scared banks, who are afraid that it is symptomatic of a broader deterioration in credit quality. As a result, lending standards have been raised in the second half of 2007 than it has been in previous years, causing the funding of M&A transactions to be more challenging - this can have an adverse effect on Jefferies' advisory business. Additionally, Jefferies has exposure to junk bond and collateralized loan obligation (CLO) markets, which were disrupted by the subprime problems. On top of this, as many financial services firms have reported losses regarding subprime mortgages, the overall equity markets have been depressed, which may have an adverse effect on the firm's sales and trading and asset management business.
Competition
Jefferies faces strong competition from many investment banks. On the advisory side of the firm, it competes with other leading middle-market investment banks, including Houlihan Lokey Howard & Zukin, William Blair & Co, Thomas Weisel Partners, and others. On many transactions, it also competes against larger investment banks,with substantially greater capital and resources[8],such as:
- Goldman Sachs Group (GS) - ranked number one in mergers and acquisitions advisory for the last 8 years running. GS is also a big player in the trading, principal investing, and asset management functions.
- Morgan Stanley (MS) - typically ranked number two in global mergers and acquisitions advisory, behind Goldman Sachs.
- J P Morgan Chase (JPM) - one of the largest financial institutions, with operations in Investment Banking, Commercial Banking, Treasury, Asset Management, Credit Cards, and Retail financial services.
Market Share
According to Thomson Financial, in Q3 2007, Jefferies ranked as one of the leading advisors in the US for M&A deals under $500m[9].
| Rank | Company | Number of deals | Market Share (%) | Value of deals (US$m) | |
|---|---|---|---|---|---|
| 1 | Houlihan Lokey Howard & Zukin | 74 | 0.9% | 6,509.6 | |
| 2 | Credit Suisse Group (CS) | 64 | 0.8% | 10,940.3 | |
| 3 | Jefferies Group (JEF) | 61 | 0.8% | 4,233.6 | |
| 4 | Goldman Sachs Group (GS) | 60 | 0.8% | 10,025.5 | |
| 5 | Citigroup (C) | 58 | 0.7% | 7,496.1 | |
| 6 | Sandler O'Neill Partners | 54 | 0.7% | 3,806.4 | |
| 7 | UBS AG (UBS) | 50 | 0.6% | 9,863.1 | |
| 8 | J P Morgan Chase (JPM) | 44 | 0.6% | 7,830.9 | |
| 9 | Lehman Brothers Fin SA (LEH) | 44 | 0.6% | 8,389.8 | |
| 10 | Keefe Bruyette & Woods Inc | 41 | 0.5% | 3,259.9 |
Notes
- ↑ JEF 2006 10k, Item I, Pg. 3
- ↑ JEF 2006 10k, Item I, Pg. 2
- ↑ JEF 2006 10k, Item I, Pg. 6
- ↑ JEF 2006 10k, Item VII, Pg. 20
- ↑ JEF 2006 10k, Item VI, Pg. 16
- ↑ JEF 2006 10k, Item VII, Pg. 20
- ↑ Jefferies Company Website: Our Firm
- ↑ JEF 2006 10k, Item I, Pg. 7
- ↑ Thomson Financial: Mid-Market M&A Review
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