|Jefferies: 'Mini' Berkshire or 'Bizarro' Buffett?|
Antoine Gara - The Street NOV 13, 2012 2:48 PM
For Jefferies, the biggest question may be whether CEO Handler can handle an expanded job.
Or, as in the famed comic's storyline, the deal simply molds a "Bizarro" Buffett with a company that becomes the antithesis of the investing Man of Steel's performance.
After Monday's deal, Jefferies employees and shareholders are likely still trying to figure out what exactly they are getting in the share combination with Leucadia National and no one is likely to be asking that question more than CEO Handler. He was one of the Jefferies' largest independent shareholders prior to the deal and will be tasked with managing the investment bank and a conglomerate with operations spanning the timber, energy, gaming, real estate, and health care industries, among others.
Meanwhile, for Wall Streeters, Jefferies sale to Leucadia National highlights a score of questions overhanging the industry.
Does the deal mark the end to the full-service independent investment banking model? That's especially true as rating agency downgrades compel Wall Street firms like Jefferies and Morgan Stanley
Jefferies partnership with Leucadia National certainly raises big questions for Wall Street, with KBW analysts calling the deal "defensive," and ratings agency Moody's taking a wait and see approach on upgrades, which it could pull the bank from its near speculative grade rating of Baa3.
The more immediate question is whether with Jefferies' operations and management, Leucadia will continue to draw comparison to Warren Buffett's style and Berkshire Hathaway's earnings consistency.
Leucadia National, co-founded in the late 1970s by Ian Cumming and Joseph Steinberg, has grown through acquisitions from a small financial services specialist into a conglomerate with scores of operations and annual revenue in excess of $1.5 billion. The company's structure and long-term perspective of its founders often gives way to comparison to Warren Buffett's Berkshire Hathaway, a conglomerate with earnings so diverse it's seen as a proxy for corporate America. A look at Leucadia National's earnings and even the terms of Monday's deal signal that while the company is diverse and has grown at a Buffett-like clip, it is no Baby Berkshire Hathaway.
Unlike Berkshire, Leucadia National wasn't able to weather the financial crisis without posting an annual loss. Meanwhile, the company's shares are roughly half what they were prior to the crisis, while Berkshire shares have gained back most of the ground they lost since 2008.
In fact, a key piece of Monday's acquisition of Jefferies' remaining shares -- Leucadia already owned 28.6% of the company's stock prior to Monday -- is a multi-billion dollar net operating loss carry forward that is capitalized on Leucadia's balance sheet as a result of crisis time losses.
The New York Times highlights that Monday's deal is a deviation from Leucadia's course of being a "Baby Berkshire Hathaway" because Buffett has been reluctant to take direct ownership or even the common stock of investment banks after a failed foray into the business by way of a late 1980s rescue of bond trading pioneer Solomon Brothers.
The more pressing question for investors and Jefferies employees is whether Handler is ready for comparisons to Buffett.
If managing an investment bank is hard enough, how will Handler maintain his strong stewardship of Jefferies -- the firm survived the financial crisis without a bailout -- while also managing Leucadia's disparate set of operations?
To Handler's credit, Jefferies' partnership with Leucadia culminates in a remarkable turnaround for the investment bank from where it stood at this time last year. In the wake of late October 2011 collapse of brokerage MF Global (FRA:E37) as the debt crisis in Europe escalated, some investors and independent rating agencies were all but ready to write Jefferies off.
Meanwhile, under Handler's leadership, the bank has been one of the fastest growing businesses on Wall Street through the crisis. Bloomberg reports that Jefferies has boosted headcount by over 60% in recent years, as it grows operations to resemble the likes of Goldman Sachs
Peter Hall, a partner at investment banking boutique The Valence Group, highlights the fact that running an investment bank and a holding company could stretch Handler's talents. Meanwhile, he raises the question of whether Leucadia's stock will be attractive as bonus compensation for investment bankers, who might want to see a direct payoff from their Wall Street efforts.
Sachin Shah, a special situations strategist for Tullet Prebon, questions whether there is any synergy to the merger of Jefferies and Leucadia National, as both companies stressed on an analyst call.
"From my perspective, they weren't able to quantify the synergies," says Shah, after participating in the call. He sees the merger as evidence of the uncertainty surrounding the investment banking industry, amid regulatory reform and an uncertain global economic outlook. "No one really knows what is going to happen in the industry in the next 12 months," adds Shah.
KBW analyst Joel Jeffrey called the deal "defensive" in a note to clients and highlighted that while Leucadia's support and NOLs are likely to bolster Jefferies' balance sheet, the firm is unlikely to grow assets far beyond present levels, in fear of new regulatory scrutiny.
As CEO Handler takes the reins of what's likely to be a stabilized investment bank and a corporate conglomerate, Wall Street might do better to dwell on whether he can perform like the next Buffett rather than whether Leucadia continues to be a "Baby Berkshire."