Cowen Group’s plan to maintain its standing with the buyside got a boost last week when shareholders voted to approve its takeover of market maker LaBranche & Co.
The $193 million deal will double the size of the investment banking and money management firm and give Cowen technology to support a wider array of trading services. The acquisition is part of a plan, underway since last year, to diversify away from Cowen’s bread-and-butter cash equities business.
Despite exiting the market making business in the past two years, LaBranche still owns the technology to make markets. The deal will give Cowen the ability to make markets in stocks, options and exchange-traded funds in the U.S., Europe and Asia.
"LaBranche has made substantial progress in their development of proprietary information technology and electronic trading systems," Cowen chairman and chief executive Peter Cohen told analysts in May. "We can leverage that with Cowen’s existing equity and derivative sales and trading capabilities."
The acquisition coincides with a spate of recent hiring at Cowen in electronic trading, listed options and convertible bonds. On the electronic front, it brought on a three-man crew from derivatives specialist Newedge Group and also hired Doug Rivelli, a long-time electronic trading expert, from Weeden & Co.
The hires add greater heft to a part of Cowen that was languishing. Two years ago Cowen recruited an executive from Morgan Stanley’s program trading desk to grow the service.
"We will do whatever we need to do to defend our position [with the buyside] including spending some money to build out our electronic trading platform," Jeff Solomon, Cowen’s chief operating officer and head of investment banking, said at an industry conference this month. "We don’t really have much of a product offering there today."
Rivelli will co-head Cowen’s quantitative trading solutions group with Stuart Gould, the former Morgan Stanley exec.
Market Share
The flurry of activity stems from a decision by Cowen last year to expand its sales and trading platform beyond cash equities, the brokerage’s traditional strength. Given the buyside’s de-emphasis on high-touch stock trading, management believed it was necessary to expand its trading services in order to keep its head above water.
"It’s very important to build out our capacity and make sure we don’t lose our market position," Solomon said at Sandler O’Neill + Partners exchange and brokerage conference earlier this month.
While Cowen’s equities business has suffered along with the rest of the Street in the wake of the financial crisis, its problems didn’t just surface in the past two years. Since 2004, the firm’s brokerage revenues have been flat or in decline.
Its troubles made it ripe for a takeover. Ramius Capital Group, a hedge fund run by industry veteran Cohen, bought Cowen in 2009. Since the acquisition, Ramius executives have taken complete control of the firm, jettisoning many staffers in the investment bank. "The investment bank is smaller today and roughly half of the capital markets individuals are new," Sandler O’Neill analyst Devin Ryan wrote in a recent report.
The combined Cowen Group now operates two divisions: the Cowen and Co. investment bank and the Ramius hedge fund operation. Top man Cohen spent 20 years building–as Sandy Weill’s protege–and eventually running the brokerage powerhouse previously known as Shearson Lehman.
Research, Too
Besides the push on the trading front, Cowen also feels pressure to beef up its research product. At the end of last year, the firm had 27 senior analysts covering about 400 firms. One quarter of those stocks were in the healthcare industry, Cowen’s specialty. This year, the number of analysts has increased to 30, according to Solomon, and more hires are expected.
Cowen’s goal in offering more research and trading services to the buyside is so that they don’t take their business elsewhere. And by making the firm more responsive to the buyside, Cowen will, in turn, make itself more attractive to investment banking clients.
At Cowen, banking drives the bus. In order to win underwriting mandates, the firm needs to be able to place the securities with investors.
"It’s very important for us to stay inside the Top 20 in terms of the research vote and the vote in corporate access," Solomon said. "Because, at the end of the day, we’re out selling corporate finance or capital markets products."
The problem Cowen faces is one of capacity. A research department is expensive, but corporations want their bankers to cover their stocks. To make ends meet Cowen must juggle coverage of both large-cap and small-cap stocks, according to Solomon. The firm has to cover the large caps to "drive volume," but must also cover the small caps in order to win banking business. And it must be done with a finite number of analysts.
According to Solomon, many potential investment banking candidates were concerned they wouldn’t be "relevant" if Cowen did not employ analysts to cover their stocks. So, after a year spent agonizing over the issue, Cowen decided to take the plunge.
It is launching an "emerging company" research effort and is looking to hire analysts with a history of covering companies under $2 billion in market capitalization. "In doing that, we open up brand new opportunities to win business in banking and capital markets," Solomon said.
According to Sandler O’Neill’s Ryan, Cowen "has spent considerable effort better aligning its research coverage with its clients, and has been committed to trading clients’ stocks post offering." Ryan has a buy recommendation on the stock, noting the LaBranche deal "moves Cowen into the next echelon of investment banks."
