Stifel sees financial-industry slump as opportunity to grow

While most of his competitors are licking their wounds from the financial crisis, the Stifel Financial chief executive has bet shareholders’ money on acquisition after acquisition.

When Kruszewski closes the books on last week’s deal to buy KBW Inc., Stifel will be seven times as large as it was in 2005, when the buying spree began. It has doubled in size since the crisis year of 2008, while many investment firms have been forced to shrink.

“This is an industry going through tremendous turmoil,” Kruszewski acknowledges, “but I’m a contrarian. I don’t think the world is coming to an end. Last I checked, capitalism is alive and well.”

He’s betting that, eventually, capitalists will need help raising more capital. And when they do, he wants Stifel to be the firm they turn to.

That’s why he has bought firms like Thomas Weisel Partners, a West Coast firm with a long list of technology clients, and KBW, a New York firm that could be thought of as the bankers’ banker.

KBW has struggled since the recession, losing money in five of the past seven quarters. Its core customers, small banks and insurance companies, have struggled with asset-quality problems and new regulations.

But that business won’t be down forever. Acquisitive regional banks will eventually work through their bad loans and be in a position to buy their smaller competitors. As merger activity picks up, so does revenue for firms like KBW and Stifel.

For now, KBW’s problems mean that Kruszewski can buy a premier firm at a bargain price.

“KBW is a marquee name, but its business has simply evaporated in the past four years,” says Michael Flanagan, an independent brokerage industry analyst in Philadelphia. “We see it as the shell of a once great and prominent firm that will eventually regain its stature.”

Although he’s made about one sizeable acquisition a year since 2005, Kruszewski also has passed on some deals. Stifel dropped out of the bidding for Memphis-based Morgan Keegan this year because, Kruszewski says, “I didn’t think we could effectively integrate it.”

When he does find a fit, he makes sure the firm’s best assets don’t walk out the door. At KBW, executives who held restricted stock will now own Stifel shares, and 85 key people have signed retention agreements.

“I’m a finance guy; financial engineering is easy,” Kruszewski says. “Making sure the people fit in, that’s where the rubber hits the road.”

Flanagan is impressed with Stifel’s record of making deals and making them work. “Opportunistic has become Ron Kruszewski’s middle name,” he says. “Ron has done many good deals where others never bothered to look.”

Shareholders have benefited from the buying, as has St. Louis. Stifel’s share price has more than tripled in the past eight years, while the broader market is up less than 20 percent. The firm employs 1,200 people in the St. Louis area, up from just 500 in 2004. Kruszewski says Stifel is still looking to add people here.

Will there be more deals? Kruszewski is noncommittal, but he says the firm will remain “counter-cyclical,” expanding when markets are tough but refusing to pay high prices when things get frothy.

If you believe the forecasts, the economy of 2013 will be only slightly cheerier than that of 2012. It should continue to provide plenty of opportunity for a contrarian like Kruszewski.