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Raymond James Financial, Inc. : Raymond James's Morgan Keegan Deal Looking Better

02/22/2013 | 12:05pm US/Eastern
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--Raymond James's Morgan Keegan acquisition gets a second look with market's climb

--Deal could lead to earnings accretion "in the double-digit area," analyst says

--Raymond James focused on reaching expense-savings goal in late 2013, boosting advisers' productivity longer term

A rising stock market is breathing new life into Raymond James Financial Inc.'s (RJF) acquisition of Morgan Keegan & Co.

While management projected a slight earnings increase this year from the $1.2 billion transaction, which closed in April, a sharp rebound in capital-markets activity, progress on reaching expense-savings targets and a key technology integration could give a bigger jolt to the firm's bottom line.

Raymond James, which is known primarily for the roughly 6,300 financial advisers in its regional brokerage business, stands to benefit from a market rally because it collects commissions for executing customer transactions and receives fees for managing client assets. A renewed appetite for deal making among corporate clients means the firm can generate additional revenue from advising on mergers and acquisitions.

Raymond James is riding a wave of momentum: Shares have risen 27% over the past six months, reaching an all-time intraday high of $46.36 on Wednesday on a split-adjusted basis. The climb comes amid some renewed concerns about the U.S. economy that surfaced this week, stalling the market's recent momentum. In early trading Friday, though, the Dow Jones Industrial Average was up 45 points to 13926.

Analysts say the St. Petersburg, Fla., company's recent ascent is due mainly to renewed enthusiasm over the potential benefits of the Morgan Keegan deal--an announcement initially met with some skepticism because of Raymond James's conservative forecasts for both earnings and expense savings.

Some investors, including Tom Carhart, chief investment officer of South Street Advisors LLC, had doubts about the company's ability to execute a big integration.

Following the company's strong fiscal first quarter, though, Mr. Carhart, whose firm owned 143,430 shares of Raymond James as of Dec. 31, said "they seem to be more effective in merging [Morgan Keegan] into the company than I and others had thought."

According to Wells Fargo Securities analyst Christopher Harris, "Investors are revisiting the story and realizing this is a really good deal. People are saying their [earnings] accretion guidance [of 2% to 3%] isn't going to be valid anymore." Now, the projection "could potentially be in the double-digit area."

The original forecast, issued in January 2012, assumed a flat market environment and no rise in interest rates, though Chief Executive Paul Reilly told analysts at that time the transaction could yield "tremendous upside when markets improve."

The Morgan Keegan deal added roughly 900 brokers to Raymond James's private client group, a division that accounted for 63% of the company's revenue in the fiscal first quarter. Revenue for that unit climbed 35% from a year earlier.

In an interview, Mr. Reilly attributed the results to strong retention after the deal, saying "we had a lot more of the advisers stay than we thought."

Raymond James has retained 95% of Morgan Keegan brokers who were offered retention packages, better than its original 90% estimate. Such pay awards are incentives typically offered to brokers in an acquisition to keep them in place.

That early success has translated to investment banking, too. Raymond James led 37 transactions valued at $2.1 billion in 2012, according to data provider Dealogic's U.S. equity capital markets rankings, up from 25 deals worth $1.6 billion in 2011.

Raymond James, which moved the Morgan Keegan brokers to the same computer system as its legacy advisers last weekend, aims to achieve $60 million to $80 million in cost synergies as soon as the second half of 2013.

The company, which is halfway to its expense-savings goal, plans to cut some information-technology staff and shut down unnecessary data centers once it fully consolidates the computer systems. Raymond James plans to keep both legacy brokerage platforms running in the near term to ensure clients aren't affected by any potential glitches.

The company also hopes the platform conversion will help it increase annual productivity from the Morgan Keegan advisers, who do more commission-based business and typically generate roughly 15% less in revenue than its legacy employee advisory force.

Raymond James brokers manage more fee-based accounts, which are desirable because they offer stable revenue that isn't tied to transaction activity. Such trading can be lumpy depending on market conditions.

On a recent conference call with analysts, Mr. Reilly said the company can close that revenue gap, but it will take "a year or two."

(Brett Philbin covers investment banking and online brokerages for Dow Jones Newswires. He can be reached at brett.philbin@dowjones.com.)

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