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After long arranging mergers and acquisitions for companies that were too small or controversial for the likes of Goldman Sachs (GS), Jefferies is trying to elbow its way in on the biggest deals.
Hoping to improve on its 23rd-place ranking in mergers and acquisitions, the New York-based investment bank has been on a hiring binge this year, drawing pedigreed dealmakers from Credit Suisse, Citigroup (C), Blackstone (BX), Barclays (BCS), and other big firms. Among its recent recruits: Citigroup's Michael Tedesco, who represented Affiliated Computer Services when it was sold to Xerox (XRX) for $7.6 billion in February, a deal bigger than any technology transaction Jefferies has done. It has also signed Barclays' Frank Cicero, a banker to financial companies, and Blackstone's David Bradley, a chemicals specialist.
They're being drawn by the chance to work for a company that's expanding in a downturn—and the prospect of getting 85 percent of their compensation in cash. "Anyone who's followed the market over the last 18 months has seen Jefferies at the forefront of talent acquisition," says Thomas Kade, who runs recruiting firm TBK Associates. "They are making every effort to play at the upper echelon of the market."
Chief Executive Officer Richard B. Handler, 49, is able to bulk up now because he shunned the kind of big bets on mortgage securities that put Lehman Brothers in bankruptcy and cost Bear Stearns and Merrill Lynch (MER) their independence. Bigger investment banks, such as UBS and Citigroup, cut staff and bonuses after accepting government rescues and increased the share of compensation paid in stock. Jefferies boosted head count in investment banking 50 percent, to 600, in 2009. Figures for this year are not available. "Many quality professionals who are unsatisfied or disillusioned at the largest commercial banks come to Jefferies because they can accomplish everything their client requires," says Handler.
Until recently, Jefferies called itself a "leading middle-market" investment bank, industry jargon for a house catering to companies with less than $1 billion of revenue. It also took on clients others wouldn't touch, such as Carl Icahn, the billionaire activist investor famed for battling blue-chip corporate boards. Its $4.2 billion market value reflects its position in the Wall Street pecking order: Goldman Sachs has a market value of $89 billion.
The hiring surge began last year when Jefferies lured Benjamin Lorello, 57, and about three dozen of his colleagues from UBS after the Swiss firm slashed its bonus pool 80 percent. Lorello is now head of investment banking and capital markets. Members of his team advised drugmaker Sepracor on its $2.5 billion sale to Japan's Dainippon Sumitomo Pharma last year, which was bigger than any health-care deal Jefferies had previously completed. Last month they notched Jefferies' first assignment for Pfizer (PFE) on its acquisition of FoldRx Pharmaceuticals in October. "Ben is the kind of guy who wants to know why his bankers haven't gone after every deal the competition picked up," says Richard Lipstein, a recruiter at Boyden Global. Lorello would not comment.
It may be a while before the hires pay off. Tedesco, Cicero, and Bradley haven't started work yet, and bankers typically take months before earning fees for their new employer. The average corporate takeover Jefferies advised on in 2010 was worth $505 million, compared with $1.74 billion at Goldman Sachs, according to Bloomberg data. Morgan Stanley (MS) holds the top ranking in M&A this year, advising on $379 billion in deals, while Jefferies can claim only $37 billion. "It's going to be difficult for anyone" to unseat the top investment banks, says Ada Lee, an analyst at Morgan Joseph in New York, who rates Jefferies shares "sell."
Still, Jefferies earned $260 million in fees this year for advising on mergers and other corporate activities, on track to make 2010 the firm's biggest year on record. Advice on takeovers and restructurings contributes 17 percent of net revenue at Jefferies, which also underwrites and trades securities and manages convertible bond funds. Jefferies shares returned 2.6 percent including dividends over the past three years, beating the two biggest remaining investment banks, Goldman Sachs and Morgan Stanley.
The bank has long been on the lookout for opportunities its rivals ignored. Boyd Jefferies, who founded the firm in 1962, made his name by helping clients trade blocks of shares outside of the stock exchanges. While the practice rankled his more established peers, it eventually became commonplace. (Boyd Jefferies resigned from the firm in 1987 and pleaded guilty to two felonies in connection with the Ivan Boesky insider-trading investigation.)
When junk-bond powerhouse Drexel Burnham Lambert sought bankruptcy protection in 1990, Jefferies hired 60 of its bankers, including future CEO Handler, to expand into high-yield finance. After the tech bubble burst and FleetBoston Financial shuttered its tech-focused Robertson Stephens investment bank in 2002, Jefferies scooped up 21 bankers. Now the financial crisis may prove to be its biggest growth opportunity yet.
The bottom line: Stepping up where rivals are pulling back, Jefferies is making a bid to get in on the biggest mergers and acquisitions.