Leucadia National is deviating from the playbook of the
billionaire investor Warren E. Buffett, which it has long followed,
by buying an entire investment bank, something he has never done.
For years, Leucadia National followed the investment philosophy
of Warren E. Buffett, earning the nickname "Baby Berkshire
Hathaway," after the company Mr. Buffett runs.
But the conglomerate is now deviating from Mr. Buffett's
playbook. It is buying an entire investment bank, which Mr. Buffett
has never done.
On Monday, Leucadia agreed to pay $2.8 billion for the remaining
shares of Jefferies Group. With the acquisition, Leucadia, which
already owns 28.6 percent of Jefferies, will add a growing midsize
investment bank to its eclectic holdings. Jefferies is gaining a
deep- pocketed partner to help navigate the uncertainty on Wall
Street, an environment that has humbled bigger rivals like Goldman
Sachs and Morgan Stanley.
"It allows us an even larger foundation to build our company for
three, five, seven years with a robust capital base, extremely smart
investors as our partners, and do it in a tax-efficient manner,"
said Richard B. Handler, the chief executive of Jefferies.
Independent investment banks have been a dwindling breed. Since
the 2008 financial crisis, new regulations and a sluggish global
economy have crimped industry profits. Jefferies' revenue from fixed-
income trading fell 9 percent in the third quarter from the previous
quarter, echoing a slump across Wall Street.
With profits slipping, some smaller investment banks are finding
it difficult to go it alone. Last week, Stifel Financial agreed to
buy KBW in a deal valued at $575 million. Gleacher, a boutique
investment bank, recently put itself up for sale.
"I don't think anyone would say that this is a robust period for
investment banking firms," Mr. Handler said.
Jefferies has sought to transcend its roots from a firm that
traded stocks and bonds. In recent years, the investment bank has
worked to raise its profile in areas like merger advisory, a
relatively low-cost business that does not require much capital.
The lack of complexity may be part of the appeal. Leucadia is
paying about 1.2 times Jefferies's tangible book value, a measure of
a company's worth.
Investors are not nearly as optimistic about the firm's bigger
brethren, which have significantly larger balance sheets and face
stiffer capital requirements. Goldman's stock trades at 0.9 times
its tangible book value, while Morgan Stanley stands at 0.6 times.
Jefferies does not plan to use its expanded war chest to increase
the size of its balance sheet, Mr. Handler said during a conference
call with analysts. But it could use its new financial heft to make
investments, like the $400 million lifeline Jefferies arranged to
bail out Knight Capital, a trading firm.
If the deal is approved, Jefferies will begin a new life as the
biggest division of Leucadia, a conglomerate that has little
recognition outside Wall Street but has drawn the admiration of
value investors.
In the late 1970s, Ian Cumming and Joseph Steinberg took over the
company, then a struggling specialized lender named Talcott
National. The two men, who were classmates at Harvard Business
School, renamed the firm after Leucadia, California, a seaside town.
Like Mr. Buffett, the partners invested in undervalued stocks,
building a diverse group of holdings that includes
telecommunications companies, National Beef Packing and the Hard
Rock Hotel and Casino in Biloxi, Mississippi. They even worked with
Berkshire, buying a commercial loan company now known as Berkadia
Commercial Mortgage.
But the Jefferies deal diverges from the Berkshire model. Mr.
Buffett is wary of investing in complex financial firms. More than
20 years ago, he was burned by his stake in Salomon Brothers after a
bond-trading scandal. When he more recently poured billions of
dollars into Goldman and Bank of America, Berkshire received
securities that paid out handsome dividends, rather than solely
betting the stocks would rise in value.
The Jefferies deal may be more than just a traditional takeover
play. The acquisition also provides a potential succession plan. Mr.
Cumming will retire, handing over the role of chief executive to Mr.
Handler of Jefferies. Leucadia's president, Mr. Steinberg, will
become chairman.
The teams have a long history together. Mr. Handler and Mr.
Steinberg have been friends for years, and their firms have done
business for more than a decade.
Leucadia first took a stake in Jefferies in 2008, gaining 14
percent of the company and two board seats. The two companies had
discussed tightening their bond for several years, and the outlines
of a merger took shape several months ago, according to people with
direct knowledge of the matter.
Leucadia's management was particularly impressed with Jefferies's
handling of the recent market scare. After the brokerage firm MF
Global collapsed last year, investors raised concerns about
Jefferies's holdings in European government debt. Mr. Handler and
his team quickly sold the bonds and provided regular updates on the
firm's financial health, arresting a potentially fatal stock slide.
"Their ability to manage and grow Jefferies through the elongated
financial bubble, successfully navigate the crises that followed
where others could not, and protect the firm from the attacks based
on false information exactly one year ago with deftness and grace,
should comfort all," Mr. Cumming said in a statement.
