When former LPL CEO Mark Casady and his board of directors retained Goldman Sachs to explore strategic options earlier this year, they were looking to find either a strategic buyer or a financial buyer willing to pay between $42 and $50 a share, preferably on the high end of that range. Goldman reportedly sought out several big players in the retail brokerage space, including Merrill Lynch/Bank of America, Ameriprise and UBS, but in the end, none were interested.
Interviews with investment bankers in the M&A and private placement world said that the only interested parties were financial buyers from private equity firms, including KKR. But none were willing to pay more than $38 or $39 a share. Concerns about the firm's future profit margins, the need for continued investments in technology, and an increasingly difficult regulatory environment made the nation's largest independent brokerage firm less attractive than it might have been a few years ago.
Casady was credited with leading LPL after it did a leveraged buyout in 2005 financed by Texas Pacific Group (TPG) and Hellman & Friedman and with guiding it through the Great Recession. During the period up until LPL's initial public offering in 2010, it made several successful acquisitions and attracted some of the top management in the industry.
Unlike many broker-dealers, Casady also adopted a pro-consumer position and embraced the DOL's proposed fiduciary rule. Given that LPL is making a serious push into the retirement plan business, supporting the rule was a logical move.
Attracting top talent was easy for a company planning to do an IPO, but within a few years after LPL went public in 2010 and managers became vested in their stock options, turnover in the executive suite accelerated dramatically. As the nation's largest independent B-D with a strong balance sheet, LPL also became a favorite target of regulators and, as Finra and various states sought to display they were getting serious in a post-financial crisis world, LPL's fines starting piling up.
These were among the factors that made the firm less attractive to potential buyers. Sources said the board was hoping to get an acquirer to pay $50 a share but would have settled for an offer in the low- to middle-forties per share.
If the incoming Tump administration follows though on its promise to deregulate financial services, LPL could become a more attractive investment and possible acquisition candidate down the road. This potential scenario probably was not lost on LPL directors when they decided to take the firm off the market last month.
A valuation of $42 a share would have been in the range of the $44.50 price that LPL had paid TPG, its biggest shareholder, to repurchase shares in late 2015. The unusual way the buyback was structured last December infuriated many shareholders, including activist hedge fund Marcato Capital, and proved to be Casady's undoing.
Rather than repurchase most of the shares in the open market as most companies do, LPL dealt primarily with its largest shareholder. In some investors' view, the firm cut "a side deal," benefiting only one party while freezing out the rest. Casady was ill-advised, according to investment banking sources.
It was estimated that more than 75 percent of the $250 million in shares repuchased were bought from TPG, and much of the money was borrowed. Ironically, the significant additional debt LPL assumed in the buyback made it less attractive to potential acquirers.
When LPL was unable to find a buyer willing to pay the same $44.50 a share price Casady negotiated with TPG or even close to it, Casady's position became difficult to sustain. It was anticipated that the firm could face serious challenges from further activist investor moves. These could include non-binding but publicly critical shareholder resolutions across a range of issues during next year's proxy season.
Consequently, the board decided it needed to turn a new leaf and install its president Dan Arnold as chairman and CEO effective January 3. Sources in the investment management world said Arnold had the respect of institutional investors.
Some LPL advisors and others think it was TPG that was particularly interested in pushing LPL to go public as early as possible. They cite the fact that the private equity firm was deeply embarrassed in 2008 when it invested $1.35 billion in Washington Mutual that April only to see the investment turn worthless when the financial crisis worsened five months later and Washington Mutual became completely insolvent. When LPL went public in 2010, TPG was able to show investors it was capable of making good investments in financial services companies.
One of the first questions Arnold will face is whether to designate a second in command. A number of LPL reps were rooting Andy Kalbaugh, managing director in charge of relationship management and business consulting. Kalbaugh is highly regarded for his ability to analyze the offices of LPL advisors and help reps dramatically improve their productivity.
Another possible candidate is Bill Morrissey, managing director in charge of recruiting and branch development. As head of recruiting, Morrissey is the executive who convinced many advisors to join LPL and is also very well-liked among the firm's advisors. Both Morrissey and Kalbaugh are divisional presidents and are said to get along well with Arnold.