Jefferies reorg: where's the beef?
With dead eyes, the procession of defeated beasts shuffled forwards, waiting for the axe to fall… no, not Deutsche Bank’s fixed income traders, facing yet another round of restructuring and redundancies but a possible scene from the activities of National Beef, the business that, until recently, shared a corporate roof with Jefferies. Both were part of the conglomerate Leucadia Corporation, which also owned auto dealership Garcadia with the Garff family.
It’s easy to mock conglomerates, and even Rich Handler and Brian Friedman, chief executive and president of Leucadia, described its holdings as a “highly diversified, but relatively random, collection of assets”.
Corporate finance lore suggests shareholders dislike these structures, preferring to manage their own diversification, and deploy capital into discrete, identifiable businesses, rather than writing blank cheques for holding company acquisition sprees. All else being equal, cutting up a conglomerate ought to unlock value. There are no synergies, beyond steak dinners for bankers, in holding a beef operation and broker-dealer under the same roof.
This doesn’t really account for the success of Warren Buffett’s Berkshire Hathaway, but the man deserves his own chapter in the corporate finance textbooks.
Either way, Leucadia is set to rebrand itself Jefferies Financial Group, a newly focused and directed financial services group, which will continue to have as its main holding the Jefferies we’ve all come to know, and in some cases, perhaps even love.
But it also comes with an extra kicker, in the shape of a little more merchant banking firepower for the group to throw around. Pre-crisis, securities firms extended their tentacles into all sorts of businesses.
Sometimes these were businesses acquired through loan defaults, sometimes they were co-owned market infrastructure, but fairly frequently, they were simply good trades which banks spotted and jumped into, acting like the private equity firms that were some of their biggest clients.
This was always somewhat questionable. Investment banks, especially pre-crisis, ran monumentally high leverage levels compared to ordinary corporates. Running what was effectively a private equity business funded by short term debt was never such a strong idea.
Post-crisis, regulation came down heavily on attempts to run internal private equity or hedge fund business, aided partly by the conversion of all the biggest pre-crisis securities firms into bank holding companies to access emergency liquidity.
Some firms, notably Goldman, dragged their feet about disposing of these businesses — a strategy likely to be vindicated by Trump administration's zeal for deregulation — but most dumped the extras fairly quickly.
But running a private equity business not too far away from an investment bank actually makes a lot of sense. PE firms need M&A advice, debt, the distribution of risk, and market intelligence, while investment banks need deal hungry clients to be active. There is at least as much sense in that as there is in housing asset management in the same group as corporate finance, and some firms, such as Macquarie, have made an art form of blending PE with IB.
That’s why the new look Jefferies ought to be well placed. Now free of worrying about how long to dry-age its rump for, it has the firepower to renew its merchant banking activities, which should in turn fuel its investment bank’s continued expansion.