Keefe Bruyette & Woods Calls Off IPO

When specialty investment bank Keefe Bruyette & Woods cancelled its IPO Monday morning, some Wall Street wags figured there was only one reason for such a move -- the firm must be entertaining a takeover offer.

The New York-based firm, a leader in bank-related merger advisory, was planning to sell about 4.7 million shares for 17 to 19 per share through underwriters led by Donaldson Lufkin & Jenrette (DLJ).

A short memo sent to the underwriters and to firm employees stated the board had "elected to cancel" the IPO and would "review all other strategic alternatives," according to two people who saw the memo. KBW's board met late last week and decided to cancel the deal, says one KBW employee, requesting anonymity. Firm officials didn't return two phone calls.

"It came as a surprise, especially since the road show went so well," says one person close to the deal. The IPO was to be priced this week, possibly Monday or Tuesday.

In the past KBW has negotiated for possible combinations with larger financial entities, such as commercial banks and insurance companies, says the person. If KBW is involved in another deal, it is likely to happen soon, he says, because the board wouldn't have made the bold move of canceling the IPO without a serious offer in hand. About half the shares in the offering were coming from a group of selling shareholders, which included several trusts operated on behalf of board members.

"This looks like it was 'selling shareholder' driven," the person says. This leads to the logical speculation that company insiders may be considering another deal that could ostensibly value the firm higher than would an IPO.

"I don't know if the board is considering a bid for the whole company or just the part they own," he says. The 10-person group of selling shareholders holds about 48% of the company, a stake that was going to be reduced to about 29% in the IPO, according to the most recent amended prospectus.

"That's what I'd assume, definitely," says Bjorn Turnquist, an analyst for SNL Securities in Charlottesville, Va. "I mean, Goldman [Sachs] went public at this time so I think the market may be right." If there is a merger deal in KBW's future, Turnquist guesses that a large commercial bank would be the most likely acquirer, although he declined to name any likely suitors. "You should look at who would want to compete with the First Unions (FTU) of the world."

However, not all observers were convinced the delayed IPO meant there was a new deal on the horizon. Nancy Bush, co-director of research for Ryan Beck & Co., says KBW could have delayed its IPO simply because it didn't get the price it was after. Indeed, the firm pulled a previous IPO bid off the table during the market turmoil last October.

"Bank stocks, and the entire sector in general, is not doing that great, and any firm tied so closely into that may have thought this was not the best time to go public," Bush says.

KBW, known as a quality research house in the financial sector, has consistently been listed high on the Street's M&A advisory rankings, through volume if not individual blockbuster deals. The firm recently represented State Savings Bank, of Columbus, Ohio, in its sale to Fifth Third Bancorp (FITB) of Cincinnati. Not household names, but it was a $900 million deal. KBW also is working with Mason-Dixon Bancshares (MSDX) in its sale to BB&T (BBT).

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