Mid-Tier Brokerages Headed to M&A Cotillion

A wave of corporate mergers keeps generating fat fees for investment bankers. Ironically, the brokerage sector has been only a modest player on the merger front.

But that state of affairs may begin to change in the coming months, as midsized brokerages start to draw attention from larger investment firms, similar-sized brokers and foreign banks.

"We know the economics of these consolidations work,'' says Brad Hintz, a brokerage analyst with Bernstein & Co. "A large retail operation generates higher margins than a medium-sized one.''

Some midsized brokers that could be ripe for a merger or acquisition include Oppenheimer & Co., RBC Dain Rauscher, AG Edwards(AGE) and Raymond James(RJF).

Acquiring a midsize brokerage presents an attractive entry point into the U.S. market for foreign banks. For instance, Royal Bank of Canada(RY), Dain Rauscher's parent, has made no secret of its desire to expand its U.S. brokerage operations, say Wall Street analysts and traders.

One thing that's been holding these deals back is the big run-up in the stock prices of many small and larger brokerage firms. Over the past year, the Amex Broker/Dealer Index is up 78%. Every few days, the index seems to trade at a new all-time high.

Some on Wall Street say a pause in the surge in brokerage stocks -- even a modest decline -- might not be so bad, as it would make all-stock acquisitions more attractive.

Indeed, there are signs that some brokers are beginning to shop around.

Over the past several months, Oppenheimer has received preliminary inquiries from at least two similarly sized brokerages about the possibility of a merger, say people familiar with Oppenheimer. Traders say speculation about a potential deal is one reason shares of Oppenheimer have surged 30%, or $6, to $26.47 in the past six weeks.

The two brokerages that have approached Oppenheimer about a possible deal, sources say, are Friedman Billings Ramsey(FBR) and Dain Rauscher. A Dain Rauscher spokeswoman declined to comment. An FBR spokeswoman didn't return a phone call.