It's true that the financial services industry is in the throes of great upheaval and change: Merrill Lynch was forced to sell itself, Lehman Brothers is in bankruptcy protection, AIG was saved by the government and, well, you know the rest. Yet, behind that noisy backdrop, Miami-based investment bank Ladenburg Thalmann, founded in 1876, is remaking itself, too. Ladenburg, perhaps best known for its small company IPOs in the 1990s, is morphing from an investment bank that raises money for “blank check” companies into a player in the independent broker/dealer space.

On the brink of collapse just a few years ago, Ladenburg has since climbed out of its hole with the help of billionaire pharmaceutical entrepreneur Phillip Frost, who became chairman of the board in 2006. (Granted, after two years of profits, the firm has been unprofitable so far in 2008.) In part with Frost's financial backing, Ladenburg has acquired two independent b/ds — Investacorp and Triad Advisors — over the past nine months, bringing its rep count to about 900 and adding annual revenues of $123 million. That puts it in the top 25 independent b/d networks in the country (by rep count), and management says it's open to buying more.

“Ladenburg is now one of the aggressive acquirers in the independent arena. There is little logic to them buying 1,000 to 2,000 reps. Look for them to grow about 5,000,” says Chip Roame, founder of Tiburon Strategic Advisors, a financial services consultancy.

That Ladenburg would want to diversify out of investment banking seems obvious enough. (Even Merrill Lynch has suddenly “diversified” itself by rushing into the arms of Bank Of America.) But why independent b/ds? After all, independent b/ds have notoriously slim profit margins. Ladenburg President and CEO Richard Lampen has explained that the firm was attracted to independent retail brokerage because, with its recurring asset-based fees, it provides a steadier stream of revenue in volatile markets than investment banking does. In fact, the foray into independent b/d land may also be an attempt to find a distribution outlet for some of its investment banking products, say consultants. After all, Ladenburg is planning on letting the two b/ds operate independently and is apparently not seeking cost-cutting consolidation.

Ladenburg is truly a chameleon. In the 1990s, it was known for its IPOs of speculative companies. And, in recent years, it has found a niche in so-called blank check IPOs, or SPACs (Specified Purpose Acquisition Companies). In general, SPACs are development-stage shell companies with very few or no operations that are formed to raise capital through an IPO. The proceeds of the IPO are then used for merger and acquisition opportunities.

According to Ladenburg, since 2005, it has led or co-managed 35 SPAC offerings, raising approximately $7 billion. SPAC offerings helped bump investment banking fees by 199 percent, or $37 million, in 2007. That year, Ladenburg acted as either a leader or co-manager on 19 offerings.

“Financial advisor forces — captive or independent — can sometimes be profitable on their own, but always serve as a way to distribute products like IPOs, bonds, mutual funds, annuities and insurance products in which profits are captured in other departments of the investment bank,” says Roame, “So, if one's goal is simply to gain distribution, the obvious new strategy is to enter the independent advisor market.”

ROCKY ROAD

Whatever its strategy, Ladenburg has come a long way in a short time. Indeed, it's only been a few years since the firm's last earnings disappointment. It was so bad for Ladenburg back in 2004 that it was nearly delisted from the American Stock Exchange. The company suffered losses totaling nearly $100 million in 2001 through 2005. Thanks to the SPAC deals, the firm has recently emerged from a bad run.

Enter Philip Frost, an entrepreneurial dermatologist who's ranked high on Forbes list of “Richest Americans.” (Frost is also vice chairman of the board of generic drug manufacturer Teva Pharmaceutical Industries.) Actually, Frost, the company's largest shareholder, started loaning Ladenburg money back in 2001 after it went public (ticker: LTS). The firm made him chairman of the board in 2006, and that year, the firm posted a profit. Frost is now one of the driving forces behind the firm's turnaround. In fact, one of Frost's affiliate companies extended a five-year $30 million revolving credit facility to Ladenburg to purchase its first independent b/d. By 2007, revenue had doubled to $96 million versus the previous year, and net income had almost doubled to $9.4 million.

On October 22, 2007, Ladenburg announced it had made a deal that would almost double its revenue. Ladenburg scooped up its Miami neighbor, Investacorp, an indie b/d with 500 reps, $8.5 billion in client assets under management and revenues of $63 million in its fiscal year ending June 30, 2007. The deal was worth $45 million, including $25 million cash paid to Investacorp's CEO and another owner, $15 million in cash payable over three years and $5.1 million to the sellers as a reimbursement of the firm's pre-existing net worth.

At 71 percent of Investacorp's revenue, the price Ladenburg paid was pretty dear. Most broker/dealers usually fetch anywhere between 20 percent to 40 percent of a firm's revenues. That said, LPL Financial sold a 60 percent stake in itself to two private equity firms in 2005 at a price of around 2.5 times gross revenues, a record valuation for the independent b/d industry.

Pat Farrell, Investacorp's new CEO and formerly its CFO and COO, says the deal will provide Investacorp with much needed capital for growth. “This business is much more margin sensitive than it used to be,” Farrell says. “We needed a sizeable investment in order to keep growing the way we had been.” (Of course, it had a motivated seller — Investacorp's then-CEO, Bruce Zwigard, 60, was in search of an exit strategy.)

Dennis Gallant, principal of consulting firm Gallant Distribution Consulting in Sherborn, Mass., says, “There are a lot of independent firms with thin margins looking for capital investment. They are always asking themselves, ‘How do we scale up? If we can't acquire, then should we look to be acquired?’ If you don't want to lose your culture, this may be a good thing.”

Nine months after securing the deal with Investacorp, Ladenburg announced the acquisition of Triad Advisors, a Norcross, Georgia-b/d with 380 advisors, $9 billion in client assets under management and $60 million in revenues. Unlike Investacorp, though, Triad's CEO was not looking for an exit. Mark Mettelman, president and CEO of Triad, says Ladenburg offered an opportunity for more resources without threatening its corporate culture. “We had no interest in changing our name, our management team or severing the relationships we'd developed,” says Mettelman. “Ladenburg is respectful of that and they see that our continued success is based on those relationships and based on running our business the way we have been.”

Ladenberg CEO Lampen says he's not looking to change the core operations of the independent firms his company buys. “These firms are already successful. They are already very profitable. We're just looking to provide extra resources to help them even further,” Lampen says. Both Triad and Investacorp continue to operate independently, their respective CEOs say. The only changes its advisors may notice are a few technology and product upgrades such as web-based portfolio accounting and performance reporting solutions.

A MORE DIVERSE COMPANY

In May 2008, Ladenburg completed the acquisition of Punk, Ziegel & Company, a boutique investment bank with some retail advisors, along with its outspoken financial services analyst and media darling, Dick Bove.

Some of the resources Ladenburg is offering Triad and Investacorp reps include a broader asset management platform and programs, access to capital markets, investment banking products and institutional research. “We now have access to research that you only get at larger firms,” Farrell says. “And every now and then, our reps have clients who need to sell a business. Ladenburg is in the middle market for M&A work, so that's one more resource for our advisors to reach into.”

Ladenburg's acquisition run may continue. Lampen declines to say much about any potential upcoming deals, but says, “If things make sense, then we would definitely have interest in additional acquisitions. People should look at the firms we've already bought to get an idea of what we are looking for,” he says. (Both indie firms that Ladenburg has acquired have at least $60 million in revenue and at least 350 reps.)

Will the firm's current bet on independent brokerage pay off? It just may if Ladenburg executives allow the b/ds to do their own thing, as they have said they would. After all, independent retail brokerage is a different monkey from investment banking: Retail advisors pride themselves on owning the client relationship and, largely, running their own show. As an executive at one of the b/ds acquired by Ladenburg puts it, “In general, the mentality of an investment banking firm by nature is transaction oriented. On the independent b/d side, it's much more focused on long- term relationships.” Of course, this may be more perception than reality; underwriting securities issuers and advising on M&A deals also depends upon building relationships. But perception does matter.

Ladenburg, of course, says it has no intention of cramming its products down the throats of its independent firms. But it wouldn't be a novel business strategy. Like the first group of independent b/d acquirers — insurance firms like AIG and ING — Ladenburg may also want them for product distribution purposes, Roame reiterates. While AIG and ING sell mutual funds, insurance and annuities through its b/ds, Ladenburg will probably distribute its IPOs, Roame says.

Meanwhile, at least one b/d executive familiar with Ladenburg's newfound interest in the independent space agrees that it's distribution they want. “They are trying to create critical mass and generate revenue.” He points out that among Ladenburg, Investacorp and Triad and their separate clearing firms (there are four clearing firms between the two) there is little room for efficiency.

Ladenburg Thalmann was not completely barren of retail financial advisors when it started making acquisitions. The firm has roughly 50 or so of its own brokers, mostly located in New York City, who cater to high-net-worth individuals. That side of the business includes $1.3 billion in client assets and approximately 20 percent of annual revenue. Ladenberg's Lampen says his firm is still interested in growing the employee side of retail brokerage, but that it is expecting the real growth and scale to come from the independent b/d side of the business.

THE BENEFITS

For the acquired advisors, there are benefits to Ladenburg's backing: Investacorp won a team of two advisors from Ameriprise last month. Ted Jenkin and Kile Lewis, who run oXYGen Financial, say they would not have joined Investacorp if it weren't for Ladenburg. “We wanted to be able to have private offerings, access to private equity and the ability to help our clients take their small businesses public,” says Jenkin.

Then there's Steve Schou, an Investacorp advisor who has been with the firm for 18 years and was “real close to making a move to another firm.” He says Investacorp couldn't provide the technology he needed for his firm, which manages $300 million in client assets. But news of Ladenburg's purchase of Investacorp stopped Schou in his tracks. “Deep-pocketed Ladenburg opened up an avenue of technology and client services that we've always been pushing for. It's not that Investacorp didn't know we needed the technology upgrades, but there just wasn't the capital to provide it,” Schou says. Schou's firm, Klaas Financial based in Loves Park, Ill., is now digging into paperless capabilities that weren't available prior to the Ladenburg deal, as well as Ladenburg's third-party money manager platforms. “The technology is allowing us to actually shift the duties of our staff from the back office to more client-focused areas. We're able to build our client relationships, so this deal was a blessing in disguise,” he adds.

For firms like LPL, Advanced Equities and Ameriprise, known as the big three independent b/d acquirers, Ladenburg may be one to watch. After all, this new kid on the block is financially backed by billionaire, Frost, and wants to acquire the same types of firms they do.

LADENBURG'S POSSE

2007 Revenue Retail Client Assets Retail Advisors
Ladenburg Thalmann $96 million $1.3 billion 50
Investacorp 63 million 8.5 billion 500
Triad Advisors 60 million 9 billion 380
Source: Ladenburg Thalmann