Keefe, Bruyette Joins Bevy Of Boutique Bank IPOs
BY AMY REEVES
INVESTOR'S BUSINESS DAILY
Posted 11/6/2006

THE BUZZ

It's been a long road to the stock market for KBW.

The boutique investment bank, better known as Keefe, Bruyette &
Woods, first filed to go public in the heady market of 1999. It withdrew its
plans after its then-chief executive was arrested for passing inside
information to his girlfriend.

Then in 2001, a third of the firm's work force was wiped out in the attack
on the World Trade Center, including more than half the board and a co
CEO.

Still, the little bank soldiered on. Surviving CEO John Duffy has
continued to lead the company and expand it into new sectors. The
employee count today is nearly double its pre-9/11 level.

Now the timing appears to be in KBW's favor. A booming merger-and
acquisition market has inspired three other boutique banks to go public
already this year: Thomas Weisel Partners, (TWPG) Cowen Group
(COWN) and Evercore Partners. (EVR)

Francis Gaskins, president of IPO Desktop, says KBW is distinct from
the others for its concentration on the financial services industry and its
prominence.

"KBW's more focused," he said. "They have a credible reputation in their area of specialty. They have branding, which they've earned."

THE COMPANY

Keefe, Bruyette & Woods was founded in 1962 and initially focused on
the bank and thrift sector. The financial services industry still provides a
large chunk of its clientele, but it has diversified considerably. It still
mainly targets small- to mid-cap companies.

The current holding company was created in August 2005.

For the last three years, KBW has led the field in the number of mergers
and acquisitions it has formally advised. Some of the larger deals it's
worked on include Capital One Financial's (COF) buyout of North Fork
Bancorp, Bank of America's (BAC) purchase of MBNA, and Texas
Regional Bancshares' (TRBS) pending sale to BBVA. (BFR)

For the last two years KBW has also managed more initial public
offerings and follow-on offerings than any other company.

Investment banking provides about half of KBW's revenue. Most of the
rest comes from the commissions it draws from equity and fixed-income
sales and trading. It also draws some income from investment advisory
fees.

The company opened an office in London in 2004. It sees Europe as a
major opportunity for growth.

About 300 of KBW's 430 employees own stock in the company. After the
IPO, all of them will.

RISKS/CHALLENGES

KBW faces significant competition. On the banking side it competes with
a large number of other investment banks, many much bigger than itself.
On the trading side, it faces rival traders as well as alternative trading
formats that put pricing pressure on commissions.

The change in stock ownership after the IPO will increase employee
ownership and break the strict tie between stock ownership and
employment. This gives workers less incentive to remain with the
company.

KBW's fortunes are still tied to the financial services industry, which is
itself vulnerable to larger economic conditions and interest rates. The
current M&A boom is several years old, and historically that sector is
cyclical.

The company commits its own capital to some investment banking and
trading activities, exposing itself to potentially greater losses if they fail.

THE RESULTS

KBW has seen steady revenue growth the last five years, reaching $308
million last year. Net income, however, declined in 2004 and 2005 as the
company invested in building out the business.

That turned around this year; net income in the first half nearly tripled to
68 cents a share. In the second quarter, income rose from 11 cents to 31
cents a share.

USE OF PROCEEDS

KBW expects to net $67.3 million from the offering of 3.75 million shares.
Shareholders will sell an additional 2.7 million. It does not have any
specific plans for the money.

THE MANAGEMENT

John Duffy
Chief executive and chairman
Joined the company in 1978 and attained his current position in 2001.
Graduated from the City College of New York.

Andrew Senchak
Director, vice chairman, president and co-head of investment banking
Joined in 1985 after teaching economics at Rutgers University. He
became head of the investment banking department in 1997, vice
chairman in 1999 and president in 2001. Holds a Ph.D. in economics
from Columbia University.

Danny Herron

Director, vice chairman, chief operating officer
Joined in 1986 and reached his current position in 2001. Holds an MBA
from New York University.