Will Ernst & Young be getting a broker-dealer license someday?
Maybe the question is asked with a smile, but the answer is dead serious. “Our corporate finance unit is considering that,” said Greg Soukup, partner and co-director of a special team named Ernst & Young National Office West (EYNOW) in downtown Los Angeles, a part of the E & Y; empire.
Gathered under one roof in Los Angeles, EYNOW has 60 professionals dedicated to the M & A; and corporate finance game and the majority are tax lawyers, not accountants, as one might expect for a CPA shop. There are a few investment bankers on the team too, such as Peter Griffith, former head of corporate finance for brokerage house Wedbush Morgan Securities. Certainly, it is getting harder and harder to tell who’s who anymore in high finance.
Investment bankers became venture capitalists in the late 1990s, while banks and insurance giants bought brokerages. Between financial industries and sectors, lines have become blurrier than Mr. Magoo’s eyesight. The national CPA firms have long lusted after legal and brokerage fees. What’s the point of doing the serious groundwork, only to have other professionals make a few connections, sign off on deals and go home with moneybags bulging?
But the days are drawing nigh that corporate clients may go to a Big 5 shop not only to have the green eyeshade guys look it over, but to have it legally vetted and perhaps even financed.
Not yet, but getting there, said Soukup. “The lines are being chipped away at. We do have affiliates which practice law, especially in overseas transactions. Of course, outside the U.S. and the UK, accounting firms can hire lawyers and practice law.”
Not that Soukup is hard up for work in just two years, his team boasts of having spearheaded $40 billion worth of corporate transactions for middle-market and Fortune 500 companies.
Prospects are for more in the future maybe a lot more.
For now, state laws in the U.S. generally prohibit lawyers in CPA firms from straying much beyond tax law. “The corporate law part of a deal has to be done by law firms or in-house lawyers,” said Soukup. But the rules are being challenged. “The ABA (American Bar Association) and state bars have heard proposals for changing this (allowing non-tax lawyers at CPA firms to practice law),” he said. “It’s probably a matter of when, not if.”
If the antique rules crumble and CPA shops hire lawyers and investment bankers, how long until they start underwriting and if not selling stocks and bonds on Wall Street, at least making private placements with institutional investors?
Soukup doesn’t think Ernst & Young will be selling securities anytime soon. But, he adds, “certainly corporations want one-stop financial shopping. What does that tell you?”
Poor Man’s Buffett
They call it the “poor man’s Berkshire Hathaway.”
The low-profile Pasadena-based Wesco Financial Corp. usually scoots through corporate life just below the radar screen. No press releases, scant analyst coverage on Wall Street, no media interviews the usual recipe for corporate anonymity.
Except this outfit is run by Chairman and Chief Executive Charles Munger, 76, local powerhouse in his own right and sidekick of legendary investor Warren Buffett. And it has a market capitalization of $2.16 billion. So why do market mavens apply the “poor man’s Berkshire Hathaway” moniker to Wesco? Because, though Wesco has been trading at more than $300 per share (hardly in the bite-sized range), it is more chewable than the royal $64,000-plus per share of Berkshire Hathaway.
And Wesco is a cousin company to the famed Berkshire Hathaway in many other regards. Its main line of business is investing, and its second line is insurance, just like Berkshire Hathaway. A review of Wesco’s portfolio reveals many Buffett-like holdings, including Coca-Cola Co. and Gillette Co. And just as Berkshire Hathaway made a few acquisitions of private operating companies in the last several years when shopping on Wall Street became too pricey (International Dairy Queen and Benjamin Moore & Co., the paint makers) so too has Wesco made some corporate buys. Among them is CORT Business Services Corp., the business furniture rental folks.
Buffett himself likes Wesco, as it turns out. Berkshire Hathaway owns 80 percent of Wesco stock, a $1.7 billion block. Wesco stock has fared well enough in the past year, rising from a low of around $200 a share last July to more than $300 in trading last week, in the face of a bear market. However, it should be noted that this stock hit $400 a share in June 1998.
Among other features, Wesco is notable for stability: Of its seven-member board, one (David Robinson) has been a director since 1959, two others have been in place since the mid-1960s and Munger has been a board member since 1972. The company got its start in 1954, when its primary business was Blue Chip stamps.
Buying Ideas
High-tech startups can be expensive, as VC tyros recently have discovered. But the dot-com and telecommunications bloodbath does not mean that investing in new inventions or intellectual property is a poor strategy, said Tom Horgan, chief executive of West Los Angeles-based Acorn Technologies Inc., itself a 3-year-old outfit.
Rather than finance a whole startup, Acorn looks for technologies or inventions that can be readily developed, patented and then sold, usually for royalty payments, and ideally to large corporations. “We have acquired 19 patents, and are in the process of acquiring five more from academia,” Horgan said. “There is a patent boom in the United States, but many patents are not being used.”
Typically, Acorn will look for ideas that can be shepherded through a commercialization process for less than $1 million, Horgan said. “We don’t want raw ideas. We want inventions that need a new business model, or technology that can be commercialized readily.”
The idea is to keep costs and overhead low, while financing a lot of tech ideas, with the hopes that even a few hits will more than recoup expenses, said Horgan.
Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. His new book, “The Pied Pipers of Wall Street: How Analysts Sell You Down the River,” Bloomberg Press, will be published in May. He can be reached at [email protected].
