This may be the worst of times in the modern history of the financial services industry, but Wedbush Morgan Securities Inc., a small investment bank in downtown Los Angeles, has proceeded as if it's the best of times.
Since summer, the company has made three acquisitions, opened several branch offices and added 200 employees. And in what may be its boldest move, its parent company, Wedbush Inc., now wants to go public, perhaps even as early as this year although it likely will be later.
Founder Edward Wedbush said last week that the firm could benefit from a public offering, and it already has begun exploring the possibility.
"Our philosophy is to become a public company," said the 76-year-old executive. "We will logically become a public company somewhere downstream, but we have to get past all of this worldwide financial turmoil."
In addition to Wedbush Morgan, the parent company also owns private and public equity funds, and a small commercial bank that opened in February.
Though the company has not officially begun preparing an IPO filing and Wedbush said it could be more than a year before it begins its structure is similar to that of a public company, which could make the transition simpler.
"We're already prepared: Our boards of directors are outside directors; we run it as if we were a public company; we have all the audit committees and other risk management activities," he said.
If the company went public it would be unusual because the IPO market, which hasn't been strong in recent years, all but disappeared in recent months, said James Cameron Spindler, a USC law professor and IPO expert. Also, Sarbanes-Oxley and other regulations can make life tough for newly public companies.
"Going public imposes some pretty onerous requirements on public companies you're subject to a whole bunch of regulations," he said.
The IPO market has not been particularly strong since the technology bubble burst in the early 2000s, he said.
"It hasn't been a very good environment for initial public offerings in the United States in the last few years."
Climbing the ladder
Founded in 1955, Wedbush Morgan has become one of the leading correspondent clearing services in the Western United States. The company provides a range of services, but its bread and butter is in processing stock trades for broker-dealers.
In December, Wedbush Morgan ranked as Nasdaq's top liquidity provider, or market maker, beating out big-time rivals such as Morgan Stanley (No. 2) and Goldman Sachs & Co. (No. 5). Wedbush Morgan has been at or near the top of that list for more than two years.
The company was one of the early investors in Bats, an electronic securities exchange founded in 2005 that is now the third largest U.S. equities market. Approved by the Securities and Exchange Commission, the exchange, essentially a Web site, allows investors to trade quickly and anonymously.
With the growth of new trading platforms such as Bats and Chi-X Europe, liquidity providers have gained in stature and Wedbush Morgan is now mentioned in the same breath as Citigroup Inc. and Morgan Stanley.
But the growth has not been purely organic.
In late September, Wedbush Morgan announced the acquisition of Phoenix-based broker-dealer Peacock Hislop Staley & Given a deal Wedbush said would provide both a greater presence throughout the Southwest and a leg-up on the municipal bond market in Arizona. Wedbush Morgan followed up that transaction with the December purchase of First Wall Street Corp., a brokerage in San Diego.
Then this month Wedbush Morgan announced the acquisition of Pacific Growth Equities, an institutional brokerage in San Francisco. The deals have helped Wedbush Morgan increase its head count to nearly 1,000 employees from about 750 in the summer.
By comparison, Thomas Weisel Partners Group Inc., a mid-sized brokerage based in San Francisco, laid off 60 employees in the past quarter and axed 200 during all of 2008 as the deepening recession took a major bite out of the firm's revenue.
"We are exposed to volatility and trends in the general securities market and the economy, and we are currently facing difficult market and economic conditions," the company said in a recent regulatory filing. "We are focused on making the necessary adjustments to our business and adapting to the current environment."
Thomas Weisel Partners made a splash in early 2006 with a highly successful public offering. With an initial per-share price of $15, the stock gained a third in its first day and hovered above $20 per share for some time. But the share price has nosedived this past year, closing Jan. 22 at $3.89.
The firm declined to comment for this article.
Wedbush said his company has been in a strong financial position in large part because it didn't do what most of its peers did during the boom times.
"We have not used leverage like other firms have, and we've managed the finances of our firm in a careful manner," he said. "We're in excellent financial condition because we're extremely liquid and we don't have the pressures that some of these other firms have."
With $260 million in revenue, Wedbush Morgan is nowhere near the size of Wall Street titans, though the recent financial crisis has helped to close the gap. Indeed, the financial turmoil in the past few months knocked several of Wedbush Morgan's competitors, including Lehman Brothers and Bear Stearns, from their lofty perches.
Stephen Massocca, who served as chief executive of Pacific Growth Equities before it was purchased by Wedbush Morgan, said with so many firms on the mend, Wedbush Morgan is wise to move in and grab market share.
"There was a vacuum created by all the troubles and difficulties of 2008," said Massocca, now a managing director with Wedbush Morgan. "The landscape is changing dramatically. A lot of competitors in our space have gotten in trouble and significantly changed their business plan or disappeared."
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