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Soul-searching at Ferris

The Baltimore Sun

So Stifel Financial and a few other companies are interested in buying Ferris Baker Watts. No big news there. Ferris has been getting buyout feelers for years.

The difference now is that Baltimore's century-old brokerage and investment bank, wounded by a federal criminal investigation, is talking publicly about the suitors. And it's not instantly rejecting them.

"Should we consider being acquired" by another financial house? asks Roger L. Calvert, Ferris's chief executive. "As board members, we have an obligation to be open to that."

Four companies have "aggressively approached" Ferris about a takeover, says Chairman George M. Ferris Jr. He confirmed that one is St. Louis-based Stifel, which has a big operation in Baltimore. He wouldn't identify the others.

No negotiations have begun. "So far, we have not changed our viewpoint" about wanting to stay independent, Ferris says.

But a recent conversation with him and other top bosses strongly suggests that the company is at a crossroads and considering a sale more seriously than ever. My guess is it will be bought by the end of 2008.

"Everybody in the securities industry is doing a lot of re-evaluating right now," says Ferris, 80. He and his colleagues, however, may be noodling over the future harder than anybody.

Last week federal prosecutors charged former Ferris broker Stephen J. Glantz with fraud and lying to investigators. Glantz is accused of helping a Cleveland-area client, David A. Dadante, operate a multimillion-dollar Ponzi scheme by helping him manipulate the price of Innotrac Corp. stock through Ferris' trading desk.

According to the criminal information, Glantz bought Innotrac stock for other Ferris clients' accounts without their knowledge to help Dadante, who has pleaded guilty to fraud charges.

Nobody else who worked at Ferris has been criminally charged. No clients lost money as a result of what Glantz and Dadante did, the firm says. Even so, the investigation has been going on since late last year and isn't over. Three employees took temporary leave this year as Ferris looked into the matter, and another three have resigned or retired, including general counsel Theodore W. Urban and former CEO Louis Akers Jr.

The Sun's Paul Adams has reported that top Ferris executives had concerns about Dadante's activities as far back as early 2003 but allowed him to continue trading Innotrac, albeit with restrictions.

A Ferris sale could give the firm an exit from a painful episode, although potential buyers will tread very carefully until the investigation gets closer to completion.

Regulatory and legal troubles, however, aren't the only reason to consider a merger.

Regional firms such as Ferris are under great profit pressure, thanks to soaring costs for legal compliance, technology and recruiting and keeping good brokers.

Controls required by the Sarbanes-Oxley law are much more easily borne by the giant New York firms than by somebody such as Ferris, with only 330 brokers. Ferris and other full-service brokers continue to be challenged by online discount firms. The number of regional U.S. brokers has fallen to fewer than 30 compared with a roster of 45 in 2000. Some buyout targets -- lately A.G. Edwards -- have gotten very high prices.

Plus, the Dadante-Glantz investigation is costing Ferris millions, although executives wouldn't specify.

The employee-owned firm remains profitable, they said. (George Ferris owns the largest stake, 26 percent.) It has decent business in trading stocks and bonds for investors from here to Michigan -- many of whom are too small-time for the Merrill Lynches and Smith Barneys. Its stock-research shop provides a focused alternative to the usual New York fodder.

And it has a lovely little franchise of issuing municipal bonds and smaller public and private stock placements, especially in oil and real estate. Its capital is solid, and the Dadante scandal doesn't seem to have caused a hemorrhage of clients.

Ferris would fit perfectly with Stifel, which bought Legg Mason's capital markets group and has 400 employees in Baltimore but no substantial broker presence here.

"We are not currently engaged in any discussion with this firm," said Stifel Chairman and CEO Ronald J. Kruszewski, after I told him Ferris said he was interested. However, he added: "I would have interest in a firm of the quality of Ferris Baker Watts. It's a fine firm."

Who else might be kicking the tires?

Milwaukee-based Baird just lured away a bunch of Ferris brokers in Reston, Va. Like Ferris, Robert W. Baird & Co. is employee-owned. Maybe it might like to buy the whole company. Or how about Minneapolis' RBC Dain Rauscher, whose last acquisition (five years ago) was boutique Boston investment bank Tucker Anthony Sutro? Or Pittsburgh's PNC Financial, recent buyer of Baltimore's Mercantile Bankshares?

Spokespeople for PNC and Dain declined to comment. A spokeswoman for Baird didn't call back.

Like Stifel and Dain Rauscher, Ferris falls into the "regional" brokerage category. Regional, however, is a relative term. Dain Rauscher has 5,000 employees and Stifel, nearly 3,000. Ferris has only 850.

Marrying Ferris to one of those outfits could cut overhead costs and boost profits and capital. It might also close a painful chapter in its history. True, it would be the last chapter. But for regional brokerages, there's a lot of that going around.


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