Ferris, Baker Watts Inc., the conservative regional brokerage with Baltimore roots dating to 1900, closed yesterday its sale to a division of Royal Bank of Canada in an all-stock deal valued at more than $230 million.
The sale was approved by Ferris' employee shareholders in a meeting yesterday morning in Washington. The deal combines the firm's 300 brokers spread among 42 branch offices in eight states with the 4,000 brokers and financial advisers in the wealth management division of Canada's largest bank. The familiar Ferris, Baker Watts nameplate gracing area brokerage offices will eventually be replaced by RBC, whose Dain Rauscher Inc. money management subsidiary is based in Minneapolis.
Yesterday was the last day of work for about 10 percent of Ferris' 840 employees, whose jobs were eliminated at the close of business, according to John Taft, head of RBC Wealth Management's U.S. division. Most were in the firm's capital markets division or held duplicate positions with those at RBC. A second round of cuts might come after the two companies are integrated, but it's too soon to say how many will be affected, he said.
Despite the expected job losses, the outcome of the shareholder vote was never in doubt, given the favorable price being offered and the sizable holdings of George M. Ferris Jr., the firm's chairman, and other top executives. Ferris owned about a quarter of the firm's shares, giving him substantial say in the deal's success. His Ferris shares will be converted to RBC stock worth more than $50 million, according to regulatory filings.
The deal also will leave many long-time employees - from brokers to mail clerks - with a sizable gain in the value of their shares as the sole owners of privately-held Ferris. Some will see six- and seven-figure gains. The deal also establishes a $97 million pool of money to keep brokers from leaving during the transition.
"I think you will find that the shareholders at Ferris, Baker Watts are very pleased with the consideration they will receive," Taft said.
The sale comes after a year in which the firm dealt with the dual pressures of a declining market and costly regulatory inquiries into a stock manipulation scheme involving one of its former clients and his broker. For Baltimore, it means another home-grown financial institution will be absorbed by an out-of-state corporation.
But for the firm and its customers, the deal will mean greater access to technology and services that come with being part of a company with vast stores of capital and global reach. By contrast, Ferris has suffered from a dearth of investment in recent years as a consequence of being a small competitor in an industry that increasingly thrives on economies of scale.
Whereas Ferris is primarily a no-frills retail brokerage, RBC offers a mix of financial planning, wealth management services, trust services and lending capabilities, among other things.
"It takes a lot of money and a lot of technology and a lot of expertise and support to be able to offer all the products and services that customers would like to have offered to them today," Taft said.
In the short term, Ferris will operate as a wholly owned subsidiary of RBC. The transaction will initially result in no change for clients, who will continue to deal with their same brokers and advisers. Eventually, Ferris will take on the RBC name, becoming the seventh region in the firm's U.S. operations.
A Ferris spokeswoman declined to comment on the sale yesterday, referring questions to RBC officials. In a statement issued after the close of markets yesterday, Roger L. Calvert, Ferris' chief executive, echoed Taft's comments about the expanded services RBC brings to the table.
"Both FBW and RBC Wealth Management share the same philosophy and commitment to focusing on clients' interests as our top priority," he said.
Ferris has about $19 billion in assets under administration to RBC's $500 billion.
Ferris lasted longer than most brokerages of its size, surviving the Great Depression, world wars and countless market downturns during its history. But the need for investment in new technology combined with the growing expense of compliance and regulatory pressures took a toll.
Like many of its larger rivals, Ferris has suffered from declining commissions for equity research and trading, according to industry analysts. The current market downturn and global credit crisis weigh especially heavy on smaller firms, as well. The Sun reported in November that Ferris was hit by the subprime mortgage meltdown, taking a $7.4 million loss on debt securities purchased by a bond trader who was subsequently fired.
The stock manipulation scheme involving a former client and his broker at the firm also contributed to the decision to sell, the firm disclosed in an April regulatory filing. The client, David A. Dadante, managed a $47 million investment fund that turned out to be a Ponzi scheme, in which money from new investors is used to pay phony returns to earlier investors, according to court documents.
Dadante used some money from his fund to open accounts at Ferris, where he engaged in illegal stock manipulation, according to federal investigators. Dadante pleaded guilty to securities fraud. His former broker, Stephen J. Glantz, pleaded guilty to aiding Dadante's stock manipulation scheme. Both are serving federal prison terms.
The Securities and Exchange Commission is probing the firm's handling of Dadante's account. Ferris disclosed in the April filing that it faces a civil fine of $1.2 million or more stemming from the investigation. It also agreed to pay roughly 100 investors in Dadante's fund $7.2 million in cash to settle potential lawsuits. The firm will also relinquish its claim to about 3 million shares of stock in Innotrac Corp., a lightly traded Georgia company whose shares Dadante purchased and manipulated.
The deal with RBC hinged on Ferris setting up a reserve to handle regulatory and legal expenses related to the matter.
Ferris, Baker Watts timeline
March 1, 1900: Sewell S. Watts Sr. and William G. Baker Jr. open brokerage at Baltimore and South streets.
1904: Great Baltimore Fire destroys their offices and much of downtown.
1906: Baker, Watts sets up shop at new U.S. Fidelity & Guaranty Building at Calvert and Redwood streets.
1927: Baker, Watts becomes third Baltimore firm to buy seat on New York Stock Exchange.
1974: Baker, Watts moves to new USF&G; building at Pratt and Light streets at Inner Harbor.
1986: Sewell Watts Jr., a former senior partner at Baker, Watts and son of the founder, dies at age 82.
1987: Switches from partnership to corporation. USF&G; Financial Services Group buys 25 percent stake in firm, which is struggling after stock market crash.
1988: Agrees to be acquired by Washington-based Ferris & Co. in all-stock deal. Headquarters move to Washington, but the bulk of operations remain in Baltimore.
1992: George M. Ferris, founder of Ferris & Co., dies at age 99.
2004: Sewell Watts III, who was chairman of the company at the time of the merger and served as managing director of the combined company, dies at age 72.
February 2008: Ferris, Baker Watts Inc. announces that it is selling itself to Minneapolis-based RBC Dain Rauscher, a division of the Royal Bank of Canada.
Yesterday: Firm closes sale to RBC in an all-stock deal valued at more than $230 million.