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Gregory Sichenzia quoted in Financial Week on Rodman & Renshaw and Cowen & Co. merger

Big battle shaping up for smaller i-banks

Boutique and the beast: Smaller firms go after asset-rich rivals

December 15, 2008 7:20 AM ET

By Tim Catts

Boutique investment bank Rodman & Renshaw’s $100 million hostile bid to take over rival Cowen & Co. shows that Wall Street’s big boys aren’t the only ones trying to take advantage of the financial industry’s woes. Like its larger counterparts, Rodman & Renshaw is trying grow by buying a weakened competitor.

“The disappearance and distraction of competitors, especially bulge-bracket firms, has created enormous opportunity,” said Rodman CEO Michael Lacovara in an interview. “We’re prepared to pursue that opportunity on our own, but the prospect of our joining forces with Cowen offers tremendous potential pursuing it on a joint basis.”

The deal would help Rodman & Renshaw bolster its already formidable business advising small and mid-size healthcare companies, where Cowen is also strong, Mr. Lacovara said. And Rodman & Renshaw regularly leads league tables as the most prolific advisor on private investment in public equity, or PIPE, transactions. A merger would help the combined company sell such deals to Cowen clients, who have had to look elsewhere since Cowen, once a PIPE powerhouse as well, largely exited the market in recent years.

But there is another reason Cowen makes an attractive target: Its balance sheet. The company had $111.9 million in cash and equivalents as of Sept. 30, according to its financial statements. In other words, assuming all of Cowen’s other assets are worthless, it still has $7.85 in cash for every share of stock outstanding. The stock traded at $5.60 on Dec. 1, the day before Mr. Lacovara said “informal discussions” between the companies’ executives about a deal took place. The deal may spark interest in other middle-market firms with lots of cash relative to their market value.

Rodman & Renshaw may be able to make a case for its offer—which works out to $7 a share—because 90-year-old Cowen has had just one profitable quarter since it was spun off from Societe Generale in a July 2006 initial public offering. The value of its investment banking franchise has suffered, said Sterne Agee & Leach analyst Ada Lee, who covers both companies.

“There doesn’t seem to be much of a future for them from an operational standpoint,” Ms. Lee said of Cowen. “They lack a real franchise and seem perfectly content to burn through their cash until the [business] cycle is over.”

Cowen rejected the overture, citing “significant risk that a transaction with Rodman & Renshaw would result in the destruction of shareholder value,” according to a press release. A spokesman did not return calls seeking comment.

Mr. Lacovara said Rodman & Renshaw would now take its offer directly to Cowen’s shareholders, a third of which are institutional investors, Ms. Lee wrote to her clients. The largest, Bank of America, held 17.3% of Cowen’s stock at the end of the third quarter. A spokesman for B of A declined to comment on the situation.

If the deal’s successful, it may give other struggling boutique investment banks something to worry about. After all, Cowen isn’t the only such company that has seen investors punish its shares despite having relatively healthy cash stockpiles on the balance sheet.

There’s Thomas Weisel Partners, for example, which had $110 million in cash at the end of the third quarter and a market capitalization of $125 million as of Dec. 11. The firm isn’t bringing in enough M&A advisory or underwriting deals to sustain its current size, Ms. Lee wrote in a note to clients. Like Cowen, the company is “a walking balance sheet without a franchise,” Ms. Lee said.

A Thomas Weisel spokeswoman declined to comment.

Rodman & Renshaw’s Mr. Lacovara is clearly aware of Cowen’s balance sheet. “We’re mindful that one of the benefits and the assets of Cowen is its cash position,” he said on a conference call with investors after the proposed deal became public. Because Rodman, with some $87 million in assets, is a much smaller company than Cowen, which boasts assets of $228 million, some analysts believe Mr. Lacovara may finance the deal with a bridge loan that could be paid back with Cowen’s cash. But he downplayed that idea. “We’re not going to do a transaction that would beggar the resulting franchise,” he said on the call.

Gregory Sichenzia, a partner with SRFF, a law firm that specializes in PIPE transactions, who has worked with both Rodman and Cowen, said the deal would bolster Rodman & Renshaw at a time when the credit crisis is clouding the outlook for big and small investment firms alike.

“There will be a culling of the herd,” said Mr. Sichenzia. “And that’s one of the reasons this makes a lot of sense for Rodman. It’s a great time to get stronger, if you can afford to.”

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