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Analysis: Stifel CEO puts reputation on line with KBW buy

By Jed Horowitz and Olivia Oran

NEW YORK (Reuters) - Over the past seven years, Stifel Financial Corp Chief Executive Ronald Kruszewski has impressed Wall Street with a series of acquisitions that quintupled the regional brokerage's revenue and rewarded shareholders with a nearly four-fold increase in returns over the last five years.

Still, some investors view Kruszewski's latest deal, to buy money-losing investment bank KBW Inc , as a much riskier proposition. Some question the wisdom of spending $575 million to build out a middle-market investment banking business at a time when tougher financial regulations are posing a threat to profits of giants such as UBS AG and Goldman Sachs Group Inc.

Moreover, after years of expansion, Stifel's board is starting to worry that Kruszewski may be overextended. Before announcing the KBW deal on November 5, the board was mulling whether to appoint a senior administrator or president to help him run the company, according to one director. Kruszewski is currently chairman and president, as well as chief executive.

"We talk about him moving too fast, and whether we have the infrastructure to move as fast as we're moving," said Robert Lefton, a psychologist who has been on Stifel's board for 20 years.

But he stressed that the board supported the KBW deal and was very happy with Kruszewski, who has been CEO for 12 years and is Stifel's largest individual shareholder with a 1.6 percent stake worth more than $26 million.

"He has a very clear sense of where he's heading," Lefton said. "When he came aboard, we were a struggling little regional firm barely eking out a living. He has put together what he told us he would."

Another board member echoed Lefton's comments. "Even if there is a modest recovery, (KBW) will be a very smart acquisition because he bought it off the bottom," said Robert Grady, a Stifel director and former Carlyle Group partner. "I wouldn't bet against him."

Kruszewski, 53, has said he wants to better balance revenue between the St. Louis-based company's retail and institutional brokerages. The deal to buy KBW, which specializes in advising small banks and thrifts on mergers and capital-raising, takes him closer to that goal.

If he succeeds, Stifel will be able to compete with Jefferies Group Inc - whose market value is twice Stifel's $1.6 billion - to raise money for companies with revenue of $100 million to $1 billion. Big banks like Goldman and Morgan Stanley largely ignore this middle-market segment.

Unlike Kruszewski's previous acquisitions, KBW brings complex integration issues. Stifel already has dozens of bankers, analysts and salespeople serving financial companies, so employees are worried that the merger could bring job cuts.

"He is already pretty exposed to the institutional securities business, and ... financial services is not a great business right now," said Susquehanna Financial Group analyst Douglas Sipkin. "He is a very smart guy, but it doesn't make a lot of sense to me."

In addition, money managers who trade through both Stifel and KBW do not want to pay twice for research and other products, so parsing the benefits of the merger becomes difficult.

"To distinguish between the two from Stifel's business perspective is going to be tricky," said Mark Kuzminskas, director of equity trading at Robeco Investment Management.

In an interview, Kruszewski defended the KBW deal, and said it and the 2010 purchase of Thomas Weisel Partners, which specializes in banking for technology companies, are core components of his middle-market corporate strategy.

"I'm not predicting that next year is going to be a blowout year for financial companies, but I'm not being reckless," he said. "Institutional (brokerage) is much more cyclical and, of course, you take a lot more risk. It is also a high profit-margin business when things are working."

Investors do not appear to be convinced. At Monday's close, Stifel shares had declined 2.9 percent this year, compared with an uptick of 1.1 percent for the NYSE Arca Securities Broker/Dealer Index.

CRAFTY NEGOTIATOR

Kruszewski, the son of a fireman from South Bend, Indiana, has an accounting degree and, according to people who have worked with him, a steel-trap mind for absorbing new data and translating it into action.

He demonstrated discipline earlier this year, passing on the acquisition of Morgan Keegan from Regions Financial Corp because the price was too high, Lefton said. Raymond James Financial Inc later purchased the Tennessee-based brokerage.

"At the beginning of every year, I have no idea what we'll do," Kruszewski said. "Strategic planning is for people who have too much time on their hands. Our plan is to be in a position to take advantage of opportunities."

KBW was one such opportunity. The company had lost more than $60 million since the financial crisis of 2008 and was cutting 15 percent of staff. It was also weighing radical changes in its operations after another down year for financial services deals and capital-raising, a person close to KBW said.

Kruszewski drove a hard bargain. He required about 95 key employees to waive change-of-control clauses that would have let them sell their shares, and he compelled them to sign noncompete agreements. He also won control of $250 million of cash on KBW's balance sheet to help finance the cash-and-stock transaction.

You never want to negotiate against that man," said Scott McCuaig, the retired president of Stifel Nicolaus, the company's principal brokerage subsidiary. "He gets his hands dirty and works deals until they come to fruition. Nobody is going to snooker him."

(Reporting by Jed Horowitz and Olivia Oran; Editing by Paritosh Bansal and Steve Orlofsky)

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