Brokerage Consolidation Begins, Or Not (RODM, COWN)

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If you have been waiting for the smaller brokerage firms in the Tier-2 and Tier-3 categories to start merging, it looks like the first shot in the consolidation wars has been fired.  Rodman & Renshaw Capital Group Inc. (NASDAQ: RODM) has made an offer to acquire Cowen Group Inc. (NASDAQ: COWN).  The problem is that Cowen has already said, "Thanks, but no thanks!"

The Rodman & Renshaw offer for Cowen was for $7.00, which comes tonearly $100 million.  Cowen’s refusal of the offer noted that themerger would "distract Cowen’s management and employees in the currentchallenging environment when all efforts should be focused on servicingthe firm’s clients."

Cowen even noted that firm does not believe further discussion withRodman & Renshaw would be productive, nor does it intend to giveadditional consideration to the unsolicited proposal.

Rodman & Renshaw’s proposal was also not contingent on anyfinancing, according to the data.  After an informal offer was sentfrom CEO to CEO and that was denied, then Rodman & Renshaw decidedto send the buyout offer directly to the Cowen board of directors.This is also apparently not the first time the companies have discusseda possible merger this year.

The $7.00 buyout offer would come half in cash and half in Rodman &Renshaw stock.  The $100 million is actually right at $99.7 million andbased upon last week’s closing prices.  It would have been a 17%premium, but it would also be in the lower half of a 52-week tradingrange of $4.60 to $11.31.  Rodman & Renshaw’s stock trades at roughly 75% off of its 52-week highs.

Cowen shares are up over 12% at $6.76 and its market cap based uponcurrent prices is right above $96 million.  Rodman & Renshaw sharesare up almost 3% at $1.08.  What is interesting is that its market capis actually under $40 million.

Both companies here trade under last quarter’s net tangible values and under orright at net cash values after backing out all of their statedliabilities.  The problem with financial firms right now is that WallStreet and Main Street have trouble trusting each others’ books.  Rodman & Renshaw also goes back and forth from net profits to net losses, yet Cowen has been running at losses for most of the recent periods and is expected by analysts to continue seeing losses during the current time.

We wouldn’t even be too surprised if the role of the cat and mouse changes here.  You never know, the cat was maybe interested in being the mouse the whole time.

Jon C. Ogg
December 8, 2008