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January 21, 2010

ConvergEx Goes Deal-Happy

By James Ramage

ConvergEx's recently completed $5 million cash purchase of NYFIX U.S. Transaction Services highlights a flurry of deals for the agency brokerage.

Joseph Velli, ConvergEx

After two years of silence, ConvergEx bought three businesses during a six-week period this past autumn. The reason? It wants to grow its list of clients and its offerings.

The targets all expand ConvergEx's footprint, according to Joseph Velli, the chairman and chief executive of ConvergEx Group. It began with an Oct. 8 deal that brought in Cogent Consulting, a commission management business. One month later, the NYFIX transaction was inked, which brought Millennium, a dark pool that caters to the sellside. Then a Nov. 23 deal for NorthPoint Trading Partners put ConvergEx in the prime brokerage business. While the first two acquisitions expand existing ConvergEx product offerings, NorthPoint adds a new business line altogether.

All three introduce new technology, which was an important factor behind each deal, Velli said. "We're pretty excited," Velli said. "All three help to expand our business model." ConvergEx's last acquisition was in July 2007, when it bought Tony Saliba's LiquidPoint, a provider of execution management technology and brokerage services for listed options.

ConvergEx plans to keep the staffs of all three firms in tact; there will be no layoffs, Velli said. The firm purchased Millennium for $5 million in cash. The Cogent and NorthPoint deals were for an undisclosed amount of cash and stock.

On the brokerage side, ConvergEx hopes the deals bring in more business. This is important because trading volume and commissions are its primary source of revenue, according to Moody's Investors Service. Commission levels continued to fall last year. Moreover, ConvergEx has seen its volumes and marketshare drop on the New York Stock Exchange and Arca since autumn 2008, according to NYSE numbers.

At almost 171 million shares a day, ConvergEx in June 2008 was the fifth largest volume provider at NYSE Euronext--which includes NYSE Arca--at 3.29 percent of overall volume. From Oct. 1 through Oct. 21, 2008, the firm climbed to number one, ConvergEx reported, without giving specific numbers. But by Dec. 15, 2009, ConvergEx had dropped to ninth, at 2.28 percent of overall NYSE volume and ADV of 103 million shares traded.

On the commission management front, the Cogent purchase lets ConvergEx add products to fill out its offering. These products include technology for the broker vote, the allocation and reporting of the commission spend and for payments.

ConvergEx can now access Cogent's "hundreds" of broker participants. And ConvergEx can also cross-sell into Cogent's client base of large money managers, said John Meserve, chief executive of Westminster Research Associates, a member of BNY ConvergEx Group.

In addition, Velli considers prime brokerage, and hence NorthPoint, to be a natural expansion of ConvergEx's business. Now that ConvergEx has established execution and technology relationships with many large hedge funds, he added, it will look to leverage its expertise downstream to smaller hedge funds.

Finally, Millennium opens ConvergEx up to sellside liquidity. It taps a customer segment Velli said ConvergEx is keen to develop.


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