Penson Leapfrogs in Clearing Competition

Penson Financial officials recently discovered that one small deal in Canada could lead to a much bigger one for all of North America.

That’s how Penson’s recent purchase of Broadridge Financial Solutions’ clearing business got started, and how it was able to add 100 correspondents to its roster with $1 billion in assets.

The deal is expected to bring Penson about $75 million in annualized net revenue–roughly the same amount it paid for the clearing contracts. And company officials claim the deal makes Penson a much stronger player.

Broadridge’s clearing business had been run through its Ridge Clearing operation, but it was in the red.

"This transaction came about as a result of a technology deal that we were working on with Broadridge Technology’s subsidiary in Canada," said Philip Pendergraft, Penson CEO.

"It really grew from that into a bigger transaction," Pendergraft said, adding that Broadridge officials concluded that their outsourcing business has been growing so much, they didn’t need clearing anymore.

Pension believes this cash and stock deal has pushed Penson into the number two position for clearing brokerages, giving it the second largest number of correspondents. With the purchase, Penson now counts some 415 correspondents. 

That puts it ahead of Fidelity Investments’ National Financial and behind the Bank of New York Mellon’s Pershing, according to Penson Financial officials.  Pershing has some 900 clients, according to Aite Group, an industry consultant.

A National Financial spokesman said it has about 300 correspondents, but it doesn’t discuss competitors. Some clearing industry observers suggest that the number of correspondents a firm has isn’t nearly as important as the quality of the clients.

Doug Dannemiller, an industry analyst with Aite Group, said the Penson purchase is "a good deal for both parties." But he added that Penson, even with the acquisition, would have about "one quarter" of National Financial’s some $500 billion in assets under custodianship.

Still, Pendergraft said Penson would continue to look for more acquisitions. He noted that numerous clearing firms are under pressure due to low interest rates and light trading volume.

As part of the deal, Penson also signed a technology contract with Broadridge. It will provide outsourcing functions for Penson clearing brokerages in the United States, Canada and the United Kingdom.

Penson officials argued that, since their firm is basically a clearing-only business, it would make sense for Broadridge to sell its clearing business, concentrating more on selling outsourcing services to Penson and others.

"It’s really a win-win for both of us. We get to grow our clearing business, and they get to grow their technology outsourcing business," according to Pendergraft.

Ridge Clearing will continue as a unit of Broadbridge, but it will cease offering clearing services. It will only sell outsourcing services.
At the same time, Penson and Broadridge also entered into an alliance, agreeing to sell each other’s services to customers on a global basis.

So, at least two reasons drove Broadridge’s strategic decision. First, the company had been losing money on its clearing operations over the last few quarters. Secondly, Broadridge, which was spun off by Automatic Data Processing , saw better opportunities in other lines such as securities processing.

"The Penson transaction," Broadridge CEO Richard J. Daly wrote in a letter to shareholders, "creates considerable momentum for our securities processing strategy. It will enable us to have the use of significant free cash that had previously been restricted, will eliminate the balance sheet risk associated with the clearing business and will provide us with a clear strategy for our securities processing business which now includes outsourcing."

Besides supplying processing services for former competitor Penson, Broadridge also recently announced it had signed a deal with Morgan Stanley Smith Barney.

Broadridge will provide customer communication services for Morgan Stanley. These will include the production and distribution of account statements, performance reports and tax report documents.