Friedman, Billings & Jackpot
By Jerry Knight
For the past couple of years, the talk of the Washington investment community has been about how fast Friedman, Billings, Ramsey Group Inc. of Arlington has grown and how much money the three founders of the investment banking boutique have made.
Now that the firm, which has expanded by managing initial public offerings for other rapidly growing companies, has decided to sell some of its own stock to the public, speculation about the firm's spectacular growth has been replaced by hard data.
Since it was founded in 1989, FBR has averaged a blistering 48 percent annual growth rate, with this year's revenue running 166 percent ahead of last year's, at $178 million for the first 10 months of the year, the company's stock offering prospectus filed with the Securities and Exchange Commission shows.
And founders Emanuel J. Friedman, Eric F. Billings and W. Russell Ramsey each took home $3,409,122 last year with identical $600,000 salaries and $2,809,122 bonuses, according to the document.
This year, the founders and other FBR professionals whose bonuses are linked directly to the firm's revenue are making really big money.
The documents don't specify how much individual partners are drawing this year, but they do show that total salaries, bonuses and benefits paid by the firm jumped 238 percent, from $33.3 million to $112.5 million, for the first 10 months of the year compared with the first 10 months of 1996.
The big escalation in payouts came as FBR's investment banking and corporate finance revenue ballooned from $35 million to $142 million for the 10-month periods, boosting revenue from $66.8 million to $178 million and pushing profit from $11 million to $20.4 million.
By selling stock now, FBR is trying to cash in on the hot stock market that has enabled the company to prosper dramatically, even by the standards of the booming investment business.
"Unless we get a big surprise, this will probably be a record year for brokerage industry earnings," said Michael A. Flanagan, a researcher who follows stocks of Wall Street firms for Financial Service Analytics of Fort Washington, Pa.
With the stock market still chugging along even after recent pullbacks, and with IPOs on their way to their biggest year ever, "we're looking at optimal conditions for the industry, especially for underwriters," Flanagan said.
While the record-setting IPO market makes this a good time for a company like FBR to be selling stock, he added, it "raises questions about whether it's a good time to be buying."
"It's highly unlikely that the industry's record momentum will carry through much of 1998," he said. "We haven't seen conditions this strong before. It's really anybody's guess how long that will last."
If the stock market turns down, "the underwriting business will be one of the first things to go," Flanagan said.
But for now, the IPO business is booming. Including its own offerings, FBR could sell upward of $1 billion worth of new stock by the end of the year, on top of the $1.3 billion the firm had underwritten as of its last deal on Oct. 17. By that date, FBR's IPO volume for the year ranked fourth among all underwriters, behind Goldman, Sachs & Co., Merrill Lynch & Co. and Morgan Stanley & Co.
The company's rapid growth has come not only from its burgeoning underwriting business but also from three mutual funds that it started a few weeks ago, an expansion of its research department to three dozen analysts and an expansion of its money management operations.
All are people-intensive businesses in which employee compensation is the biggest expense. The 63 percent of revenue that FBR pays out in compensation is not out of line by industry standards, Wall Street professionals said.
Investment bankers typically earn salaries in the low to middle six figures but make most of their money from bonuses that are tied directly to the volume of business they produce. When their extremely cyclical business goes into one of its periodic slumps, those bonuses evaporate.
In the past year, FBR's work force has grown by 66 percent, from 138 employees to 230, but total compensation has grown 238 percent.
Friedman, Billings, Ramsey Group, which is the parent company of the investment banking firm and a handful of affiliates, is offering to sell 7.79 million shares to the public and has already made a deal to sell an additional 2.2 million shares to PNC Bank Corp. of Pittsburgh.
PNC has tried unsuccessfully to buy several other investment firms over the last couple of years and instead has formed a "strategic relationship" with FBR. The Virginia firm will provide investment banking services for the bank's clients, helping them sell stocks and bonds. In exchange, PNC will offer loans and other services to FBR's investment banking clients.
The price of the FBR stock will not be set until just before it is sold -- probably late next month -- but the company is projecting a price of $18 to $20 a share. For the IPOs FBR has handled so far this year, the firm has nearly always sold stock at the top of the offering range.
At $20 a share, the 10 million share offering would raise about $200 million. Like most new stock offerings, the FBR IPO includes a "green shoe" option to sell additional stock -- another 1.17 million shares -- which would bring the total stock sale to about $223 million.
Most of that money will go to FBR itself, but 2.8 million shares are being sold by the three founders and several other employees who also own stock in the firm. Those sellers will split about $56 million, but the documents do not specify how much stock any individuals plan to sell.
At the $20-a-share asking price, the FBR stock would be expensive compared with benchmarks set by the recent sales of some other brokerage firms. Those firms sold their stock for a little more than three times book value, Flanagan noted. FBR's stock will have a book value of slightly more than $3 a share after the IPO, making the minimum offering price of $18 a share six times greater.
After the offering, public investors would own about 19 percent of the company, PNC would own 4.9 percent and insiders would own the rest. The shares to be sold to the public and PNC are Class A stock, which carries one vote per share in corporate elections. Insiders hold mostly Class B stock, which has three votes per share.
Corporate finance fees
Compensation and benefits
PRO FORMA NET INCOME
EARNINGS PER SHARE
1996: 28 cents
1997: 51 cents
SOURCE: Securities and Exchange Commission
NOTE: Figures are for 10 months ended Oct. 31.
Total: 230 full-time workers
Sales, trading and syndicate 73%
Investment banking 62%
Accounting, administration, operations 46%
Venture capital, principal investment 15%
and asset management
COMPENSATION FOR THE BIG THREE
Emanuel J. Friedman
Chairman, chief executive and director
Eric F. Billings
Vice chairman, chief operating officer and director
W. Russell Ramsey
President and director
NOTE: Figures are for 1996.
SOURCE: Securities and Exchange Commission
© Copyright 1997 The Washington Post Company