Penson Keeps Door Open for Potential Acquisitions
February 26, 2007
Dallas-based Penson, which went public in May and has a stock-market capitalization exceeding $800 million, recently acquired the clearing business of New York-based active-trading brokerage Schonfeld Securities for $25 million, and on Feb. 16 it announced the closing of its acquisition of Chicago futures clearer Goldenberg Hehmeyer & Co., which has been renamed Penson GHCO. Penson released its earnings last Tuesday after the stock market closed, and the next day its shares gained $3.35, or 11 percent, to $33.22, after hitting a record high of $33.61.
Even as Penson integrates its recent additions--costs related to converting Schonfeld customers took 2 cents out of fourth-quarter earnings per share--analysts on the earnings call Wednesday pressed CEO Philip A. Pendergraft on the company's current acquisition stance. The company would look to make deals that expand its scale and existing capabilities, he said, adding, "Without commenting on any specific conversations--or even that we're having conversations--we think the environment remains very good."
In an interview prior to the earnings release last week, reflecting on changes that the IPO has brought about, Penson president Daniel P. Son said that the company is now more in the public eye, and acquisition candidates naturally present themselves. "We put them through a filter," said Son. The conversations that take place are not necessarily predicated on acquisitions. "They could be about adding new business as a correspondent," he noted.
In the case of Schonfeld, top executives Steven Schonfeld and Andrew Actman decided to focus the firm on its core trading strengths, turning clearing and transaction processing over to a company that specializes in those functions. The Goldenberg Hehmeyer business "fills a product-offering gap" for Penson in futures clearing, as "we were a nonclearing futures commission merchant," Son explained. "They had a lot of prospects for bringing in new customers, but not enough capital," Son said of principals Ralph Goldenberg, who is now vice chairman of Penson GHCO, and Chris Hehmeyer, its president and CEO. "We could bring capital to bear," said Son.
Including nearly 100 Goldenberg Hehmeyer employees--not counting those of a London-based proprietary trading business that remains independent and headed by Goldenberg--Penson Worldwide now employs 900.
Across-the-Board Gains
On the Penson earnings call, Pendergraft said that acquired and continuing businesses, including core clearing activities in the U.S. and Canada, contributed to a fundamentally strong fourth quarter and full year. Clearing operations' quarterly revenues increased 23 percent, to $19.7 million, as the number of correspondents served rose from 220 to 230 and the company handled more volume per correspondent.
With expenses growing more slowly than revenues, the companywide operating margin doubled, to 14.8 percent from 7.3 percent. "We are a scale business with significant operating leverage," said Pendergraft, "and our results for 2006 bear that out."
Penson's fourth-quarter income from continuing operations jumped 208 percent, to $7.7 million, and corresponding earnings per diluted share rose 131 percent, to 30 cents from 13 cents, reflecting the IPO. The quarter's revenues gained 37 percent year-over-year, to $79.4 million, roughly 28 percent of the $287.6 million for the full year, on which income from continuing operations rose to $24.3 million from $2.7 million in 2005.
