Thomas Weisel Partners Group Inc. Q3 2009 Earnings Call Transcript

Thomas Weisel Partners Group Inc. (TWPG)

Q3 2009 Earnings Call

October 28, 2009; 05:00pm ET

Executives

Tom Weisel - Chairman & Chief Executive Officer

Ryan Stroub - Chief Financial Officer

Lionel Conacher - President

Analysts

Devin Ryan - Sandler O’Neill

Lauren Smith - KBW

David Trone - Fox-Pitt Kelton

Presentation

Operator

Good afternoon, and thank you for joining the Thomas Weisel Partners earnings conference call. I have been asked to remind you that today’s call includes forward-looking statements, and those statements represent beliefs regarding future events that by their nature are uncertain.

Actual events may differ possibly materially from what is indicated or implied in those forward-looking statements, and TWP makes no commitment to update them. For a discussion of some of the factors that could affect those statements, please see the risk factors set forth in TWP’s most recent reports filed with SEC.

This audiocast is copyrighted material of TWP and may not be duplicated, reproduced or rebroadcast without consent. As a reminder, today’s call is being recorded.

I would now turn the conference over to the Chairman and CEO, Mr. Weisel.

Tom Weisel

Good afternoon, and thank you for joining our third quarter earnings call. With me is Lionel Conacher, our President and COO; and Ryan Stroub, our CFO. I will provide an update on our firm, and then I’ll turn it over to Lionel and Ryan to provide details on the third quarter results.

With the economic recovery taking hold, and as companies with strong fundamentals, especially in technology and the resource industries, continue to post top line growth, we are starting to see strength in our investment banking business, which increased 9% sequentially for the quarter. As interest returns to the emerging growth sectors of the capital markets, we are confident our investment banking business will benefit.

Our conversations with our corporate finance clients have not only picked up substantially, but the tone and outcome are much more actionable in nature, evidenced by the pick up in deal flow and building pipeline. Our expansion into the resource sectors diversified our platform, and continues to be an important component of our revenues. With the lag in growth equity issuance in the US, our investment banking business benefited from the energy and mining sectors, which represent 51% of investment banking revenues in the first nine months of ‘09.

We are pleased with our efforts on the cost reduction side of our business, and we remain steadfast in our approach to managing our business on a low cost structure; however, it has been important that we keep the leverage in banking, as we return to a more normal capital markets environment, as well as maintain an impactful brokerage unit; we think we’ve accomplished both.

Preserving capital has been a top priority. While we believe we maintain a solid capital position, we intend file a universal shelf statement with the SEC to register up to $100 million in securities. We do not have any immediate plans to raise capital. The shelf filing provides us with the flexibility to raise capital or take advantage of future growth opportunities. As we weigh options, we will be extremely mindful of the dilutionary impact.

Our strategy of maintaining deep coverage and broad product offering, and five growth verticals remains at the core of the firm’s strategy. We have built an integrated platform and our teams are working hard to deliver positive results. As we look forward, we are encouraged by the improving operating environment, which enables to demonstrate the earning power of the firm.

I will now turn the call over to Ryan who will provide details on our financial results.

Ryan Stroub

Thanks Tom. In the third quarter, we recorded a GAAP net loss of $14.4 million, and a GAAP dilutive loss per share of $0.44. Adjusting for non-cash tax affected amortization expense of $1.5 million, related to intangible assets acquired in the Westwind Partners transaction, we recorded a non-GAAP net loss of $12.8 million, and a non-GAAP dilutive loss per share of $0.39.

For the quarter our pretax loss, excluding certain non-cash items, was approximately $4 million. From pretax income, we primarily included non-cash share-based compensation, depreciation, amortization of intangibles, and unrealized investment gains and losses. As of September 30, we had $66 million in cash and cash equivalents, and $52 million in excess regulatory capital on a consolidated basis, compared with $89 million and $49 million as of June 30 respectively.

As previously disclosed, during the quarter we purchased at par, approximately $13 million of auction rate securities. The change in cash is primarily due to the repurchase of these securities, and the payment of mid-year bonuses pursuant to our acquisition agreement with Westwind. As Tom stated, we are committed to preserving our capital, and we expect to end the year with cash of approximately $70 million, excluding reserves for year end bonus payments.

Total net revenues were $3.6 million in the third quarter, a 11% decline compared with net revenues of $49 million in the year ago quarter, and a 10% decline compared with $48.3 million in the second quarter. Investment banking revenues were $15.6 million in the third quarter, a 11% decline compared with the year ago quarter, and a 9% increase compared with the second quarter. We completed 23 transactions in the third quarter, versus 13 in the year ago quarter, and 28 in the second quarter.

Brokerage revenues were $24.3 million in the third quarter, a decline from $33.7 million in the year ago quarter, and from $27.7 million in the second quarter. Asset management net revenues were $3.9 million in the third quarter, compared with net losses of $2.3 million in the year ago quarter, and net income of $6.4 million in the second quarter.

On the expense side, compensation and benefits were $27.3 million, a decrease of 26% and 9% from the year ago quarter, and second quarter respectively. This significant decrease over the year ago period is a result of our head count reductions. Our non-GAAP compensation ratio decreased 63% in the third quarter, compared with 68% in the year ago quarter, and was slightly up from 62% in the second quarter.

Our non-compensation expenses which totaled $30.3 million in the third quarter, included a non-cash facilities charge of $2.6 million or $0.08 per share, as a result of further reducing our real estate footprint in San Francisco. Excluding this charge, our non-compensation expenses would have been $27.7 million, representing a 29% decline over the year ago period, excluding the goodwill impairment charge, and a 5% decline over the second quarter.

Market and promotion expenses decreased 37%, communications and data processing decreased 24%, brokers execution decreased 18%, and other expenses decreased 34%, all compared with a year ago quarter. Our effective tax rate was a negative 2% in the third quarter, compared with 9% in the year ago quarter, and 6% in the second quarter.

As we mentioned on previous calls, we recorded a full valuation allowance on our US and UK deferred tax assets as of December 31, 2008, and as a result do not currently recognize a tax benefit on losses in the tax jurisdictions. The tax expense in the third quarter is related entirely to taxable net income reported by our Canadian operations, mainly driven by investment banking activity at a rate of approximately 33%. Looking forward as we become profitable in the US and the UK, we will be able to utilize approximately $47 million of net operating loss carry forwards.

I will now turn the call over to Lionel.

Lionel Conacher

Thanks Ryan. We are starting to see growth in investment banking across all product lines. The fourth quarter is off to a great start already, having closed 13 transactions across all product lines. Additionally, we’ve announced four M&A transactions that are expected to close by the end of the fourth quarter.

We also have renewed confidence that investment banking will continue to grow based on the high quality companies in our pipeline. Our brokerage business is stable, and benefiting from the contributions of our recent hires.

As I stated on previous calls, we have aggressively reduced the cost side of our business, to mitigate lower than average historical revenues. While we continue to fine tune our expenses, based on opportunities we are seeing in the marketplace, our focus has shifted to capitalizing on the growth prospects of our business, and to increasing our market share. We continue to strategically hire and invest in areas where we believe there to be the greatest impact.

In August, Matt Allard joined as Managing Director of investment banking focused on financial sponsor’s. Matt’s dedicated financial sponsor effort is an important component of further developing relationships with venture and private equity firms, which is a cornerstone to the firm’s strategy.

Also in the investment banking group, we are pleased to announce that Abi Subramanian will join the firm as Managing Director in capital markets, focused on private placement. Abi brings detailed industry knowledge with respective private placements and deep client relationships developed over the past 15 years.

In our institutional brokerage group, Hank Lammens joined as the Managing Director in trading. With over 12 years of experience, Hank has brought established institutional relationships to our platform. Also on our trading desk, Kevin Travis joined as the Director, focused on growing our middle market business.

I will now turn to the operations of our investment banking and brokerage businesses. In the third quarter, investment banking revenues increased 9% in the second quarter, mainly due to the strength in capital raising transactions, particularly in Canada, also contributing to the increase with higher transactions values, leading to an increase in revenues per average transaction as compared with the second quarter.

In the quarter we led 10 capital raising transactions generating over 75% of our capital raising revenues. Joint book managed transactions included both Cisco Exploration, North American Palladium, and Petrolifera Petroleum. Strategic advisory revenues decreased 17% from the second quarter to $5 million. This decline is a result of closing one less transaction than the prior quarter, and slightly lower revenues per M&A transaction, due to a decline in the overall average deal value.

We recently closed or announced five strategic transactions within the health care and technology sectors. Among these include Dainippon Sumitomo’s pharma acquisition of Sepracor for approximately $2.6 billion, Life Technology’s sale of a business unit to Danaher Corporation for approximately $450 million, Merricks in its merger with Bio-Systems, E Ink’s revised merger agreement with Prime View International, and Agilent’s Technologies sale of a product line to Ixia.

Investment banking revenues by region were split fairly equally in the third quarter, with 52% generated from Canada and the UK, and 48% from the United States. The composition of investment banking revenues by sector was led by mining, representing 44%, a sector that continues to perform well, followed by health care which accounted for 20%, and the remainder fairly equally split among energy, technology and consumer.

It’s our view that we have not yet recognized the full potential related to the market rally. Typically the first companies to come to market are larger cap names resulting in a lag between this tier and growth companies. The second step is typically the return of activity in the middle market space, which we are now starting to see, and which is reflected in our backlog.

Our current backlog, consisting of the number of files and announced transactions that has increased significantly versus the beginning of the third quarter, for both capital raising and strategic advisory assignment; specifically, the number of follow-on’s has increased 250%, and the number of M&A deals increased by over 100%.

Our brokerage revenues in the quarter declined 13% sequentially. The primary reason for this decline is attributable to lower US institutional commissions, coupled with lower revenues in our electronics and block trading businesses. While equity market indices rose during the quarter, both market volume and volatility, which are the key drivers of revenue in our brokerage business were lower on a sequential basis.

In the summer months our revenues trended lower than the average in the first half of the year, and our retention ratio declined; however, in September the business improved significantly, mainly due higher volumes and a higher retention ratio. Current trends suggest that our brokerage business is improving, as we are now seeing contributions from the senior sales and trading hires that have joined our platform this year.

On the Canadian brokerage platform, revenues increased 32% from the second quarter. Contributing factors there were the pick-up in volumes in September, and the benefits from an increase in investment banking deal flow. We are encouraged by the increased level of activity right across our businesses. We are starting to benefit from the improved operating environment, particularly in investment banking. We’ve built a diversified platform that we have largely kept intact throughout the downturn, in order to capture the upside potential.

I will now turn the call back to Tom for some details on our asset management business and concluding remarks.

Tom Weisel

Thanks Lionel. In the third quarter asset management total net revenues were $3.9 million, consisting of management fees of $3.8 million, net realized and unrealized gains and warrants and other securities of $200,000, and net realized and unrealized private equity losses of $100,000. While the broader market experienced rising asset values in the quarter, several companies in our health care portfolio were written down.

Our Portland growth strategies team continues to perform exceptionally well. Through September 30, every product achieved top quartile performance against its peers for the year-to-date period and for the last 12 months.

Small cap growth strategy accounts are up 38%, which is over 900 basis points above the Russell 2000 Growth Index benchmark for the nine months ended September 30. Additionally, all products will achieve their full three year track record on December 31 ‘09, a milestone many institutions and consultants need to see to commit capital. Geologic resources also continue to have outstanding performance.

As I look out over the next several quarters, our overall investment banking activity has picked up significantly in the last three months across all product lines, which will positively impact us next year. Our fourth quarter investment banking activity has started to return to a more normal level of activity. We witnessed an increase in the pace of formal IPO pitches that were essentially non-existent months ago. Management teams and boards are now in evaluation mode, and are analyzing data to see if they want to move forward and many are.

With most companies looking to file off of year-end results, spring and summer offerings could increase substantially. There are also a number of deals for both equity offerings and strategic assignments, that we have been awarded a mandate on, but are not yet reflected in public filings.

As the IPO markets slowly returns, our recent history could add perspective for the future. After the market bottomed at the end of 2002, it took more than a year before the US IPO market went from issuing roughly 80 IPO’s a year, to an average of 240 per year for the four years following. Our firm was the leading venture backed underwriter during that time, averaging 27 US IPO’s per year.

In 2007, on a combined basis we generated $49 million of revenue associated with IPO issuance. In 2008, this declined significantly to $4 million, and this year 2009 year-to-date we have recognized a third of the 2008 level. I believe the quality and the quantity of the venture backed IPO’s in 2010 will be as good if not better, than we have seen over the past decade.

In several of our verticals such as software and internet, we have identified over two dozen quality prospects for possible IPO issuance in 2010. In addition, the M&A environment has significantly changed for the better. Last weekend, Barons pointed out that larger technology firms are back in acquisition mode, which has already positively impacted our business. If I’m right about next year’s environment, our investment banking revenue should increase substantially in 2010.

In summary therefore, throughout this downturn our strategy has been to keep the scale, breadth, and depth of our franchise, in order to capitalize on the upside. Given the improved operating environment, and the momentum we have established in investment banking, along with our commitment to control costs, we expect to return to profitability in 2010.

I will now open the call up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Devin Ryan with Sandler O’Neal.

Devin Ryan - Sandler O’Neill

Hi, guys, how are you doing?

Lionel Conacher

Hi, Devin

Devin Ryan - Sandler O’Neill

First questions on the brokerage business I guess first, what were the loss rates in the quarter, were those meaningful and then I guess to follow on, seems like that business just gotten tougher and tougher every quarter. Do you see revenues kind of leveling half year, especially kind of given the new people that you hired and I guess also potentially what the pickup in capital raising activity and how should we think about growth in that business going forward?

Lionel Conacher

So, Devin, this is Lionel. Let me talk to the brokerage business and Ryan will try in here. On the quarter, our overall retention ratio actually improved from 75% from 70%. We had a more difficult July and August, but September we ran quite a low loss ratio and so on an overall basis for the quarter, our loss ratio improved quarter-over-quarter from Q2 to Q3 and it’s inline our target loss ratio is in the 20% to 25% on institutional business.

So for Q3, we were kind of at the top end of that range, but we think with we’re kind of volatility that we had in Q1, Q2 has largely gone out of the market and things seem to be much more stable. In terms of the second question, can you just clarify specifically; you’re talking about the follow on business, is that are you talking about?

Devin Ryan - Sandler O’Neill

Essentially with revenues essentially declining in the last few quarters, just trying to get a sense if you have seen any signs of them leveling off on the brokered business and I guess suggesting that maybe reason why that would be, given that you hired new people there and that also that capital raising activity may pick up which will help brokerages as well. You trying to think about what the growth in that business it look like, maybe the level of where we have been, is going to level off.

Ryan Stroub

Devin, I don’t think $24.3 million we would consider a baseline level. I think certainly what we expect going forward, is something more what you saw in 2008, as far as a baseline and depending how some of the new hires go, and somewhat business lines go, it could go up from there.

Devin Ryan - Sandler O’Neill

That’s helpful. That was actually the detail I was looking for.

Lionel Conacher

If you look back over the last three years, ‘06, ‘07, ‘08, the firm has been able to generate on a pro forma combined basis, with the Canadian business. Somewhere on the order of $30 million, $32 million, a quarter and that’s the level that certainly we feel comfortable, given our research footprint and the number of guys we got against the business on a go forward basis.

Devin Ryan - Sandler O’Neill

Asset management, I’m not sure if you covered this, but it looked like rolling up a couple of percent from last quarter, despite the big market move. Any color there would be appreciated.

Lionel Conacher

Well, the big part of the assets are in the fund-to-funds in venture, and so there is quite a lag between the market, the public market recovering and asset values that are primarily aimed at that sector. A vast majority of those assets are either in direct investments in venture or those fund-to-funds in venture and you will see a lag in terms of those assets being written up relative to public comps. You might see part of that actually in the fourth quarter. I think there is a lot more attention to the valuations at year end than they are mid year.

Devin Ryan - Sandler O’Neill

Investment banking you spoke about the trends with growth companies is improving and obviously it sounds like you are expecting a much better 2010. Just thinking about how good it could be, I mean do you see any reason why we couldn’t get back to the 2006, 2007 type levels for those sectors of the economy?

Lionel Conacher

No I don’t. I think to the contrary, you had four decent years in the venture backed monetization in the IPO market and M&A and now you kind of dam that up for a couple of years. So, a lot of these companies now have spent, instead of three years, five or six years inside and are bigger and more subsidents. So, that’s why I made the comment about quality. You’ll see the crop of 2010, being some of the best we seen in decades frankly, more unique, more diversified, larger, but sustaining even though larger pretty high growth rates in 30% to 40%.

Devin Ryan - Sandler O’Neill

In terms of the shelf, it sounded like the filing is more just a function to give you flexibility, but nothing is imminent are you seeing acquisition opportunities or other opportunities that you feel like could be beneficial to have this additional capital to deploy right now or just you want to have the flexibility to do something if opportunities do come offer or to be offensive depending on where the market goes, I guess.

Lionel Conacher

I think it’s more the latter. We didn’t see a lot of opportunities, but frankly prices of say asset management companies, even though they come down a lot are still high for on our standards and therefore we be much more inclined to build rather than buy, but it isn’t out the possibility, which is where we are seeing most of the potential acquisition ideas.

I would say, that we just want to put up a shelf, let it run for quite a while, it’s kind of the advice we give a lot of our clients that maintain flexibility, because who knows what could happen 6, 12, 18 months down the road. So, that’s the reason we are doing it. We got absolutely no plans immediately to do anything.

Devin Ryan - Sandler O’Neill

That’s fair and I appreciate the color and then just lastly, can you guys give additional detail on that $0.08 charge, related to the downsizing of the San Francisco real estate footprint. That would be helpful?

Ryan Stroub

We had got some leases, we got two properties in San Francisco and we have some leases that ran through 2012. With the headcount reductions, we were able to consolidate into one of our buildings and take the opportunity to sublet some of those floors and improve the cash flow. In doing that, the delta, between what we pay in rent and what we cost in sublet we have to accelerate that charge in the current quarter.

Devin Ryan - Sandler O’Neill

So that is a one time...

Ryan Stroub

Yes, it is a one time non-cash charge.

Devin Ryan - Sandler O’Neill

Got it okay, great. Thanks for taking all those questions.

Ryan Stroub

Sure, thanks Devin.

Devin Ryan - Sandler O’Neill

Ryan, it’s probably worth while reminding Devin and the other folks, just in terms of what our lease costs are going to be on a look out basis from this year to next year and into ‘011.

Ryan Stroub

Devin, I think we spoke about that maybe in the last call, but just kind of reiterate that point. With the downsizing, we have done a lot of space rationalization. We have really reduced our footprint, and consolidated our people into existing floors, and taken advantage to sublease some of the floors that were under contract and we expect our facilities charge to go down between $5 million and $6 million next year.

Operator

Your next question comes from Lauren Smith with KBW.

Lauren Smith - KBW

Hi, how are you this afternoon?

Lionel Conacher

Hi, Lauren

Lauren Smith - KBW

A couple of questions, one or two follow ups on the brokerage side, you made commentary and color about U.S., and touched on Canada, but how is U.K. activity coming along and even if you don’t want to give a specific breakdown of the brokerage revenue, how would it be segmented by those different regions?

Lionel Conacher

So to talk about how the business is doing, it’s relatively flat year-over-year. There hasn’t been significant change from last year. We have in the last couple of months added an additional salesman in our U.K. Office and he is starting to get traction now and in particular, given the resource deals that have been happening and typically we sell somewhere between 20% and 30% of those deals in the U.K., and that be gets trading over there as well. So, that side of the business is actually coming along okay. From a segmentation standpoint, between Canada, U.S., we haven’t historically broken that out.

Lauren Smith - KBW

I mean is it fair to say that Canada and U.S. are significantly larger than U.K. and sounds like you are getting traction in Canada. So, could you envision those businesses coming to a point where they are almost like equal in size?

Lionel Conacher

I talk it be the equal in size. In order of contribution, the U.S. is still significantly larger than Canada, and Canada is equally larger than the U.K. this is right now. I think that there is clearly an opportunity we are finally starting to see the benefits of the integration and selling U.S. stocks up into the Canadian long only accounts.

We have been successful in marketing some of our large cap U.S. tech clients up in Canada. We’ve had over the course of the past three months six or seven of the larger branding companies market up in Canada. We are starting to get paid for that now. I think we are going to see direct benefit of that in the December. Then similarly, over the course of the past 18 months, we’ve worked very hard with our Canadian analysts to have them move a segment of their coverage up market.

In particular, in the gold and energy services, and then the energy side is now coming along and we are starting to get traction selling those types of names down, set bound into the U.S. institutional account side of things. That’s taken much longer than we thought it would, but it is now finally starting to happen and I think we’ll be able to benefit for that over the coming months and the year.

Lauren Smith - KBW

Great, that’s helpful. When you look at your kind of traditionally, your top ten accounts had represented pretty significant portion of your brokerage revenues, has that changed at all? I mean do you see it becoming broader or is it still kind of top ten represent a big portion?

Ryan Stroub

It become broader I wouldn’t say it’s become much broader, but certainly become broader over the course of the past year or so. The top five accounts have gone down and we have added other names from what was traditionally very heavily weighted in the long only panel accounts, a much bigger diversification in the top 60 names between the long only final accounts, and the larger hedged funds accounts now.

Lauren Smith - KBW

Okay. So the mix shifting a little bit and then I guess, shifting gears, what was your head count at quarter end?

Lionel Conacher

450.

Lauren Smith - KBW

Okay and with respect to talking with folks bringing them on board, are you finding that level of dialogue accelerating, not really changing, and do you feel like people’s expectations are starting to change, or is this still life opportunities here?

Lionel Conacher

I would say that this quarter versus last, we’ve seen very clear tightening up in the market. We seen despite comments to the contrary by some of our direct competitors that they aren’t hiring using multiyear guarantees, we’ve seen that they have actually store people from us in the last month or so using multiyear guarantees.

So the market is definitely tightening up for talent and we’re seeing some folks like BMP, just announcing that they are going to hire whole bunch of people in the coming year and the UBS’s of the world restaffing. So, I would say the market for talent is tightening up.

Lauren Smith - KBW

Is there any area of your platform that you could identify here whether it’s a different vertical or product in asset management that you feel that will there is a hole or is it more adding opportunistically, and really penetrating what you are maximizing what you have currently?

Lionel Conacher

I think it’s very much more the latter timely on this but I think we are very comfortable with the current size of the firm. You’re not going to see us go on a massive hiring binge. We are selectively adding talent in the sectors that we are focused in and across all three departments.

I would say the one area that we continue to feel that we need to deep up and increase our footprint, but on aligned basis is in research group. As we ended the quarter, we had about 480 companies under coverage and we would like to see that in total number of companies by the end of next year much closer to a number like 600 companies under coverage.

Lauren Smith - KBW

So are you seeing new verticals, or is it more going up cap..

Lionel Conacher

It’s actually I don’t think it’s necessarily going up CapEx. It’s just expanding, for example within energy; we got one U.S. energy analyst. It would be very logical for us to add a second EMT analyst and another U.S. based oil services analyst to compliment what we are doing in Canada. So that’s how you are going to see us do it.

Lauren Smith - KBW

Okay, great, I guess its last question for me, theoretically you have this shelf out there. As there is an opportunity comes along in terms of in organic growth, could you just sort of higher level prioritize, where you would like to expand in terms of prioritize looks like in your business. Is it really asset management or is there a product or geography potentially where you feel you want to get an entrance?

Tom Weisel

Well I say there is probably three areas big areas. I mean in the first is asset management, most important. Two, product, we are not in the debt side. So do we get in there, and how we get in there is a big question for us and three, we like the growth area of financial service and so what if anything, do we do there. I would say that from an expansion standpoint, those are kind of the three and in that priority we would take a look at opportunities.

Lauren Smith - KBW

So you would consider getting in to select areas of fixed income.

Tom Weisel

Well, we are reviewing that right now. I’m not to say we are going to do it, but we are thinking and trying to analyze that. Having been in that business and starting a number of those businesses over at, I recognize how difficult and capital intensive they are, but having said that, we are looking at a few other different models right now.

Lauren Smith - KBW

Okay. Thank you for taking my questions.

Lionel Conacher

Thanks, Lauren.

Operator

(Operator Instructions) Your next question comes from the line of David Trone with Fox-Pitt Kelton.

David Trone - Fox-Pitt Kelton

Actually, I tried to queue, because my question was asked and answered, but maybe I will kind of come at it from a little bit of a higher level. So, the fact of $5, and the bear case that I hear is that, because of the downturn, layoffs, and some departures, you don’t have the fire power that you had coming in. Not saying I agree with it, just kind of telling you what I hear. How would you respond to that? You had people coming in and going out. How do you think about the quality and experience of the staff that you have now, say before the financial crisis.

Lionel Conacher

Well we have the same amount of calling officer today that we had in ‘07 in investment banking and we have same amount of senior people. We had turnover particularly in our healthcare group a couple of years ago and we replaced them and you can see by the M&A activity, they’re highly prolific. Doing a $2.6 billion merger with Sepracor, and doing a very substantial transaction for Life Technologies, those are big high quality clients.

So that group is doing a terrific job and they’ve got a nice backlog both in the capital raise and M&A. So, I think we tried very hard. The people we eliminated were either in junior ranks, or non-aligned activities like in research where we didn’t have banking and so we feel that ‘07 is kind of a benchmark, and could we get back there with the current staff and the answer is a resulting yes.

Tom Weisel

If you look back to January 2 2008, when we closed the Western transaction, we had about 750 people and today, we are around 450. Over the period of time, we actually had about 350 people leave. We hired about 50 people over the course of the past 18 months. Almost all on the producer side, and almost all actually I would say with exception, upgrades to the folks we had here before.

So, I think our revenue generating potential is equal to, if not better than what it was a year and a half ago and I think the other points to make, is that of those 350 people, a huge number of them were on the IT ops and admin side of things. Where the firm we had more capacity than we needed, and we really focused on right sizing.

As I said before, the one area that in terms of overall number of analysts and overall companies under coverage, and where we are at the bare minimum of where we want to be, is on the research side. That’s an area where in order to maintain the historic position that we had in terms of our rankings, OpEx rankings and rankings with our institutional accounts, we need to beef up a little bit there over the coming months and we are actively doing that right now and I think you will see some announcements in that regard in the not too distant future.

David Trone - Fox-Pitt Kelton

Okay, great another follow-up question. When you brought people in the door, to what extent did they get the stock?

Lionel Conacher

That’s a very good question. We have been very disciplined in the guarantee side of things and perhaps unlike some of our competitors in that regard. The one thing we did do, as we brought people on is that we issued them restricted stock units, but rather than just giving them outright restricted stock units, we did it on a vesting schedule that was directly tied to the revenue production. So, its all everybody we brought on at a senior level has a significant amount of stock.

For them, I think in retrospect, they will look back and say they got it at good levels and it’s tied the vesting is tied to their ability to produce revenue in the coming months and years. We like that model a lot. I can say that we have been very successful. We hired Joe Kerry as we talked about before on the last call to come in and run our North American energy practice on the banking side and virtually everybody that we hired at the senior level we’ve done it using that model.

David Trone - Fox-Pitt Kelton

Okay, great and then maybe one last question. I know this would have been a hard question to answer in the past two quarters, but as you are starting to see activity pick up again here on the other side, how has the deal economics changed or actually maybe I am thinking more along the lines of competitive landscape.

We all know the big picture stuff, but in actual practice now, as you are going in and pitching deals, are starting to see better economics or and then in terms of what are you seeing from the bigger guys, and what are you also seeing from folks more directly at your size and competitive talking about the names around that kind of small cap and private segment.

Lionel Conacher

Yes, it’s a good question and historically during the ‘05, "07 period, we had between a 30% and 35% leader book manage percentage on total deals, and deals that were at $500 million or market cap or lower, the book and lead percentages were up 40% to 44% level, depending on the year. This year we are doing very well, so far year-to-date, we’ve done 12 book or lead transactions 34% of our deals, 44% are at $0.5 billion dollars.

I think even though the volume is somewhat muted, we are kind of coming out of the box pretty well. Having said that, in the dozens of bakeoffs that we have been in, the competition is never been fiercer. If anybody thinks that some of the excess capacity in Wall Street’s been diminished, I can tell you it hasn’t.

The big firms are reaching down market; we are seeing the biggest firms compete for some $300 million market cap IPO business. So the competition is absolutely peers, particularly on the book side, either one or two books. We are confident that we can either maintain or increase our book or lead managed percentages, which is pretty unique.

I think there is only one or two other focused firms that have anywhere near close to this kind of record. It might be tough to maintain that just measly coming out of the box here, depending on the volumes but we are pretty confident we are going be able to hold this over the course of the next year or two. I hope that answered to your question.

David Trone - Fox-Pitt Kelton

Yes, absolutely. Thanks for your answers that was great.

Lionel Conacher

Okay, David.

Operator

There are no further questions, do you have any closing remarks.

Tom Weisel

Yes, I want to thank everyone for joining this call that afternoon and for your interest in our firm. We look forward to a much improved operating environment going forward, and discussing with you this with you in the future.

Operator

This concludes our program. You may now disconnect from the audio.

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