James Dunne III should be getting ready to step down as head of New York investment bank Sandler O’Neill & Partners. In 2002, while frantically trying to hold together a firm that had been decimated by the 9/11 terrorist attack on the World Trade Center, a beleaguered Dunne announced that he would only stay on as senior managing principal for five more years. Since then, however, the intense Long Island native has led a remarkable revival at the firm. Business - and morale - have never been better. Now Dunne, 50, says he’s having too much fun to quit.
“At the time, five years seemed like an eternity,” he recalls. “In hindsight, it wasn’t very thoughtful.”
Sandler’s comeback under Dunne is one of the most unlikely and inspiring stories Wall Street has seen in recent years. The terror attack not only killed 68 of the firm’s 171 employees - among them, investment banking chief Christopher Quackenbush, Dunne’s boyhood pal, and chairman Herman Sandler, his mentor - it destroyed irreplaceable business records and client information that had been housed at Sandler O’Neill’s headquarters on the 104th floor of the south tower. Dunne, who was golfing when the planes hit, worked tirelessly to rebuild the firm even as he mourned friends and colleagues - and dealt with survivor’s guilt. He infused the partnership with new recruits, many of them refugees from bigger, more prestigious firms who appreciated the boutique’s close-knit culture but also brought bigger ambitions with them.
The new Sandler O’Neill is on a roll. Last year the firm - which specializes in arranging mergers for financial services companies as well as underwriting and trading their securities - advised an industry-leading 37 bank and thrift mergers. For the first half of 2006, it ranked ninth among advisers on financial services transactions, based on the dollar value of the mergers and acquisitions it was involved in, according to research firm SNL Financial. That’s up from a 19th-place finish in 2005. It also places Sandler above bigger, more powerful firms, such as Credit Suisse and UBS. Among the firm’s recent coups is its biggest M&A mandate ever, representing North Fork Bancorp on its planned $14.6 billion acquisition by credit card powerhouse Capital One Financial Corp. - the second-largest financial services merger of 2006.
Today Sandler O’Neill employs 252 people, up nearly 50 percent from before 9/11. A private concern owned by its 38 partners, the firm doesn’t disclose its earnings, saying only that its annual revenues exceed $200 million. (Dunne contends that Sandler has been profitable every quarter since the start of 2002.) Investment banking accounts for more than half of revenues, with fixed income and equity brokerage - which are also focused on the financial services sector and driven by respected securities research - generating the rest.
Along with the firm’s success, however, come some critical strategic questions. Sandler’s prodigious deal making has been driven in part by a slowdown in business for its core clients: midsize banks and thrifts. Regional players like North Fork face challenges from a flattening yield curve, a slowdown in mortgage origination and steadily weakening credit quality. Though that may drive more banks to sell, it may also dampen their demand for capital-raising and sap investor interest in bank securities. Competing boutiques are bulking up. Among them: archrival Keefe, Bruyette & Woods, another firm that has rebounded since losing its headquarters and many of its employees on 9/11. KBW is planning an IPO, which will give it more capital and a currency for making acquisitions.
For now, Dunne and his partners say they are resisting the temptation to go public. An IPO could bring all manner of complications and thorny conflicts, says Dunne, a dynamic, sandy-haired man with a booming voice who waves his arms fervently when discussing Sandler’s passion for its clients. Unlike bulge-bracket rivals like Goldman Sachs Group and Morgan Stanley, Dunne’s firm doesn’t engage in proprietary trading or private equity investing - activities that can run counter to customers’ interests.
“We won’t leverage our capital against our clients,” he says. Dunne feels that the burdens of public ownership - addressing investors, talking to analysts, dealing with regulatory requirements - would detract from the time that he and other senior executives can spend with clients.
“If I thought it would make us more competitive, I’d do it today,” he says. “But we’re under no pressure to do anything.”
JIMMY DUNNE NEVER THOUGHT he’d wind up on Wall Street. Born in 1956 in Babylon, a comfortable suburb on New York’s Long Island, he took aim at a different game: golf. Dunne’s father, vice chairman of clothing company Cluett, Peabody & Co. and president of its Arrow shirt unit, instilled a strong work ethic in him. When he was just ten years old, the younger Dunne set out to earn money as a caddy at the Southward Ho Country Club in nearby Bay Shore, New York. (He fibbed and told the club he was 14, the minimum age for loopers.) It was here that Dunne befriended fellow caddy Quackenbush, who was about the same age. Soon, Dunne became serious about playing the game.
An above-average student in high school, Dunne went on to the University of Notre Dame. He graduated in 1978 with an economics degree but with no clear direction. After getting rejected by a few law schools, he took the suggestion of a Southward Ho member he had gotten to know through caddying - Robert Tighe, then a Bear, Stearns & Co. partner - that he try Wall Street.
“Jimmy was always an intense young man but with a good sense of humor, and he knew how to get along with people,” Tighe, now retired, recalls. “And he has an excellent memory, which is very important on Wall Street.”
Dunne landed a job as a municipal bond trader at L.F. Rothschild & Co., where he met Herman Sandler and Thomas O’Neill. He followed this group to Bear’s fixed-income sales division, where Sandler took him under his wing. In August 1988, Sandler, O’Neill, Dunne and four others founded Sandler O’Neill & Partners in an office near the New York Stock Exchange.
The firm initially focused on fixed-income sales and trading, as well as advising banks on structuring their asset-liability mixes and interest rate risks. Dunne ran the bond-trading desk and was the firm’s de facto chief operating officer. He soon lured Quackenbush from Merrill Lynch & Co. to start a banking business. Dunne also pushed the firm into trust preferred securities, debt-equity hybrids that banks started using for cheap capital in the late 1990s.
By early 2001, Dunne was tiring of the grind. He, Sandler and Quackenbush, who ran the boutique as a triumvirate, started to wonder where to take the firm next. But before they could figure that out, Sandler and Quackenbush were gone.
The 9/11 attacks exacted a deep emotional toll on Dunne. Especially painful was the loss of Quackenbush, whom Dunne says was “like a brother” to him. The funerals for Sandler employees went on for weeks.
“I don’t even know how many eulogies he [Dunne] delivered. I personally heard maybe 30 of them,” says Thomas O’Brien, a former CEO of Atlantic Bank of New York and a longtime friend and client of Dunne’s. “And then he had to put his game face on. That was a tremendous drain on him.”
There also was plenty of guilt.
The morning of the attacks, Dunne was on the links at the Bedford Golf & Tennis Club in Westchester County, trying to qualify for the U.S. Mid-Amateur Championship golf tournament. When the towers were hit, he rushed to Manhattan, arriving in the early evening.
In the end, stabilizing and rebuilding the partnership after 9/11 reenergized Dunne, who took over as the firm’s leader and quickly appointed veteran partners Fred Price and Jonathan Doyle as the other managing principals. Price, a former equity research head, is COO; Doyle runs sales and trading. They and the other remaining partners moved quickly to buy out the stakes of the partners who were killed in the attacks, straining the firm’s finances. They also immediately offered health insurance through 2009 to the families of those who perished that had no other insurance; 40 families continue to receive the benefit.
In 2002, Sandler moved to new, nondescript offices on Third Avenue and 55th Street, purposely picking a suite on the relatively low sixth floor. Today a small sculpture engraved with the 9/11 victims’ names stands outside Dunne’s office.
Although the pain lingers, Sandler has been reborn. The firm has absorbed an influx of new talent, capitalizing on the postbubble layoffs that flooded the Wall Street labor market from 2001 to 2003. Those who joined after 9/11 now make up a majority of employees.
One important newcomer is Robert Castrignano, 56, a retired Goldman Sachs executive who is now one of three Sandler principals running equity trading. Castrignano, known as “Coach” at Goldman, where he oversaw hiring and training in equities, quickly built Sandler’s institutional brokerage business, which previously called on clients only out of its Boston office. Castrignano soon had staff in New York, Chicago and other offices cold-calling institutions. Today institutions account for 95 percent of Sandler’s equity sales, up from just 10 percent before 9/11. (The rest of the flow comes from wealthy individual clients.)
Many of the new recruits instinctively went after bigger game. Robert Kleinert, a 20-year veteran of Salomon Brothers who now runs Sandler’s equity and fixed-income syndicate desk, pushed the firm to participate in bigger and more profitable deals. In 2000, Sandler underwrote just four offerings of $100 million or more, according to the firm. Last year it did 31 deals of that size.
Investment banking co-head Brian Sterling, who joined in February 2002 from Merrill, has helped broaden Sandler’s M&A and underwriting work beyond banks and thrifts to include exchanges and e-finance companies. In the past 12 months, Sandler has comanaged stock offerings for CBOT Holdings (parent of the Chicago Board of Trade), fellow boutique investment bank Cowen & Co. and E*Trade Financial Corp. Providing research support on the exchanges and online brokers is well-regarded analyst Richard Repetto, who joined Sandler in November 2003 from rival boutique Putnam Lovell NBF.
The need to honor those who were lost - and to provide for their families - also has helped to focus everyone’s energies.
That hard work is now paying off. In addition to coups like the North Fork deal, Sandler recently advised Harbor Florida Bancshares on its $1.1 billion sale to National City Corp. and counseled Commercial Capital Bancorp on its $983 million sale to Washington Mutual.
Sandler works to build long-term relationships. North Fork CEO John Kanas, who has relied on the boutique for counseling on balance-sheet restructuring and acquisitions for 15 years, turned to Sandler for advice on his company’s $6.5 billion purchase of GreenPoint Financial Corp. in 2004. He and Dunne speak several times a week.
“Jimmy and I spend a lot of time musing about what transactions could be done or couldn’t be done,” Kanas says. “Jimmy was an important part of all those conversations and contributed to our decision when we elected to merge with Capital One.”
Sandler’s core business remains midsize financial institutions: banks and thrifts with up to $10 billion in assets or $1 billion in market capitalization. As these clients grow, so does Sandler. The firms’ average M&A deal had increased from $123.2 million in 2002 to $617.4 million by July 2006, according to SNL Financial.
Even small deals can be significant if they are for big clients who can shower the firm with future business. Sandler bankers had been pitching ideas to the Chicago Mercantile Exchange before their firm won the mandate to advise the CME on its $15 million purchase of Swapstream, an electronic trading platform for interest rate swaps. Sandler now has an in with what is perhaps the world’s premier publicly traded exchange, which boasts a $15 billion market cap.
If Sandler has been reborn, so has Dunne. Friends say he has slowly but surely returned to his old self, his intensity offset by an easy smile and a preference for khakis and oxford shirts instead of suits. Long known inside Sandler as a shrewd, often blunt taskmaster, Dunne has had to adjust to being the public face of the firm - a role once filled by Sandler and Quackenbush. Friends and colleagues say he has become more patient and a better listener.
“I’m significantly less volatile,” Dunne confides. “I don’t yell anymore.”
Well, that depends on who you ask. “He’s still a hard-ass,” laughs Andrew Armstrong Jr., a co-founder of private equity firm Spire Capital Partners and a friend of Dunne’s. “I think he still yells the same amount, but he has to come back and apologize more often.”
SANDLER’S PARTNERS must now decide how quickly the firm will grow, whether it will stick to a financial-services-only focus and whether it will remain independent. The catalysts for change are many. First and foremost is the impending IPO of Sandler’s chief competitor, KBW. The firm tied Sandler for most bank and thrift advisory mandates last year, after Sandler finished second to KBW in that category in 2003 and 2004, according to SNL. With an infusion of capital and a publicly traded stock with which to compensate employees and make acquisitions, KBW will become a more formidable rival. Meanwhile, other boutiques have been scrambling to grow. The head count is rising at shops like Friedman Billings Ramsey and Evercore Partners (which went public last month). Another worry is that a slowdown in the banking industry will reduce the volume of deals done by Sandler’s clients.
Dunne feels no urgency to make sweeping changes. He believes that catering to small banks will continue to provide plenty of opportunity in the future. The bank and thrift sector has seen at least 250 mergers a year for five years running, according to the Federal Deposit Insurance Corp.
Sandler’s response to competitors is to diversify, adding ancillary services that closely align with its concentration on financial firms and financial structuring. In July, for instance, it unveiled a joint venture with American Financial Realty Trust, a real estate investment trust backed by former Salomon vice chairman Lewis Ranieri, to provide real estate sale-leaseback arrangements for the branches of midsize banks.
Sandler is also helping private equity firms put their swelling cash hoards to work in financial services. Buyout firms have long eyed banks because they generate fairly steady cash flows, but have eschewed majority ownership to avoid being regulated as bank holding companies. Sandler deals involve helping LBO shops buy minority stakes instead.
“That is going to be an important part of our business for the next few years, for sure,” says sales and trading chief Doyle, who is seen inside the firm and out as Dunne’s likely successor.
A bigger step would be to move beyond financial services. Ryan Beck & Co. - now also pursuing an IPO - in 2005 broadened from financial services to cover aerospace and defense, business services and real estate.
“It’s not lost on me that some of our success in the middle-market business could be transferred to another sector,” says Dunne, noting that Sandler could merge or partner with a boutique that has a different specialization. “If there was a deal that made a lot of sense, we would consider it.”
Another option is to simply join the ranks of IPO-bound boutiques. Dunne and his partners are careful not to rule out an IPO, but it isn’t their preferred route. Above all, Dunne is concerned about maintaining his firm’s ability to provide objective advice to clients. A private Sandler can stay truer to that ideal, Dunne reasons.
“They’ve told me ‘no’ more times than they’ve told me ‘yes,’ says Marty Adams, CEO of Sky Financial Group, a midsize bank in Bowling Green, Ohio, and a Sandler client for 12 years. Adams uses Lehman Brothers and other white-shoe investment banks for some transactions but places a high value on what he calls Sandler’s “deeper understanding of our company and our strategy.” In February, Adams chose the firm to help negotiate its $330 million purchase of Union Federal Bank of Indianapolis.
Dunne says he spends 70 to 80 percent of his time working with clients. Naturally, that includes time on the golf course talking about deals. (The CEO is a 4 handicap who still plays two or three times per week.) One thing is certain: Dunne won’t do anything to compromise his ability - and that of future leaders of the firm - to provide that kind of attention to customers.
“We focus on what’s best for our client,” he says. “So far, so good.”
