ISI’s Hyman Parlays Research Into Fortune With Evercore Deal

Aug 04, 2014 10:43 am ET

(Updates with share price in seventh paragraph, buyback plan in eighth.)

Aug. 4 (Bloomberg) -- Ed Hyman, Wall Street’s top-ranked economist for more than 30 years, is on the verge of cashing in on his research by selling his firm.

Evercore Partners Inc. said yesterday that it agreed to buy his International Strategy & Investment Group LLC and the remaining 40 percent of its own equity business for as many as 8.1 million shares, or as much as $406 million at Evercore’s Aug. 1 closing price. Almost 70 percent of the payout is contingent on five-year profitability targets. Dana Gorman, a spokesman for New York-based Evercore, wouldn’t say how much ISI will receive.

Hyman, who started developing economic forecasts on early computers in the 1960s, made a bet about four years ago that he could expand ISI beyond macroeconomics and hired top stock analysts away from Wall Street’s biggest banks. Regulatory records show he owns at least 75 percent of ISI.

“Ed Hyman is an industry unto himself,” said Richard G. Lipstein, managing director of New York-based recruiting firm Gilbert Tweed International. “ISI is one of the most successful research boutiques.”

Evercore, founded by former Deputy U.S. Treasury Secretary Roger Altman, is counting on ISI’s 226 employees to help turbocharge its 80-person unit that researches and trades stocks so it wins more business underwriting share offerings. Hyman, 69, will stay on as a vice chairman of Evercore and as chairman of the merged business, to be called Evercore ISI Institutional Equities.

‘Exceptional Record’

“ISI has delivered an exceptional record of revenue growth and market share gains during a challenging equity market environment,” Ralph Schlosstein, Evercore’s president and chief executive officer, said in yesterday’s statement announcing the deal.

Evercore, which first sold shares to the public in 2006, dropped 8.1 percent on Aug. 1, the most in three years, after Bloomberg News reported on the planned deal. The shares fell an additional 3.4 percent to $48.41 at 10:37 a.m.

Schlosstein said today on a conference call with analysts that Evercore plans to buy back about half of the shares it will issue to fund the deal over the next five years, reducing the potential dilution for investors.

Selling research to hedge funds has fallen out of favor on Wall Street because commissions are dropping, according to Don Putnam, managing partner at investment firm Grail Partners LLC.

Revenue Doubled

“From a strategic point of view, it is deeply contrarian,” Putnam said. The conventional wisdom is that the business is in decline, he said.

It hasn’t been for ISI. The New York-based firm lured analysts by guaranteeing millions of dollars over multiple years, according to five current and former employees.

The expansion roughly doubled the firm’s revenue, even as stock trading slowed and commissions fell across Wall Street, the current and former employees said. Evercore said that ISI and its own equities unit generated a combined $230 million from handling institutional investors’ trades in the year that ended June 30.

In the 1960s, when Hyman was studying for his MBA at the Massachusetts Institute of Technology, he met a Harvard University economist who was using a computer to make economic forecasts, according to a 2011 article in Institutional Investor. Hyman went to work for the professor’s company, then joined Wall Street brokerage firm CJ Lawrence Inc. a few years later, according to the magazine.

Birthday Calls

He started ISI in 1991 after Germany’s Deutsche Bank AG bought the British investment bank that had purchased CJ Lawrence in the mid-1980s. ISI built a following as Hyman won Institutional Investor magazine’s poll for the best economist on Wall Street for more than 30 years.

Hyman is more practical than most economists, examining railroad-car deliveries rather than Laffer curves, Peter Lynch, the former manager of Fidelity Investments’ Magellan Fund, wrote in his book “One Up on Wall Street.”

ISI expanded even as it got harder to make money in the equities business. Ticonderoga Securities LLC and WJB Capital Group Inc. shut down in 2012, while companies including Nomura Holdings Inc. scaled back ambitions as commissions dropped.

Hyman outdid his rivals partly with old-fashioned salesmanship, according to the current and former employees. He travels the world to visit large and small clients, calls them on birthdays and invites them to dinners at his New York apartment overlooking the East River.

Curbing Costs

Keeping on good terms with customers is crucial. Wall Street researchers charge for their work on a sort of honor system -- they distribute their work to fund managers, who decide what share of their total trading commissions should go to each firm. Top clients can end up paying $1 million a year or more, while those who don’t pay are pressured or cut off from the research.

There’s been some turmoil amid the strategic shift. Nancy Lazar, the economics analyst who founded ISI with Hyman in 1991, quit last year with two Washington-based researchers to start a rival firm. David Memmott, head of trading, left ahead of the Evercore deal. Evercore may eliminate some jobs after the purchase, a person with knowledge of the agreement said.

ISI brought in a new chief financial officer last year, Anthony Rose, who’d previously been CFO of Credit Suisse Group AG’s equities division, according to its website. The firm has scaled back some of its entertainment expenses, said a current employee who asked not to be identified because he wasn’t authorized to comment.

The new Evercore ISI unit will aim to keep compensation at no more than 55 percent of revenue and to cut the percentage that goes to other expenses as it seeks to achieve profitability targets, according to Evercore.

--With assistance from Matthew Monks in New York.