We have two investment banking forms merging to become one larger firm. In a surprising merger transaction, Stifel Financial Corp. (NYSE: SF) and KBW Inc. (NYSE: KBW) have announced a definitive merger agreement to create the premier middle-market investment bank with a focus on the financial services industry. This merger is not so much of a merger as much as it is an acquisition of KBW by Stifel.

Both boards of directors have agreed to terms whereby KBW shareholders will receive $17.50 per share, versus the $16.30 closing price on Friday, and versus a 52-week trading range of $12.43 to $19.27. The exact payout will still give KBW some ongoing skin in the game as the breakdown is $10.00 per share in cash and $7.50 per share in Stifel common stock. Additionally, holders of certain restricted KBW shares which will continue to vest post closing will receive $17.50 in Stifel common stock.

As far as the exact price the companies said:

The stock component of the consideration is fixed at $7.50 per share, subject to a collar, provided that the volume weighted average closing price of Stifel common stock for the ten days prior to closing is between $29.00 and $35.00 per share. If the volume weighted average price rises above $35.00 per share, the exchange ratio will be fixed at 0.2143 shares of Stifel common stock for each share of KBW, and if it falls below $29.00 per share, the exchange ratio will be fixed at 0.2586 shares of Stifel common stock for each share of KBW.

Before the announcement, Stifel’s market cap was about $1.4 billion and KBW was valued at about $496 million. This transaction is valued in excess of $575 million, if you include the outstanding shares and restricted stock awards of KBW. Approximately $250 million in excess capital on KBW’s balance sheet is expected to be immediately available to Stifel upon closing.

JON C. OGG

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