UPDATE: LaBranche Sale Shows Force Of Change Sweeping US Markets

LaBranche & Co.'s (LAB) sale to Cowen Group Inc. (COWN) highlights how Wall Street's old guard is reinventing itself to compete in a changing global marketplace.

The two old-line firms have struggled for relevance in the last year with sharply lower trading volumes and difficult market conditions. Both have been in transformation mode: LaBranche in the sale of its once-dominant NYSE specialist operations to Barclays Capital last year, and Cowen in a yearlong reorganization.

Despite these efforts, the companies continued to bleed money last year. Cowen said Thursday it expects to report a 2010 loss of $45 million to $47 million. LaBranche reported a $62.4 million loss last year, after a $97.8 million loss in 2009.

The deal, valuing LaBranche at $192.8 million, or $4.71 a share, will expand the merged firm's capital base and pair LaBranche's trading technology and electronic trading capabilities with Cowen's research and sales and trading operations in stock and options markets and its $9 billion alternative investment-management business.

"The combined organization will benefit from an increased capital base and will accelerate our time to market in a number of high-growth areas in sales and trading," Cowen Chief Executive Peter Cohen said Thursday in a statement.

A desire for more capital may spur more mergers among smaller, boutique investment banks that have to compete with the huge resources of bulge bracket firms, Cohen added in an interview. Thursday's deal is "further evidence you'll see consolidation of the smaller firms because you need capital to support the businesses," he said.

The deal comes during another round of tumult in the exchange world, in which LaBranche was once a prominent player. Earlier this week, NYSE Euronext (NYX) formally announced a merger with Germany's Deutsche Boerse (DB1.XE) and a week ago, London Stock Exchange Group (LSE.LN) agreed to a merger with Canada's TMX Group (X.T), the operator of the Toronto Exchange.

On Thursday, Dow Jones Newswires reported a $360 million deal in the works between BATS Global Markets, a privately held electronic exchange based in Kansas City, Mo., and Chi-X Europe, also an electronic exchange.

The Cowen deal is a 16% premium to LaBranche's Wednesday close of $4.06. Shares of LaBranche rose 4.7% to $4.25 while shares of Cowen fell 8.5% to $4.32. Three law firms, acting on behalf of LaBranche shareholders, said Thursday they are investigating whether the firm could have extracted better terms.

LaBranche got its start in 1901, according to its website, trading shares of U.S. Steel. The firm was incorporated in 1924 and won designation as specialist for AT&T just days before the October 1929 crash.

Michael LaBranche is a third-generation chief executive and led the firm's initial public offering in 1999. He owned 3.2 million shares of the firm as of March, just over 7%, according to a proxy statement. At the time of its IPO, the firm was one of the largest specialists on the floor of the New York Stock Exchange, a business in which traders bought and sold their assigned stocks using their firms' capital to facilitate orderly trading.

At the time, the business was attractive enough to lure the biggest financial institutions, including Bank of America (BAC), which inherited specialist operations rolled up in several acquisitions over time, and Goldman Sachs (GS), which bought LaBranche rival Spear Leeds & Kellogg for $6.5 billion in 2000.

Then, just as everything was peaking, new regulations swept in favoring electronic trading and cutting deeply into the margins specialists once collected. A front-running scandal basically sealed the fate of the industry. By 2005, NYSE was moving rapidly away from the traditional model.

Several old-line specialist firms have dropped from sight in recent years, including Van der Moolen. Goldman, forced to recognize the business wasn't as valuable as it was a decade ago, last month said it wrote off $300 million--nearly all--of the value of its NYSE floor operations.

LaBranche sold its specialist book to Barclays Capital last year for $30 million.

The firm's revenues have fallen substantially in a low-volume trading environment. Trading revenues were $29.7 million last year, down from $42.9 million in 2009. The firm also once held 3.1 million shares of NYSE Euronext but sold 3 million shares of that position last year.

LaBranche said Thursday it has been reducing its options market-making positions over the last year, generating losses. Its other market-making operations, in foreign currencies, international exchange traded funds and global options arbitrage, were profitable.

-By Liz Moyer, Dow Jones Newswires; 212-416-2512; [e-mail]