Jefferies takeover comes with zero staff cuts

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If you listen to enough takeover conference calls, you inevitably grow tired of hearing about proposed synergies. So it's refreshing that they're not even a consideration in Leucadia National Corp.'s $2.8-billion (U.S.) acquisition of investment bank Jefferies Group Inc.

"That's not remotely what this is about," said Brian Friedman, chairman of Jefferies' executive committee. "There's no cost elimination or overhead reduction or anything else expected or intended."

Instead, the transaction boils down to three things: management transition, taxes and balance sheet strength.

Should the deal go through, Rich Handler, chairman and chief executive officer of Jefferies, will become CEO of Leucadia, which many refer to as a mini Berkshire Hathaway because it owns a variety of different companies, making him the head of what will effectively be Jefferies' parent holding company. (The investment bank will continue to operate on its own, however, and will even file securities documents so that it can raise long-term debt.)

Then there are the tax benefits. Leucadia has had a slew of net operating losses, mostly stemming from acquisitions. These losses will help to offset Jefferies' "substantial" income taxes. "We believe we'll create a lot of value long term and we will not have to pay a lot of taxes," Mr. Handler said.

Finally, this is a classic case of two companies sharing each other's resources. Asked if the stronger balance sheet will allow Jefferies to expand its retail platform or delve deeper into market making or electronic trading, Mr. Friedman wouldn't rule anything out. "Any or all of the things you've cited on the right basis could be businesses that will interest us as we develop," he said in response to an analyst.

The takeover is an all-share deal, even though Leucadia has $2.4-billion in cash and public securities, and only $960-million in outstanding parent company debt. Leucadia already owns 25 per cent of Jefferies stock, having invested in 2008, which topped up its initial investment in 2000.

As the plan stands, there won't be any job cuts at Jefferies, which has 700 investment bankers. This is a growth platform, not an alteration. And for those interested, all the restricted stock units held by Jefferies employees will be simply because restricted stock units for Leucadia shares, with the same vesting period and all.