Leucadia Buys a Succession Plan

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On the morning of November 12, it was announced that Leucadia (NYSE: LUK) would acquire Jefferies Group (NYSE: JEF) in an all-stock transaction.  According to the release, Jefferies shareholders are to receive 0.81 of a share of Leucadia valuing Jefferies at approximately $3.6 billion at the time of the announcement. 

This transaction did not really come as much of a surprise since Leucadia already owned approximately 28.6% of Jefferies outstanding shares.  However, it was the third paragraph of the press release that contained what may have been the true reason for the merger.  Once the merger is completed, the current Chairman and Chief Executive Officer of Jefferies, Richard Handler, will become the new Chief Executive Officer of Leucadia and maintain his current position at Jefferies.  In addition, Brian Friedman will become the President of Leucadia and also maintain his current position as Chairman of the Executive Committee at Jefferies.

As part of these executive moves, Leucadia’s current Chairman and Chief Executive Officer, Ian Cumming, will retire from these roles and remain a director of the company.  The impending retirement of Mr. Cumming was announced earlier this year when the company revealed that he would not renew his employment contract when it ends in June 2015.  Leucadia’s current President, Joseph Steinberg, will become Chairman of the Board and continue to work at the company full time. 

It is unclear exactly where this leaves the current high level executives at Leucadia other than the statement made in the press release that other Leucadia officers will continue in their present positions.  There is little doubt that the current leadership of Leucadia is very experienced and talented, but it is an aging pool of talent.  This acquisition certainly deepens a bench that may be losing its top players to retirement over the next few years.  Mr. Cummings retirement was already a known, while Mr. Steinberg and another top executive, Tom Mara, are 68 and 66 respectively. 

One young but experienced executive for Leucadia is its recently appointed Chief Operating Officer, Justin Wheeler.  At only 40 years of age, Mr. Wheeler has been involved in many of Leucadia’s past operations and has been working under the apprenticeship of Steinberg, Cumming and Mara for over 12 years.  When Mr. Wheeler was promoted to COO back in March, he immediately became the front runner for succession.  However, it would appear Mr. Wheeler will have to wait another turn.  I do not think this was necessarily an affront to the belief that Mr. Wheeler could not successfully lead this company, but more of a desire for a smooth transition to a highly experienced team of managers of which Mr. Wheeler will most likely continue to play a very key role.

This acquisition changes the face of Leucadia from what many investors believed to be stock run by a couple of jockey’s to a company run by a core group of proven managers.  It would appear that this opportunity to smoothly transition the reigns of Leucadia and add to the bench was just to appealing to pass up.

A primary concern for current Leucadia investors will be how this change in leadership may impact the culture of Leucadia.  Leucadia has built a reputation as very opportunistic value investors with a very conservative use of debt while still producing above average returns for its investors.  As we saw during the financial crisis, this does not seem to be the culture of many of the largest investment banks.  Is Jefferies any different?  It would seem so.  At a time when some investment banks were scrambling to become bank holding companies for access to funds from the Federal Reserve and others were being showered with government handouts from the Troubled Asset Relief Program (TARP), Mr. Handler guided Jefferies through the crisis without the need for either.  This is something to be admired and should give Leucadia investors some peace of mind.

On the surface, this marriage appears to be a positive for Leucadia shareholders.  They get a deepened bench of experienced management, an obvious succession plan and a quicker conversion of a large deferred tax asset to cash.  Let’s just hope that long-term Leucadia does not become just another investment bank.

ScavengerReport owns shares of Leucadia National Corporation. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Jefferies Group and Leucadia National. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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