Middle-market investment bank Jefferies (NYSE:JEF) has been through many market cycles during the past 40 years, but one of its toughest was the 2001-2003 stretch, when financial transactions like IPOs, capital offerings, and mergers and acquisitions were hard to come by. Major firms like Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS), and Lehman Brothers (NYSE:LEH) had diverse revenue sources to withstand the downturn. Jefferies wasn't so lucky, but it's now taking steps to ensure a more prosperous future.
Despite the tough times, Jefferies was able to survive and capitalize on the situation. Among other efforts, it made several key acquisitions, including Broadview International LLC, an investment bank focusing on the technology sector. The moves are definitely paying off, as evidenced by the fourth-quarter results Jefferies reported this week. Revenues increased 33% to $431.7 million, while net income rose 32%, to $46.7 million.
The key to Jefferies' growth is its investment banking division. During the fourth quarter, revenues surged 58% to $167.5 million, mostly on the strength of mergers and acquisitions. That sort of activity is cyclical, but all indicators point to a very strong 2006.
Jefferies' investment-banking performance won it the "Middle Market Investment Bank of the Year" award from the Investment Dealer's Digest magazine. Nonetheless, it's attempting to expand its offerings. For example, MassMutual (NYSE:MCI) recently invested $125 million to expand Babson Finance LLC, its joint venture with Jefferies. This company provides senior loans to middle-market and growth companies. Babson benefits both companies, letting Jefferies monetize its middle-market/growth leads as MassMutual leverages its loan infrastructure.
Nonetheless, Jefferies will rely heavily on investment banking for the next few years. But with the continued surge in M&A, that's looking like an enviable place to be.
Fool contributor Tom Taulli does not own shares of companies mentioned in this article.
