I stood accused of three charges: questionable sources, understating book value, and confusing calculations. It was puzzling. My article on the NYSEGroup (NYSE:NYX) specialists received many compliments, including from a retired finance professor. My accuser? The financial PR firm, Financial Dynamics, representing LaBranche (NYSE:LAB), a NYSE specialist. Now I can understand that the article's logic wasn't going to provoke victory laps around the Big Board -- the automation of specialists is overdue by 20 years. And there was the bark of an email, "have him call me," sent to my fearless Fool editor. I sent along my fully supported analysis to Financial Dynamics, received no response, and Fooled on.
I didn't think any more of it until I read that one of the toughest outfits in consulting, FTI Consulting (NYSE:FCN), was buying Financial Dynamics. Time for a closer look.
The financial PR industry may like soft talk, but it is also fond of hard profits. FTI expects Financial Dynamics (FD) to produce an operating margin of 28% this year, on revenue of $120 million.
But talk does not come cheap. FTI is paying $260 million in cash for FD, whose management can make another $80 million in performance rewards over five years. FD is not only good at client pitches, it's especially good at selling itself -- this is the third time management has bought and sold the business in the last eight years. FTI has made a series of good acquisitions at reasonable prices, including the restructuring and forensic accounting businesses bought from Big Four accounting firms wanting to appear independent. FD is FTI's riskiest acquisition, and it's being funded with a debt issue.
FTI operates at the "trouble only" end of consulting. It specializes in services where the client is running out of choices -- restructuring, litigation support, and forensic accounting. Now, FD has a crisis unit, which may fit well with some FTI businesses, but otherwise, synergies seem few. FTI plans to run FD as separate unit, though there are some costs to cut. FD's pro forma income statement for the year 2005 reveals a staggering selling, general, and administrative expenses to revenue ratio of 71%.
To wrap up, I can't stop thinking that the investment value of a business depends on the cash flow it produces, and its risk -- so the value of financial PR leaves me puzzled.
If you know of someone who agrees, please "have him call me."
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Fool contributor John Finneran is a consultant, investment analyst, and writer specializing in the financial value of technology. He does not own shares in any of the companies mentioned. The Fool'sdisclosure policyis never away from its desk.
