Jefferies’ third-quarter profit falls short of expectations as M&A sputters

Jefferies Financial Group, a New York-based investment banking firm, reported a smaller-than-expected third-quarter profit due to ongoing economic uncertainty affecting dealmaking. The company’s shares fell 2.1% after the earnings announcement, despite the firm’s optimistic outlook for a more “normal” investment banking environment in 2024.

The decline in earnings was primarily driven by a 97% drop in revenue from the asset management unit. However, Jefferies noted that market conditions are slowly improving, indicating a potential pickup in mergers and acquisitions (M&A) activity. This positive trend follows the Federal Reserve’s recent indication that it is nearing the end of its tightening cycle.

Jefferies President Brian Friedman expressed optimism about the future, stating that the markets are beginning to warm up, pointing to recent initial public offerings and increased merger discussions. The firm expects the demand for its services to translate into more transactions as market conditions continue to improve.

To prepare for future growth, Jefferies plans to hire more managing directors for its investment banking franchise. The firm expects to have around 360 managing directors at the beginning of 2024, up from 299 at the beginning of this year. Friedman highlighted that downturns often present the best opportunities for hiring and growth.

Jefferies’ earnings report is often seen as a precursor to the earnings announcements of other Wall Street giants, including JPMorgan Chase, Goldman Sachs, and Morgan Stanley.

In the third quarter, Jefferies’ profit declined 74% to $51.4 million, or 22 cents per share, falling short of analysts’ average estimate of 33 cents per share.

Overall, Jefferies’ earnings report suggests cautious optimism for the investment banking industry. The improving market conditions and the firm’s plans to expand its managing director base indicate a potential recovery in dealmaking in the coming years.