SAN FRANCISCO It was time Hambrecht & Quist Group sold out.
Not that business was bad for the San Francisco investment bank that accepted $1.5 billion cash from Chase Manhattan Corp. The 31-year-old firm posted two straight quarters of record profits this year. That followed a strong fourth quarter, when most rivals suffered amid declining stock and bond markets.
It was just that the firm's strength selling stock for young technology and health care companies being reared in nearby Silicon Valley became its weakness. Bigger rivals offered a broader menu of client services, from loans to bond sales.
"At some point the market slows down, and their equity business is terribly narrow," said Dick Smith, managing director in equities at Banc of America Securities in San Francisco. "And when the market's down, nobody wants to buy you."
Smith was a 13-year veteran of HQ rival Montgomery Securities, which BankAmerica acquired last year. He's one of the original 68 Montgomery partners who voted in 1997 to sell to NationsBank Corp., which merged last year with BankAmerica, creating the nation's largest commercial bank.
Part of the reason small investment banks like Montgomery and H & Q; link with bigger banks is the increasing demands of executives for one-stop financial-services shopping. "No CEO wants to make eight phone calls," said Smith. "They want to make one phone call for leveraged loans, equity financing and mergers."
In July, Hambrecht & Quist Chairman Daniel Case, who oversees more than 850 employees, said in an interview that the firm was sometimes at a disadvantage because of its narrow range of products. "We wish we had some of the products some of our competitors can offer," he said.
After failing to sell his firm to Merrill Lynch & Co. in December 1997, Case had said he expected to remain independent. With his competitors merging into national banks and concentrating on bigger clients, Case had said H & Q; could pursue a niche strategy of catering to small companies.
The problem was, as H & Q; clients grew larger, they sometimes needed "more than we could deliver," he told analysts. Under the deal with Chase, Case, the older brother of America Online Inc. Chairman and Chief Executive Steve Case, will become chief executive of Chase Securities West and head of the Chase Technology Group. (Case, who owns 7 percent of Hambrecht & Quist, is expected to make more than $90 million in the deal, according to press reports.)
While H & Q;'s revenue quadrupled from $119 million in 1994 to more than $500 million this year and the firm earned $431 million in the first three quarters of its 1999 fiscal year arranging high-tech initial stock sales, the primary business, hasn't swelled at the same rate. The firm underwrote $717 million of initial public offerings in 1995. So far this year, it has managed $635 million.
What's more, the firm couldn't really expand rapidly enough to serve technology entrepreneurs globally. Rival Merrill Lynch quadrupled its San Francisco banking staff since 1996.
Chase, the second-largest U.S. bank, brings H & Q; the heft to expand its business lines. "We believe we have chosen the strongest possible partner," said Case in announcing the deal with Chase.
But now the two sides face the same obstacles met by rivals that merged: culture clash. The shock of a new parent led to defections at both Montgomery and Alex. Brown. Of the 68 partners who agreed to sell Montgomery in 1997, less than 30 are left, said Smith.
Credit Suisse First Boston was able to hire a large chunk of Alex. Brown's health care investment banking group earlier this year after the firm in 1997 sold itself to Bankers Trust Corp. and was in turn acquired in June by Germany's Deutsche Bank AG. Chase has set aside $200 million in stock to help retain key Hambrecht & Quist bankers.
"If they're lucky they will avoid the personality and business conflicts that existed here and other places," Smith said. "There has to be a continuity of people."
New York-based Chase will pay $50 a share for Hambrecht & Quist 12.7 times H & Q;'s estimated 1999 earnings per share. That's more than Merrill stock fetches, even though Merrill is an international investment bank, the world's largest retail broker and Wall Street's biggest asset manager. "The price is full," said Merrill Lynch analyst Judah Kraushaar, "but not unreasonable."
Chase's agreement marks its first big move into stock underwriting. It's also a first for Vice Chairman James B. Lee, who will be overseeing Hambrecht & Quist and whose 24-year banking career has been built around making loans and selling bonds.
"Our goal is never top 10; it's to be more than that," he said in an interview. "Special benefits accrue to the leader."
But the king of the corporate debt world will have to learn quickly if Chase is to fulfill its aim of selling customers the whole smorgasbord of investment banking products.
"It won't come easily and he has some work cut out for him," said a senior portfolio manager at Dreyfus Corp. "He's got to come up to speed on the business and what it takes to continue the success of the business."
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