Montgomery Gets on Fast Track in Securities Field
Thomas W. Weisel, downhill ski racer and managing partner of Montgomery Securities, paces his Transamerica pyramid office as he points out the similarities between ski racing and the stock-brokerage business.
Whether vaulting through slalom gates or trading large blocks of stock, “at top speeds, a split-second lack of confidence can spell disaster,” said the powerfully built 45-year-old, who commutes to work in a Ferrari and who won national speed-skating championships in his youth. “Assuming that all the competitors are prepared for a contest, he who hesitates is lost.”
With such a fast-lane philosophy, it was no surprise last month when Montgomery grabbed at the opportunity to serve as dealer manager for First Interstate Bancorp’s $3.1-billion hostile tender offer for BankAmerica, parent of beleaguered Bank of America.
Montgomery got the nod because First Interstate’s other investment adviser, New York-based Goldman Sachs, has a policy against doing hostile deals.
Still, many observers were stunned that First Interstate picked Montgomery, a 17-year-old firm whose capital totals just $30 million, over the billion-dollar New York investment banks better acquainted with the high-stakes mergers-and-acquisitions arena.
“Win or lose, the B of A deal is a real coup for Montgomery,” said Tully Friedman, a partner in the San Francisco investment firm of Hellman & Friedman. By originating and promoting the idea for the deal, Friedman said, “Montgomery created its own opportunity.”
Montgomery, long known for its savvy securities analysts and its powerful sales and trading operations, “can now rightfully claim that its corporate finance arm has come of age,” an investment banker in New York added.
The deal would be one of the most lucrative in Montgomery’s history. If First Interstate swallows up BankAmerica, Montgomery stands to earn $3.9 million in fees--no small change for a firm whose total revenue last year was $80 million, up 15% from a year earlier.
The partnership does not disclose its profits, although its return on capital is thought to be among the highest in the securities industry.
For Montgomery, the BankAmerica deal vindicates the firm’s strategy of pouring resources into its research department, which has been built up by dangling partnerships and the promise of the California good life to top-rated analysts across the country.
“Everything we do in this firm--everything--radiates from our research department,” said Alan L. Stein, executive director of Montgomery’s corporate finance department.
Originated Idea
Although others on Wall Street are now taking credit for it, the idea for First Interstate’s audacious takeover bid apparently originated with a small team of Montgomery partners that included banking industry analyst J. Richard Fredericks.
Like nine of the 22 senior research analysts at Montgomery, Fredericks is a member or runner-up on Institutional Investor magazine’s All-America research team, a grouping of the nation’s best-regarded securities analysts.
Fredericks, who declined to be interviewed for this article, predicted in a research report titled “Darwinian Banking” that only tightly managed, well-capitalized banks would emerge victorious under deregulation. Using that logic, loss-ridden BankAmerica was a natural takeover candidate.
Never mind that Montgomery, named after the main street in San Francisco’s financial district, is winning few friends in its home town by backing Los Angeles-based First Interstate’s raid against Bank of America, a pillar of the local business community that helped rebuild the city after the 1906 earthquake and fire.
“This is not a North versus South situation,” insisted Weisel, who dismisses as “provincial” attempts by San Francisco Mayor Dianne Feinstein and others to bolster BankAmerica’s defenses. “This is a multinational world, and those who lack a global outlook will not survive.”
For Weisel, who has built Montgomery in his own image since wresting control of the firm from its founding partners eight years ago, mere survival is not enough. “What I am interested in,” said the broker, who has been dubbed “Pete Rose in pinstripes,” “is winning.”
Intensely Competitive
Like Weisel, the firm is proud, disciplined and intensely competitive. There is a definite swagger to it; this year, health-care analyst Ruth Alon sent out Christmas cards charting her successful stock recommendations.
These traits have powered Montgomery’s steady growth even as dozens of larger and better-known investment firms were merged out of existence or fell by the wayside.
Like a skilled athlete, Montgomery carefully picks and chooses where it will compete. The firm focuses on stocks, eschewing bonds. It concentrates its sales efforts on institutions--insurance companies, pension funds, mutual funds and the like--rather than on small retail customers.
And perhaps most importantly, Montgomery limits its research and investment banking coverage to the four sectors of the economy that the firm’s researchers deem most promising: consumer goods and services, technology, health care and financial services.
In doing so, Montgomery has wider coverage than such technology-oriented firms as Hambrecht & Quist or Robertson, Coleman & Stephens, both of which are also based San Francisco. Still, Montgomery, by design, ignores huge sectors of the economy, including such big industries as metals and mining, forest products, petroleum and utilities.
“We only cover 25% of the Standard & Poor’s 500,” a list of the nation’s biggest publicly traded companies, said Seth J. Gersch, Montgomery’s director of administration.
Has Only One Office
Montgomery also differs from many other brokerage firms by having just a single office: All 342 of the company’s employees work out of the firm’s modern-art-and-Oriental-rug-filled quarters in the Transamerica pyramid. It is an article of faith at Montgomery that the one-office setup speeds decision-making and communication between departments.
“It is well worth the time and air fare spent calling on clients across the country,” Joseph M. Schell, director of corporate finance, said.
The advantages of Montgomery’s single-office philosophy can be seen at the firm’s daily 10 a.m. research meeting. Here, up to half a dozen of the firm’s securities analysts present their recommendations to Montgomery’s 40-member sales force and brace for skeptical questions.
The setting provides far more interplay than at most other brokerage firms, where analysts typically brief salesmen over telephone “squawk boxes” and there is little opportunity to follow up the analysts’ recommendations with questions.
On a recent weekday, Montgomery’s salespeople were urged to push such stocks as Intellicorp (“a real fallen angel about to introduce a big new product”), Collins Foods (based on “strong fundamentals” at its Sizzler restaurants and a “turnaround” at Naugles) and General Cinema (based on anticipated improvements in soda pop profit margins and its recent leap into specialty retailing.)
Salesmen probed mercilessly for weaknesses in the analysts’ “stories,” challenging earnings estimates and other assumptions made by the analysts, anticipating the reactions of their clients.
Helps Grill Analysts
Often, managing partner Weisel joined in grilling the analysts. Intellicorp, he noted, is part of the artificial intelligence industry that disappointed investors last year.
“What is the downside risk here if the new products fail to get off the ground?” Weisel demanded. Analyst William Shattuck’s response: Not too great, based on Intellicorp’s high cash reserves.
Beverage analyst Emanuel Goldman got a colder reception when he presented his recommendation of General Cinema. “This is a confusing story, a real sleeping pill,” one salesman complained. “What does management know about retailing?” another asked. “Where is this widening of beverage margins?” asked a third.
Goldman acknowledged that “the beverage business is not good right now, but our job is to forecast.” After some discussion, Goldman agreed to huddle with Montgomery’s retailing analyst to refine the story.
Stein, of the corporate finance department, said: “Our salespeople have to like the story or they won’t sell the stock. They are smart, they are experienced, they have relationships, so they won’t go and sell a story they won’t believe.”
They are also well-paid. Six-figure compensation packages, including bonuses and partnership distributions, are common at Montgomery. The firm’s total revenue per employee is expected to top $250,000 this year.
Not surprisingly, the firm’s staff is liberally sprinkled with athletes, some of them Olympic-caliber.
Indeed, Weisel met his second wife after the firm placed an advertisement in a runners’ publication seeking “women runners interested in a career in financial services.” (He was not looking to get married; he just wanted to make sure that Montgomery won the Runners World Corporate Challenge Cup Races.)
Weisel makes no bones about favoring athletes as employees. “This business is so intense that you’d burn out if you didn’t have outside activities. You’ve got to have balance.”
Added Weisel, whose new passion for bicycle racing has him cycling up Marin County’s Mount Tamalpais almost daily as he trains for a national championship: “Like most athletes, what I am interested in is winning. It is an attribute readily carried over into the business world.”
