The Los Angeles regional brokerage firm of Bateman Eichler, Hill Richards has not exactly enjoyed a sterling reputation in the securities industry in recent years.
While it was known as the biggest and most recognizable of Southern California regionals, it was not considered to have a strong stock research or investment banking operation--thought of as essential in attracting pension funds, corporations and other lucrative institutional clients. The firm also was losing as much as $1.5 million a month a few years back, and many top brokers defected to other firms.
Today, the firm is not only trying hard to change that image. Through an ambitious expansion plan, it’s seeking to establish itself as “the dominant regional investment firm on the West Coast,” says Richard J. Capalbo, the firm’s new chairman, chief executive and president.
Under an almost totally new top management team, Bateman Eichler has opened offices in the Pacific Northwest, Hawaii and Alaska. It is adding dozens of brokers and overhauling its research and investment banking staff to target small and medium-size companies on the West Coast. The firm’s parent, Kemper Financial Cos., the big Chicago insurance firm, is committed to provide the Los Angeles firm with all the financial support it needs to carry out the mission, Capalbo says.
Such an ambitious expansion plan could be highly rewarding. The West Coast, and particularly California, boasts a dynamic economy full of affluent investors as well as fast-growing small and medium-size businesses hungry for investment banking services to help them go public, issue securities or merge with other firms.
The expansion plan, if successful, also might position Bateman Eichler as a model of how a regional brokerage--albeit backed by a deep-pocketed parent--can carve out a profitable market niche in an industry increasingly dominated by giant multinational firms based in Tokyo, London and New York.
“They (Bateman Eichler) have a great opportunity here. If they get the right people in research with good ideas that pay off, and people with smarts to put investment banking deals together, they can do quite well,” says Perrin Long, brokerage analyst at Lipper Analytical Securities in New York.
But successfully carrying out the expansion won’t be easy. Competitors and industry insiders question whether the firm can attract and keep enough top brokers, research analysts and investment bankers. They wonder whether those analysts can generate enough profitable investment ideas to attract many pension funds and other institutions as new clients.
They also wonder whether Bateman’s yet to be completed investment banking team can compete against such better heeled New York firms as Merrill Lynch, Drexel Burnham Lambert or Bear, Stearns & Co., who themselves have expanded greatly in Southern California in recent years to take small- and medium-size business clients once conceded to regionals.
Attracting top talent will cost money, and the firm also must control costs and turn a profit. Expanding during a slump period for the industry poses particular risks of failure, especially if trading volume and other securities activity--down since last October’s stock market crash--slides further. Indeed, sales production per broker at Bateman Eichler is down 15% since the crash, Capalbo says.
“That’s what gets most firms in trouble; they grow too big or too fast and lose control of their expenses,” says a top manager at a competing firm. “You want to be the best, not the biggest.”
The fact that the firm is expanding at all is a change for Bateman Eichler. Kemper saw its 1982 acquisition of the Los Angeles firm as a cornerstone of its plan to build a nationwide network of regional securities firms. Kemper also owns regional brokerages based in Denver, Cleveland, Milwaukee and Boca Raton, Fla.
But new owners and new managers added up to a traumatic experience at first. The disruptions led many brokers to defect and morale to slip.
Finally, in 1984, Kemper tapped John R. Bolin as chief executive to stem losses that at one point reached $1.5 million a month, according to Capalbo. Bolin apparently succeeded in reducing red ink, and in January of this year he was promoted to head Kemper’s broker-dealer division.
Enter Capalbo, a longtime friend of Bolin’s who was marketing chief at Drexel Burnham Lambert, where he had made his name developing innovative investment concepts and using videos to sell them.
Since coming on board in February, Capalbo has almost totally overhauled top management, bringing in, for example, a new director of research, Norman E. Mains, a former Drexel colleague. Mains subsequently has overhauled and expanded the research staff, focusing it on analyzing stocks in industries such as aerospace, computers and health care that are identified with the West Coast.
A strong research staff that can generate profitable stock picks is seen as essential in attracting new brokers and institutional salespeople, who in turn can solicit individuals and institutions as new clients.
“In the past, Bateman always thought they could get along without a strong research staff. They didn’t want to spend money to attract analysts,” says one local industry insider.
Where the Profits Are
Capalbo also has moved to shore up the retail staff, recently firing about 30 poorly performing brokers--cuts that Bateman Eichler in its partnership days was said to be reluctant to take.
Charles W. Easter Jr., whom Capalbo brought in to run the retail brokerage network, says he hopes to expand the sales staff from about 500 now to as much as 700 in the next 12 to 18 months, while further replacing low producers with higher producers.
Capalbo still faces the challenge of building an effective investment banking unit. He says he expects to hire a new investment banking chief soon who can then assemble a staff that will focus on serving companies in the $10-million to $100-million revenue range. These are firms that the big New York investment houses usually pass over as too small, he says.
“For a Drexel, Merrill Lynch or Goldman Sachs, the mega-deals are where all the money is made,” Capalbo says.
But others disagree that the New York firms will concede smaller firms as clients, particularly after major expansions of their investment banking staffs here and because of a post-crash slump in new stock offerings and other corporate finance activity.
“Every major firm is out here now, and every major firm is fighting for this turf,” says Fredric M. Roberts, president of F. M. Roberts & Co., a Los Angeles investment banking firm. “No deal is too small for these guys.”
Capalbo’s moves so far have received good marks from some industry observers. His management team is well respected in the industry, analyst Long says. And expanding during a down cycle in the industry is smart, positioning the firm to take advantage of the next up cycle, he says.
But expanding from a small base is easy, Capalbo concedes. Making money and preserving market share is not.
The firm, while not losing money, is not making any either, instead it’s “breaking even” on an operating basis, the chief executive says.
“I don’t think the jury has come back on my act yet,” Capalbo says, adding: “If I don’t make any money, I will be replaced.”