FLYING HIGH ONCE AGAIN
The investment banking business in Southern California is much like a Byzantine empire in transition. The king is dead, but no successor has yet emerged--though there are many ambitious rivals who would claim the crown or at least steal a piece of it.
The king was Drexel Burnham Lambert--or, more specifically, the firm’s junk-bond genius, Michael Milken. For most of the late-1980s, Drexel was unchallenged as the leading investment banking firm in Los Angeles. When a company, large or small, needed financial advice or sought to raise capital, Drexel was the name to know.
With Drexel’s collapse in January, 1990, Milken’s imprisonment for securities fraud and the abrupt death of junk-bond financing, the easy-money days died in Southern California and nationwide. Moreover, merger-mania’s demise, stocks’ bear market and the economic recession all converged last year to dramatically rewrite the rules of investment banking in the ‘90s .
The rules of competition still are being rewritten in the Southland market. Several major New York-based brokerages have slashed their investment banking operations here over the past year in cost-cutting moves, compounding the loss of Drexel’s presence. At the same time, a few firms have expanded significantly.
Perhaps most surprising, many smaller brokerages, such as Sutro & Co. and Crowell, Weedon & Co., have staked claims to the Southland market, vowing to become major investment banking players in what they perceive to be a region rich with entrepreneurs in need of financial advice.
But in typical Wall Street herd fashion, virtually all of these rivals now champion the same cause: The rise of a sober “relationship-based” business with the so-called middle-market firms that make up the bulk of the region’s manufacturing and service enterprises.
The new-style investment bankers don’t want to finance hostile takeovers. Rather, they want to find buyers for companies that ask to be sold. Likewise, they want to locate friendly investors for troubled firms. And they are elbowing one another to become the chosen underwriter when a healthy company seeks to sell new stock or bonds.
If it all sounds genteel and caring, well, that’s the concept. In practice, however, many experts still wonder how many investment bankers really understand what smaller companies need, and how to service them. And there remains a widespread suspicion that, even after the 1990 shakeout, there still are too many would-be financiers in Southern California for the level of business here long-term.
Investment banking has long been a profession populated by young, highly educated white males who live to make deals. These financiers are to companies what individual stock brokers are to small investors--part salesman, part counselor, part trader. Their fees depend on many deals they do--and how well they do them.
If you’re hired to represent a small company that is interested in selling out to a larger one, you will cajole, arm-twist or even bluff (to a degree) to get the highest price possible. And on the other side of the transaction, the potential buyer uses an investment banker to try and get the lowest price possible.
Among Southern California investment bankers, one of the most outwardly aggressive is Lloyd Greif, the 36-year-old head of Sutro & Co.’s corporate finance team. While Sutro is a San Francisco-based brokerage, Greif and his team are based in Los Angeles--because, he says, Sutro serves middle-market companies, and “L.A. is the middle-market capital of the U.S., if not the world.”
Everyone seems to define “middle-market” differently, but the term generally encompasses businesses valued under $500 million, and mostly between $100 million and $250 million. (As a comparison, a giant firm like Atlantic Richfield has a value of $18 billion, tallying up the worth of its stock.)
Southern California’s middle-market status stems from the founding of countless firms here after World War II by returning soldiers. As the thinking goes, many of these entrepreneurs now are in their 50s or 60s, and though their businesses may be thriving, many face the challenge of how to cash out their wealth.
Investment bankers see this market as a modern-day El Dorado. The financiers figure that many middle-market businesses have reached the stage where their future depends on finding a bigger partner, expanding through acquisitions or selling stock. All three options generally require the counsel of an investment banker.
Which Southland financiers know this market best? Sutro’s Greif--described unaffectionately by one competitor as “the loudest growl in the jungle”--has long argued that a smaller, regional investment banking operation like his can do a better job for middle-market companies than a major Wall Street firm.
Why? Because many of the major New York-based firms have come here only for the steady business of such companies as Arco, Occidental Petroleum, Mattel and other billion-dollar operations, Greif maintains. Smaller companies won’t get the same attentive service from those big-deal-oriented financiers, he argues.
His pitch has worked well enough to bring Sutro substantial business in recent years from the target small- to mid-sized firms. The average size of a Sutro-led deal was $60 million last year.
Greif now views the Southland market as “wide open . . . since Drexel cratered. And we intend to emerge as a core leader here.”
Another regional brokerage executive who sees great opportunity in Southern California is F. Van Kasper, head of San Francisco-based Van Kasper & Co. He opened an office in Brentwood last year, hiring Bruce Emmeluth, 50, who had run the investment banking business for L.A.-based Seidler Amdec Securities for 15 years.
Like Greif, Van Kasper insists that smaller regional investment banking firms often have an advantage over bigger firms when serving middle-market clients. The promise of better personal service often strikes a chord with clients, especially if they fear that a New York-based financier will put a second-string team on a small deal.
Indeed, Thomas Hacking, corporate finance chief at Kemper Securities Group in Los Angeles (the former Bateman Eichler), contends that clients’ typical complaint about some Wall Street firms is that “you have one local guy who (initiates) a deal, but then he turns it over to someone else from out of town--someone he can’t control.”
The major investment banking houses say such claims are often baseless. “The truth is, a junior (banker) at a major firm is probably as competent as a senior guy at a regional firm,” says one prominent Los Angeles financier. “I really worry about smaller companies being hoodwinked on the quality issue.”
For the major firms, one important marketing advantage is simply the scope of their national operations. For example, many middle-market companies that decide to sell stock to the public choose the biggest investment bankers for their strong national sales networks of brokers--so that the shares can be marketed to investors across the country.
For both large and small investment banking firms, a much more problematic issue is clients’ general image of the profession.
With the surge in takeovers and counterattacks in the ‘80s, investment bankers came to be viewed as opportunists who simply wanted to make a quick buck advising the predators and the prey.
“Clients’ relationships with investment bankers became less partnerships and more adversarial,” Van Kasper notes. “A company may have been trying to raise money, but the investment banker was just trying to do a transaction.”
So, when Wall Street now professes to want a genuine relationship again with clients, Van Kasper says, “The first look you get is, ‘Who are you kidding?’ We know that things have changed on Wall Street, but clients don’t.”
But have things truly changed? Even those New York-based firms that have long dealt only with the bluest of blue-chip corporate clients insist that Wall Street no longer has an attitude problem toward smaller clients. The depression in the brokerage business of the last few years fixed that, as merger mania ground to a halt.
There is no official count on the number of investment bankers who lost their jobs in recent years, but employment in the securities industry overall has dropped between 20% and 25% since 1987.
A West Coast executive of one New York-based brokerage puts it this way: “We may or may not have been arrogant (in the past), but we sure as hell aren’t now.”
While the smaller financiers are far more publicity hungry, such well-known brokerages as Bear, Stearns & Co., Oppenheimer & Co. and Morgan Stanley & Co., among others, have far better-staffed investment banking offices in Los Angeles. Many of those staffers work largely for the Fortune 100 companies that need constant servicing, but more of them also now are courting middle-market clients.
Whether this mass rush for smaller clients will pay off is still a big debate. It isn’t clear that the business these financiers envision will materialize. And the entire industry is haunted by a recent report by consultants Greenwich Associates, predicting that “by the end of the century, the business is likely to be dominated by just three investment banks . . . and by several others in specific regions or industry segments.”
And who will rule the Southland market? That race may now belong to Donaldson, Lufkin & Jenrette Securities--or it may be theirs to lose.
DLJ’s Century City office opened in 1986 with two professionals. At the start of 1990, the office had 13 investment bankers on staff under 37-year-old managing director Steven Lebow, a Southland native and UCLA graduate.
After Drexel folded in January, 1990, the normally staid DLJ jumped at the chance to bring aboard a dozen of Drexel’s top people, led by ace financier Kenneth Moelis.
Today, Lebow has a staff of 30 investment bankers, one of the largest teams in the Southland. In essence, Lebow says, DLJ’s New York headquarters has made Los Angeles a “national investment banking office” rather than a satellite. And the gamble has paid off, he says: “Our deal flow is great.”
Like many of its rivals, DLJ is actively prospecting for middle-market clients and already counts such Southland firms as Tokos Medical and LIVE Entertainment as customers.
DLJ’s embrace of Moelis and his Drexelites also was designed to give the L.A. office name talent in the area of complex transactions--the kind of difficult, time-consuming financial deals often desperately needed by troubled companies. It’s no coincidence that two financially ailing companies--Standard Brands Paints and Orion Pictures--recently tapped Lebow’s office for help.
While competitors are impressed with DLJ’s financial commitment to L.A., some say the firm will provide the litmus test of whether Southern California--or the West in general--can support another Drexel in this new era. If the business doesn’t flow to DLJ here, or if it flows but doesn’t pay enough, the result will speak volumes to every Southland financier.
Lebow is convinced that DLJ’s expansion came at just the right time. “The market here got used to Drexel,” he says. “It’s much more comfortable for a client to walk in and have four or five people ready to serve you. We’re now lucky enough to have that critical mass.”
Financiers: A Sampling of Who’s Who
Here is a cross-section of large and small investment banking firms in Los Angeles, though not an all-inclusive list by any means.
Bear, Stearns & Co.
An old-line investment bank with a long history in L.A., especially in serving troubled firms. Clients have included Tosco, Collins Foods, Wickes Cos., MGM Grand, Southern California Edison.
Crowell, Weedon & Co.
Mostly a retail brokerage, Crowell is trying to make a name in investment banking for smaller firms. Four professionals on staff. Clients have included Judy’s Inc., Kinemetrics, Taylor-Dunn Mfg.
Donaldson, Lufkin & Jenrette
Made a major commitment to L.A. by expanding from 13 to 30 professionals since Drexel Burnham folded in Jan. 1990. Clients include Vons, Orion Pictures, Chiquita Brands, Staples Inc.
First Boston Corp.
Cut professional L.A. staff from 20 to 17 over past year, but remains a leading force in finance for aerospace/defense contractors, including Litton, Northrop, Hughest Aircraft.
Goldman Sachs & Co.
One of Wall Street’s major financiers, Goldman serves many blue-chip clients, including Lockheed, Arco and Castle & Cooke, but also smaller names such as Bell Industries, Ameron, St. Ives Labs.
Kemper Securities Group
The old Bateman Eichler, Kemper underwent a major reorganization over the past year. Remains focused on middle-market firms, including CII Financial, STOR, Synergen, Community Health.
Sutro & Co.
Has eight professionals in L.A. Making a major push for small entertainment-industry firms. Clients have included Vidmark, Showscan Corp., Bumble Bee Foods, U.S. Filter Corp.
Source: Companies listed
