Chase: Building "Brick by Brick"
The Hambrecht & Quist deal beefs up investment banking
For years, Wall Street has buzzed with rumors that Chase Manhattan Corp. would merge with a major investment bank such as Merrill Lynch & Co. On Sept. 28, Chase made a move. But, to the surprise of many, it acquired Hambrecht & Quist, a relatively small San Francisco-based investment bank that specializes in high-technology stock offerings. The price: $1.35 billion, a far cry from the tens of billions that Merrill might have sold for.
The deal was quintessential Chase, and a revealing glimpse of the emerging style of William B. Harrison, who took over as chief executive in June. He had long known that Chase needed to get into the equities business. But the courtly North Carolina native was maintaining the Chase tradition, inherited from his predecessor Walter V. Shipley, of building investment-banking operations piece by piece. The bank has developed its own powerful debt underwriting and merger advisory businesses, often hiring Wall Street pros. By acquiring H&Q, Chase is again taking it slow, picking up a smaller equity underwriter that should be easier to absorb. "We have demonstrated patience," says Harrison. "We will continue to demonstrate patience."
But on the other hand, Harrison is staking out new territory. Since taking over as CEO, Harrison has moved quickly to expand Chase's Internet presence. H&Q is another step in that direction. Indeed, Chase officials maintain that they see the deal more as a move into the high-tech arena than the long-awaited plunge into equities. "It's a great opportunity for us to further participate in the New Economy," Harrison says. "This is going to make us smarter about technology and the Internet."
Whether this combination of patient empire building and soaring high-tech ambitions will satisfy investors is another question. But as is usually the case with Chase, the downside is limited. "It's a way for Chase to get their feet wet in equities," says Michael L. Mayo, banking analyst at Credit Suisse First Boston. "There's always the question of whether they are being too conservative and missing out on opportunities."
To be sure, it's hard to say that Chase's approach to investment banking has been entirely its own choice. In recent years, reports have described merger talks not only with Merrill but with such firms as Goldman Sachs and Morgan Stanley Dean Witter. Chase officials always declined public comment on such merger speculation.CULTURE CLASH. However, it can be said that Chase hasn't been hurt much by its failure to pull off a big equities deal. While competitors such as Citigroup and Bank of America Corp. have struggled with the challenge of getting investment bankers and commercial bankers to work together, Chase has increased its investment banking revenues and avoided corporate-culture clashes. Indeed, Chase officials like to point out that last year, the company made $3.3 billion from its business-banking services, more than comparable businesses produced at Morgan Stanley, Goldman, Citigroup or Merrill Lynch.
The key to Chase's incremental approach to building its investment bank has been its dominant position in syndicated lending, a business headed by Chase's resident rainmaker, Vice-Chairman James B. Lee Jr. Realizing that distributing pieces of loans isn't much different from selling bonds, Lee has moved Chase aggressively into debt underwriting. So far this year, Chase ranks third in selling investment-grade bonds and third in dealing junk bonds, according to Thomson Financial Securities Data. In turn, Chase has used its understanding of corporate balance sheets to squeeze into ninth place among M&A advisers.
In buying Hambrecht & Quist, Chase is repeating its practice of using one successful business as a basis for building another. Already, Chase's venture-capital arm, Chase Capital Partners, has become a leading provider of seed capital for high-tech firms. From 1998 through the end of August, Chase Capital Partners has reported investment gains of nearly $2 billion. But it has been frustrating for Chase to watch competitors with equity capabilities earn underwriting fees by taking companies like GeoCities and Stamps.com Inc. public after Chase had discovered them. Says Harrison: "We have been giving some other investment banks some wonderful business."
Hambrecht & Quist will give Chase a chance to use its leads in the high-tech world to produce equity underwriting fees. And it will enable Chase to arrange debt financing for companies that H&Q has helped go public. "This is incredibly consistent with how we have grown investment banking--brick by brick," says Lee. "Our view of the New Economy is what drives this transaction."
Daniel H. Case III, H&Q's chairman and CEO, says joining Chase will help his operation compete for bigger pieces of high-tech offerings. Increasingly, large Wall Street competitors have been taking away business from H&Q in Silicon Valley by offering other services and products. So far this year, Hambrecht & Quist has ranked ninth in leading high-tech initial public offerings, according to Thomson Financial Securities Data Co. With Chase, Case says H&Q will be able to respond more effectively to the challenge from rivals. "Chase is the ideal strategic partner for us," he says.
That Harrison would build his equities business on a high-tech base is true to form. Scarcely two weeks after taking over as CEO, Harrison set up Chase.com to coordinate the company's Internet operations. Then Chase joined with Wells Fargo & Co. and First Union Corp. in a venture that would route bills to consumers through cyberspace. It marked an aggressive attempt by banks to battle back against nonbank competitors who could conceivably begin providing corporate cash management services of their own.
Harrison even introduced the Silicon Valley tradition of casual Fridays to Chase. And that's a tough sell at a company where one senior executive confided that his idea of casual is leaving his French cuffs in his closet.GO WEST. In absorbing Hambrecht & Quist, Harrison will need all the cultural sensitivity he can muster. The financial landscape is littered with the carcasses of investment banks that were taken over by commercial banks and then saw their dealmaking talent walk out the door. To keep H&Q executives loyal, Chase has set aside $200 million in stock to pay them. And while Lee will remain head of Chase's investment banking operations, Case will serve as chairman and chief executive of Chase Securities West, as H&Q will be known, and head of Chase's Global Technology Group.
"It's going to be a real challenge for Chase to realize the full potential of H&Q because of the proverbial culture clash," says Michael A. Flanagan, an analyst at Financial Service Analytics in Fort Washington, Pa. "But I'm not predicting failure." Chase, after all, "has a reputation of being a good integrator," he says.
And if Chase can get the hang of the equity business at a smaller shop like H&Q, it will be all the better positioned to make a bigger equities deal down the road. Note that Case is head of Chase Securities West. There is room for a Chase Securities East, North, and South. But if that's going to happen, chances are Harrison will take his time.By Gary Silverman in New York, with Louise Lee in San Mateo, Calif.Return to top