Expanding Its Territory

Some of George Pedersen’s associates winced when he picked Jefferies Group Inc. to handle his company’s first stock offering.

The financial services firm, founded in Los Angeles 40 years ago and best known for its institutional trading prowess, isn’t considered in the big leagues of Wall Street capital raisers, especially for initial public stock offerings.

But Jefferies helped Pedersen’s ManTech International Corp., a Fairfax, Va.-based defense contractor, attract enough large investors that ManTech raised more cash than expected, Pedersen said. The firm’s stock has gained more than 30% since its February offering, making it one of the better-performing IPOs this year.

“With Jefferies, we met the top people and got access to some incredible institutional investors,” said Pedersen, ManTech’s chief executive. “I’d tell any CEO to hire them for an IPO.”

Jefferies, which this year completed a hand-over of top management’s reins from longtime CEO Frank Baxter to 40-year-old Richard B. Handler, wants to create a brand name for itself as a premier full-service investment bank for mid-size companies, Handler said.

Baxter started the firm down that road in the mid-1990s, seeking to diversify the business from its roots as a trader of large blocks of stock for big investors.

Now, under Handler, Jefferies lists its headquarters as New York rather than Los Angeles. That shift, which was simply noted in one of the company’s financial statements this year, didn’t involve moving jobs or offices, the firm said. About half of the company’s 1,200 employees work in the New York area, compared with about 200 in Los Angeles.

“We just wanted to reflect the reality of where management is now based,” said Handler, who lives in New York. John C. Shaw, 55, the firm’s president and chief operating officer, lives in Connecticut.

But Handler concedes that there’s an issue of image as well. The new Madison Avenue headquarters designation “reflects our growth from a regional boutique to a company with a $1-billion market [capitalization],” he said.

Firm Is Expanding as Others Shrink

Despite the stock market’s continuing struggles, Jefferies posted record earnings of $17.7 million, or 65 cents a share, in the first quarter, a 13% gain from a year earlier, at a time when many of Wall Street’s financial giants have faced declining profits and layoffs.

Stock and bond underwriting deals, corporate restructuring work and other financial services for companies helped drive Jefferies’ revenue from corporate finance to $37.7 million in the quarter, more than double the unit’s results a year earlier.

“Their numbers were so good, it shocked me a little,” said Chris J. Allen, an analyst with Putnam Lovell Securities who follows Jefferies. The firm’s shares, at $49 now on the New York Stock Exchange, are up 16% this year, while most brokerage stocks have slumped.

Unlike most of Wall Street, Jefferies said it’s hiring staff, including investment bankers to focus on specific industry sectors such as health care. Handler said Jefferies aims to fill the void he believes was left when independent mid-tier investment banking firms such as Montgomery Securities were swallowed up by large commercial banks in the late 1990s.

“I look at all these acquisitions that have come and gone. All these great franchises are basically blown up. All the [acquirers] are having trouble digesting them, and all the people there are either out of jobs or are unhappy,” Handler said.

For the same reason, he said Jefferies isn’t interested in being bought, despite rumors over the last year that Merrill Lynch & Co., Charles Schwab Corp. and other firms might consider a bid. Jefferies’ employee stock ownership plan holds 15.2% of the company’s shares, as of the latest proxy statement, and executive officers and directors hold 12.6%.

“As long as we keep delivering shareholder value, why join that mess?” Handler said about the idea of selling out.

With its push deeper into corporate finance, Jefferies now has 113 investment bankers and 45 analysts, up from 77 bankers and 24 analysts at the end of 1999.

However, industry experts say the jury is still out on whether Jefferies has the muscle to create a banking brand name with the cachet of, say, a Hambrecht & Quist, the San Francisco firm that helped finance many of Silicon Valley’s tech giants in their early days.

“They are a good firm, but the real question is what have they done in terms of deals,” said David Menlow, president of IPO Financial.com, a data firm in New Jersey. “They are not a well-known name” in underwriting.

Since January 2001 Jefferies has led three initial public stock offerings and three secondary stock offerings, raising about $405 million in all, according to Thomson Financial/Securities Data.

The firm also has handled debt financing deals such as a $162-million senior note financing for American Restaurant Group, and has a growing team devoted to corporate restructuring work.

One of Jefferies’ recent IPOs shows the dangers of competing in that market: The firm underwrote an IPO in November for San Jose-based software firm Bam Entertainment. The IPO was priced at $8 a share; the stock is now at $2.80 on Nasdaq.

“The deal was very well received, but we were very disappointed by the [financial] results the company later put out,” Handler said. “It happens. We tried everything to be supportive of the stock.”

Investment Banking Is About Bottom Line

Jefferies isn’t the first investment bank to stress the idea of catering to mid-size companies. Analysts say the concept is no slam-dunk.

Handler said his strategy to gain banking business includes offering a full range of services to mid-size firms. One approach Jefferies has used is buying smaller investment research firms and hiring bankers who understand specific industries.

Jefferies last year took an ownership stake in Quarterdeck Investment Partners, a Los Angeles-based defense-industry-focused boutique investment bank. The move helped Jefferies gain access to more defense-related firms, such as ManTech, Handler said.

The emphasis on investment banking is a bottom-line issue, analysts say: Underwriting, merger advisory and other banking services can provide far richer fees than what Jefferies earns trading stocks and bonds for big clients.

Even so, Jefferies remains a powerhouse in the trading arena. Trading accounted for the bulk of the company’s $195 million in first-quarter revenue. Last year, the firm executed nearly 10% of all trades on the New York Stock Exchange.

Jefferies last year bought Lawrence Helfant, a NYSE floor broker. That deal merged Helfant with Jefferies subsidiary W&D; Securities and created the largest independent NYSE floor broker. Because floor brokers are physically in one place, they often see both buyers and sellers and know the history of trading in a stock, Handler said.

“It gives the best execution and color for our clients,” Handler said. “By having a strong presence on the floor, you can have a better feel for what the other trading firms are doing and relay that color to a Jefferies salesman,” who can then tell the client.

Of Jefferies’ 1,200 total employees, about 50% are directly tied to the trading business.

The company remains a major name in block trades. Founded by Boyd Jefferies in 1962 while he was a trader at the Pacific Stock Exchange, the firm built its reputation as a brokerage that could quietly bring together buyers and sellers of big chunks of stock. Institutions looking to buy or sell big blocks prize traders who can arrange a transaction without the information getting into the market prematurely and affecting the price.

“The backbone of our firm has and always will be our trading platform,” Handler said. “But we’re trying to leverage our buy-side relationships to be a good banker” as well.

Baxter, who began with the company in 1974, had run the brokerage from L.A. since 1987, when the firm suffered a major blow: Boyd Jefferies’ guilty plea on inside-trading charges related to the Ivan Boesky scandal of that era.

Baxter guided the company out of the 1980s and through the 1990s, building up its trading operations and making the initial foray into investment banking.

This year, Jefferies completed the top-management changes begun two years ago. Handler and Shaw were named co-presidents in 2000. Handler then was named chief executive in January 2001, and Baxter remained chairman.

In February, Handler took on the additional title of chairman from Baxter, 65, who now is chairman emeritus and will continue to consult with the firm while working on various charity and civic projects. He also is the finance committee chair for Bill Simon’s California gubernatorial campaign.

Handler was hired by Baxter from the now-defunct Drexel Burnham Lambert in the late 1980s. At 40, he is young for a CEO and is known as an aggressive manager who still likes to sit on the trading desk. He formerly ran Jefferies’ fixed-income division.

Baxter said he believes that, though the company isn’t officially based in L.A. anymore, Jefferies still has a “California attitude” characterized by “challenging the status quo. That goes back to the 1960s.”

Handler said he’s counting on that spirit to drive the company’s growth as it targets mid-size companies for corporate finance and other services.

“So many of our competitors are part of large bureaucracies now, where it’s hard to get a decision made and very hard to focus on smaller” companies, Handler said. “We’re a very entrepreneurial firm. We are very lean, and we’ve got the whole mid-cap area available to us right now.”