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December 1, 2002

Rising From the Rubble: New and expanding growthis sparking a trading revival in San Francisco. Pet

By Peter Chapman

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  • Rising From the Rubble: New and expanding growthis sparking a trading revival in San Francisco. Pet
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The growth stock capital of the United States is rising again. After three years of plummeting stock prices, massive layoffs and brokerage house retrenchments, San Francisco is coming back. A slew of small and mid-sized investment banks is building up research, sales and trading in the city in a race to become Wall Street's dominant growth stock boutique.

The flurry of activity comes as San Francisco's old guard dealing firms retreat from the city, the growth stock business and even corporate existence itself. Robertson Stephens went under this summer. J.P. Morgan Chase shut its Nasdaq desk. Bank of America hired a New York-based executive to run an equity trading operation out of the Big Apple.

In their place has emerged a large group of locals and newcomers that specialize in analyzing and trading the stocks of middle market companies. These companies operate in the information technology, medical technology, specialty finance, wireless, semiconductor, online learning and other high-growth sectors of the economy.

Thomas Weisel Partners, Wells Fargo Securities, Pacific Growth Equities, W.R. Hambrecht, and ThinkEquity make up the hometown contingent. First Albany, Friedman, Billings Ramsey, Adams Harkness & Hill, and U.S. Bancorp Piper Jaffray are moving to San Francisco from the East and the Midwest.

The Carpetbaggers

The carpetbaggers are not flocking to San Francisco because of its beauty, culture and progressive outlook. But those are certainly perquisites. The locals are not hiring talent because Silicon Valley is booming. (Top Valley employer Advanced Micro Devices recently announced plans to fire 2,000 employees.)

Both groups say they are expanding for one critical reason: the retrenchment of the old guard. The Four Horseman of Emerging Growth, or H.A.R.M., as the old guard is known - Hambrecht & Quist, Alex. Brown, Robertson Stephens, and Montgomery Securities - abandoned its original growth stock focus after being acquired by four of the world's largest commercial banks in the late 1990s.

J.P. Morgan Chase, Deutsche Bank, Fleet Bank, and Bank of America, respectively, all acquired the Horsemen in the late 1990s. They refashioned them into large cap trading houses in the style of a Goldman Sachs or Morgan Stanley. In the past year the four acquiring firms began to dismantle their trading operations altogether.

Phase one of this restructuring led to fewer analysts covering up-and-coming companies. Phase two led to fewer employees as firms fired staff. The wave of layoffs climaxed with Fleet's decision to shutter the 700-employee Robertson Stephens.

All this thrashing about by the elephants has created opportunity for the small- and medium-sized broker dealers that previously worked in the shadows or - in the case of ThinkEquity - didn't exist at all. They are hiring because it's a buyer's market. They are boosting the number of stocks they cover because the demand is still there.

"We've been able to add high quality people as these firms either go out of business or downsize considerably," said Steve Massocca, head trader at Pacific Growth. "On top of that, their demise has created a vacuum in terms of the research that is available."