Baltimore's venerable Alex. Brown relies on focused game plan to expand its niche

BACK IN THE BIG LEAGUES

February 28, 1993|By Ian Johnson | Ian Johnson,New York Bureau

For more than a century, this bit of advice characterized Alex. Brown & Sons Inc., the nation's oldest investment bank. Modest goals and conservative management reduced the Baltimore-based firm to a regional player following Mr. Brown's death in 1834 -- a footnote to an industry that sired more noteworthy firms.

Now, 192-year-old Alex. Brown has fought its way back to national importance. Its strategy of concentrating on a few future-oriented industries, including health care and technology, allowed it to lead the industry in 1991 in taking young companies public. And, with help from investment banking and asset management services, Alex. Brown had record earnings last year.

Still, the firm faces serious challenges as it seeks to strengthen its position.

It must prove that a truly national financial company can limit itself to seven industries without being permanently pigeon-holed as a niche player. It also must convince investors that its revenue base is broad enough to withstand a stock market downturn. For all its effort to boost revenues through mortgage-backed securities and asset management, Alex. Brown remains to many investors little more than a stock that reflects the market's performance.

"Their stock is driven by the market and especially the [initial public offering] market," said Henry Otto of Brandywine Asset Management Inc., which owns 42,000 shares of Alex. Brown. "They're not a regional firm anymore; in their fields they're certainly national. But they're not yet one of the real biggies."

Future profits will be influenced by the firm's success in bringing companies public through IPOs. That may seem out of place for a venerable investment bank, but Alex. Brown's reputation rests on making IPOs for companies that are the financial equivalent of a sports team's draft picks -- young stars that could develop into solid, long-term performers.

Such deals do not account for a large share of Alex. Brown's revenue, but they are indicators of future prosperity, and the firm's share of that business dropped dramatically last year. Some even contend that its eagerness to bring companies public led it to sponsor a number of duds, which have tarnished the firm's reputation.

Even in Alex. Brown's newer offices in downtown Baltimore, artifacts of the firm's beginnings abound. Flags from the ships that Mr. Brown used to import linen decorate the walls, and glass cases display company log books filled out in meticulous script.

In a modest office down the hall from the trading floor, Chief Executive Officer A.B. Krongard emphasizes that such links to the past are essential to the company's rejuvenation. The decision to focus on a select group of industries, for example, was based on Alex. Brown's small size and unwillingness to overexpand.

"It doesn't make a lot of sense for Alex. Brown to get into a land war with the Chinese army. In anything that is going to be decided by mass as measured by people or money, we cannot compete as we wish to compete -- at the top of the heap with the best firms in the world," Mr. Krongard said.

Instead, the firm has focused its staff of 40 analysts on seven core industries: technology, communication, health care, the environment, transportation, consumer goods and services and financial services. Unlike other brokerages that have similar numbers of analysts -- for example, Kidder Peabody & Co. Inc. or Smith Barney Harris Upham & Co. Inc. -- Alex. Brown's are focused on these core industries, providing what many observers believe is unparalleled coverage. It has 16 technology analysts, for example, a number unmatched on Wall Street.

Recent international expansion also has been focused. A new office in Geneva, and one planned for Tokyo this year, are small and concentrate on the seven industries. Unlike Merrill Lynch, which at one time had half a dozen offices and scores of employees in Japan, Alex. Brown will start with just one banker, Mr. Krongard said.

Another venture: The company's recently announced entry into the field of mortgage- and asset-backed derivatives. True to Alex. Brown's reputation, the new business will be headed by veterans hired away from another company.

Such ventures are designed to fit into the company's expansion plan, said President Mayo Shattuck III. The firm anticipates 5 percent to 7 percent annual growth in staffing and infrastructure, supported by higher revenues and, especially, productivity.

Each Alex. Brown broker already accounts for an industry record $465,000 in business; Mr. Shattuck wants to increase this over the next few years to $1 million per broker.

Such careful growth allowed Alex. Brown to rack up record earnings of $58.6 million last year, on $455 million in revenues. This was a 13 percent increase over 1991's record earnings, a year when company revenues jumped by 51 percent.

Drop-off in IPOs

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