Chase's acquisition of H&Q not without risk

But shelling out nearly $1.4 billion in cash for San Francisco investment bank Hambrecht & Quist may prove to be the easy part. New York-based Chase, which has a reputation for successfully integrating its acquisitions, may find its hands full with H&Q, which has an equally well-deserved reputation for independence, analysts said.

Although it works with several industries, H&Q is best known for its role in taking health care and technology companies public--a market that has exploded in recent years.

Net mover and shaker
So far in 1999, H&Q has been the lead underwriter on 17 IPOs that raised $972 million, giving the firm a ranking of 12th among underwriters, according to Thomson Financial Securities Data. However, among technology deals H&Q's ranking climbs to 9th, as it handled 11 issues that raised $635 million, giving it a market share of about 4.4 percent.

Apple Computer and Amazon.com are among the more than 650 public offerings H&Q has managed since it was founded in 1968.

Because of its expertise and track record, "H&Q should be the first call made" when an entrepreneur is looking to launch an IPO, said Michael Flanagan, an independent brokerage industry analyst.

That success is largely attributed to the people running H&Q, aided by their proximity to Silicon Valley and the years of contacts they have built. While they are H&Q's strength, they could also prove to be Chase's Achilles' heel.

Retaining H&Q's top employees, said Flanagan, is a "significant challenge to the deal."

Cautionary tale
NationsBank's acquisition two years ago of Montgomery Securities is an example of what can go wrong.

Like H&Q, Montgomery is based in San Francisco, and it sold for an almost identical $1.3 billion. Also like Chase, NationsBank was looking for a beachhead in the high-tech market.

But disagreements soon led to the departure of Montgomery founder Thomas Weisel and many other top executives.

Will that happen at H&Q? "That's the fear," said Flanagan, adding that a honeymoon typically lasts 3 to 6 months before evidence of acrimony begins to surface.

Aware of the risk, Chase is setting up a $200 million pool of its own stock that would be paid out over four years to keep key H&Q employees. Flanagan called the pool a "good start, but it does get to a point where money isn't everything," especially if employees start feeling that their strings are being tugged from New York.

Under terms of the deal, H&Q would assume the Chase name and remain in San Francisco as part of Chase's investment banking arm, run by James Lee. H&Q chief executive Daniel Case III would become chairman and CEO of Chase Securities West and would lead Chase's global technology group, the companies said.

Headstart in banking business
Lee told Bloomberg that earlier transactions aren't comparable to Chase's acquisition of H&Q. "The buyers either had fledgling or really seminal investment banking businesses,'' he said. "It's very difficult to integrate an investment banking business when there wasn't one to begin with.'"

Stephen Berman, senior equity analyst at Stein Roe & Farnham, told Bloomberg that H&Q's also should fit nicely with Chase's existing operations.

"They have had the benefit of observing what happened at BofA and Montgomery," he said. "The deal sits very nicely with Chase's venture capital group, which has been very successful in technology and health-care private equity deals."

Aside from the potential for a rift developing between Chase and H&Q, the pairing was almost a necessity for one reason: The equities market is getting too large.

In Chase's case, the bank's own efforts to become an investment banking powerhouse were "painfully slow while the markets have grown painfully fast," said Flanagan. "It almost came to the point where Chase had to do something--now or never."

H&Q, meanwhile, was almost "a victim of its own success," he said. The market for technology IPOs that it has helped nurture "has grown so large that it became difficult for H&Q to manage."

Bloomberg contributed to this story.