Small brokerages see a chance to grow

In the wake of the stock market's October plunge, stories about hiring freezes, layoffs, and companies quitting the bond underwriting business have commanded tremendous amounts of newsprint. Last week E.F. Hutton Group Inc. earned a place on the front pages when the company announced it was looking for a merger partner or a cash infusion to survive the market's decline and stave off a possible lowered credit rating.

Besides the individual dramas of the post-plunge financial services industry, another story is playing out. Some of the nation's smaller brokerages and regional firms had been building up capital, not expanding in the bull market, and waiting for the right moment to buy. Indeed, some of these now plan to open more offices, hire more workers, expand into new areas, and take over smaller or failed firms.

``We now have no hiring freeze, and we plan to open more branches,'' says Benjamin Edwards, chairman and chief executive officer of A.G. Edwards & Sons Inc., in St. Louis. ``People have had more opportunity to expand in bad times than good, because the market's fall has made many problems crystal clear.''

For the Chicago-based firm Rodman & Renshaw Capital Group Inc., ``Black Monday,'' as Oct. 19 is called, provided the opportunity to add a branch office with 32 brokers in Michigan when the regional, specialist firm H.B. Shaine & Co. failed. ``Somebody's problems presented an opportunity for us,'' observes Bruce Young, vice-chairman, president, and chief operating officer.

``We immediately went up to Michigan, picked up 4,500 new accounts, and increased our distribution. The money they lost was in a narrow segment: We picked up the assets and no liabilities,'' he adds.

Rodman & Renshaw has added two other branches since May; it bought out a firm in Itasca, Ill., and opened an office in Kansas City, Mo. The company's number of employees has grown this year from 240 to 300, Mr. Young says. ``While we don't have aggressive expansion plans, if opportunities present themselves we'll pursue them. If the right people become available, we'll look at how they fit in,'' he says.

When Rodman & Renshaw went public in June 1986, it raised about $9 million. The company has $30 million in capital. ``We didn't make acquisitions even though we had the money. We can look at other firms and not pay premium prices to obtain them. We have no long-term debt, so we're positioned to take advantage of someone else's problems,'' Young says. Rodman & Renshaw is looking to get into money management and to buy firms.

According to financial services analyst Nancy Young, the smaller firms - those that may not be household names or have national recognition - could benefit greatly during the restructuring, brought on in part by the market's plunge.

``We're tending to see that those firms with insufficient focus on what their markets were are having problems now. And the dichotomy is the growth opportunities the smaller firms have,'' says Ms. Young, of Tucker, Anthony & R.L. Day, New York.

Hutton, for example, spent 10 years building up and tearing down its capital markets presence. ``Two years later they tore it down. Then two years later they built it up. It was like watching the tide come in and go out,'' she says.

One of the ironic twists in this story is that Hutton last year spurned a $50-a-share, $1.55 billion offer from Shearson Lehman Brothers; analysts now estimate that Hutton would be fortunate to receive from $25 to $35 a share. Shearson is one of many possible merger partners mentioned.

``An unfocused firm is likely to bite the dust through failure or a merger. The smaller firms, when times are good, have tended not to expand. Now they have a tremendous opportunity,'' she adds.

One reason for this opportunity is the reputation for, and ramifications of, poor management in the securities industry, Young says. ``Management has a hard time seeing past the next quarter or next year,'' she says. ``You see the firms that got carried away now scaling back and seeking an identity.''

Another factor lurking on the horizon is the end next March of the moratorium on banking expansion. Young claims it is no coincidence that Salomon Brothers, for example, is getting out of municipal bonds, short-term paper, and mortgage-backed securities, ``areas where banks have the authority to engage in'' once the moratorium ends, she says.

``There's a whole new trend in financial services. There are new competitors: banks, savings-and-loan associations, and regional brokerages,'' she observes.

As part of its positioning for growth, A.G. Edwards opened 22 branches last year, bringing its total to 330 branches nationwide. The company plans to increase its investment banking area, research department, and institutional efforts, Mr. Edwards explains.

He does note that the size of the first broker training class since the market's 508-point plunge is the smallest the company has had in four or five years. The monthly class has 10 students; it usually has 50. Edwards says the firm's employment has dipped a little from its high of 6,700, as well. ``When we get into a slow period, there's attrition,'' he observes.

A.G. Edwards experienced a good October, except for the hits in the secured-debits area, Edwards notes. ``We were modestly profitable'' is the way he describes the month. November's business should be about half of October's. ``I'm not looking for a good quarter, but we have experienced no structural problems from the market's fall.''

Young of Rodman & Renshaw expects the company to break even for the month of October. ``November should be back to pre-October levels,'' Young hopes.

For the record, the Dow Jones industrial average closed last week down 24.53 points to 1,910.48 in light trading. The exchanges were closed Thanksgiving Day.