A wave of belt-tightening and strategic rethinking of business goals is uprooting Wall Street.
At least three investment banking firms-CS First Boston, Dean Witter Reynolds, and Donaldson, Lufkin & Jenrette-have completely shed their public finance divisions, including tax-exempt healthcare activities.
Several other firms, including venerable Goldman, Sachs & Co., have pruned their public finance operations. Goldman's 15-member municipal healthcare department is down three people, although Edward Shapoff, a vice president and manager of the healthcare group, said the positions eventually will be filled.
According to the Securities Industries Association in New York, there were 95,647 brokers working for investment banking firms at the end of last year, down 81 from the third quarter of 1994.
At the same time, firms that remain seriously committed to serving the tax-exempt healthcare market are picking the cream from the crop of bankers looking for work.
So, the next time your hospital refinances or issues new debt, it may be dealing with a different underwriter or adviser.
"I think we'll continue to see a lot of shuffling of the deck," observed one banker, who declined to be identified.
Tough times.Industry insiders say
many firms had grown too large during their heyday in the 1980s. And the skimpy volume of new issues in the municipal markets in recent years has forced many firms to re-evaluate their business strategies and seek efficiencies, they said.
Narrowing spreads between yields on securities and tightening profit margins forced Donaldson, Lufkin & Jenrette to close its 125-person public finance business in January. The move affected all trading, research, underwriting and institutional sales of tax-exempt bonds, including healthcare.
Consistently ranked 10th to 12th among municipal underwriters, DLJ didn't foresee any near-term changes in the market, explained Catherine Conroy, a spokeswoman for the New York-based firm. Nor did it see opportunities to compete on anything other than price and quality to keep the firm in the market. However, DLJ remains active in the healthcare market through its corporate finance and mergers-and-acquisitions businesses, Conroy said.
In February, CS First Boston also announced it would halt all municipal securities activities, including the sale and trading of municipal bonds. The decision, affecting 150 people including 22 in healthcare, was related to First Boston's global investment banking strategy, a spokesman said. Public finance, a domestic service, didn't fit the global strategy, even though healthcare "was a successful, profitable business," the spokesman said.
Tax-exempt healthcare volume may be down, but hospitals still need help with refinancing and restructuring, said Wayne Workman, a senior vice president and manager of the public finance department of Tucker Anthony. The Boston-based investment banking company has experienced some attrition but recently hired Christopher Conley, formerly of Lehman Brothers, and Edward M. Murphy, executive director of the Massachusetts Health and Educational Facilities Authority, to focus on potential healthcare deals in the Northeast.
Lehman Brothers, with eight people dedicated to healthcare, is down four positions from 18 months ago. Lehman may fill some of the jobs, but not all of them, said Stephen Claiborn, a managing director in Houston and head of Lehman's municipal healthcare group. He said the current environment offers Lehman an opportunity to hire people with a different mix of skills, such as experience in mergers and acquisitions.
New approaches.Just as the needs
of healthcare providers are changing, so is the mix of services that investment bankers are offering. Many firms are tapping expertise in corporate finance to create financing instruments that reach beyond hospitals' traditional tax-exempt debt needs.
Merrill Lynch & Co., one firm that's added bankers, has about 30 people dedicated to healthcare: 16 in its debt-and-equity finance division and the rest in mergers and acquisitions and equity venture capital, said James D. Forbes, a director in Merrill Lynch's healthcare department. Forbes said he was attracted to Merrill Lynch from CS First Boston because of its commitment to offering a variety of debt and equity products to healthcare clients.
Likewise, Baltimore-based Alex. Brown & Sons is involving other divisions of the firm in "a more integrated approach to healthcare finance," said John Cheney, a principal and head of the healthcare investment banking group in the firm's public finance division.
The cross-fertilization of corporate and public finance will help tax-exempt healthcare providers reach HMOs and physician management firms that are key to the development of larger, integrated healthcare delivery systems, Cheney said. Corporate healthcare clients also will benefit from establishing partnerships with hospitals and healthcare networks, he said.
The misfortune of others has been a blessing for small boutique firms, such as Cain Brothers & Co. and Shattuck Hammond Partners, which serve healthcare clients exclusively.
Cain Brothers' recent additions include two former Prudential Securities bankers: Frank Taylor and Matt Goldriech.
"We think we're probably in a growth mode," said Jim Cain, a principal of the 20-person investment banking and advisory service.
Shattuck Hammond recently hired two investment banking executives: Gary D. Bunton, formerly a managing director in charge of First Boston's healthcare group, and Arthur J. Henkel, a former senior vice president with responsibility for major healthcare clients at Goldman, Sachs. Shattuck Hammond's eight principals and 15 professionals provide corporate and public finance services to a wide range of healthcare clients.
Meanwhile, the shakeup on Wall Street has spawned at least one attempt to create a new investment banking firm. Thomas M. Barry, formerly a managing director of healthcare finance at CS First Boston, is seeking regulatory approval for a new firm, Cambridge Capital Partners. The New York-based firm will offer debt and equity underwriting and advisory services on mergers, acquisitions, divestitures, restructurings, capital financings and investment policies.