Shares of a fast-rising brokerage stock apparently soared too close to the sun last week.
Hambrecht & Quist, which had risen like a rocket for months, dropped $2.19 to $37.81 after Smith Barney Inc. brokerage analyst Dean Eberling slapped a "sell" rating on shares of the San Francisco investment bank.
All brokerage stocks tallied big gains this year as acquisition deals, mostly with commercial banks, ignited takeover speculation across the sector. And none was more white-hot than Hambrecht & Quist.
But in a new report to clients, Mr. Eberling said takeover rumblings had inflated the value of the company's shares beyond all reason. The brokerage trades around 3.3 times book value, higher than Morgan Stanley, Dean Witter.
"On pure fundamentals ... it is difficult to place the kind of multiple on a company that generates 45% of net revenues from underwriting and M&A advisory, let alone a premium valuation to the likes of Morgan Stanley," Mr. Eberling wrote.
"Even if the company were to be taken over," he added, "we would be hard-pressed to find a buyer willing to pay anything significantly above current levels."
Mr. Eberling's action underlines the feverish intensity of takeover sentiment in brokerage stocks. Outright "sell" ratings from Wall Street's industry analysts are fairly rare-and rarer still when the reason is overvaluation.
Hambrecht & Quist specializes in taking public the high-tech firms based in nearby Silicon Valley. A string of its competitors-Robertson, Stephens & Co., Montgomery Securities, and Alex. Brown & Sons-all sold to commercial banks this year. Each sale has heightened speculation that Hambrecht & Quist would surely soon follow.
A spokeswoman said the investment bank had no comment.
Hambrecht & Quist was the 17th-largest underwriter of common stock and initial public offerings through the first nine months of 1997, according to Securities Data Co.
An indication of how volatile this business is, 59% of its $906 million in stock underwritings were held in the third quarter alone.
Philip R. Erlanger, managing director at Lehman Brothers, Los Angeles, said Hambrecht & Quist's strength in the high-tech and health care sectors means it possesses the same attributes that made Robertson Stephens and Montgomery so valuable to their buyers, BankAmerica Corp. and NationsBank Corp.
But he added that Hambrecht & Quist, more than the others, "is a very focused business in customer type and, to a lesser degree, very focused geographically." To that end, he said, any buyer should be quite familiar with Northern California and the computer business.
Meanwhile, market sources said Societe Generale, the major French bank, is in talks with the bank and has offered $45 per share. A spokeswoman for Societe Generale in New York said the bank does not comment on such rumors.
John Leonard, a European bank analyst at Salomon Brothers, London, said Hambrecht & Quist's niche underwriting business would match well with Societe Generale's recent efforts to build its American capital markets by emphasizing niches in specific industries rather than trying to compete directly against Wall Street's bulge bracket firms.
But all the talk assumes Hambrecht & Quist is selling. And many analysts don't buy that.
"Everyone wants to dance with Hambrecht, but there's not a hint they're selling," said Michael A. Flanagan, an independent brokerage analyst based in Philadelphia.
He said that Hambrecht & Quist took itself public only a year ago and still has "more than ample" capital to continue as an independent firm.
Indeed, more than most firms, Hambrecht & Quist would present culture problems for an acquirer, particularly one from the courtly world of commercial banking, he said.
"They are a young and talented organization," Mr. Flanagan said, "and very independent."
