First Union Corp. plans to enter the equity underwriting business this year, filling out the menu of capital markets products it can offer customers through its section 20 subsidiary.
The subsidiary, First Union Capital Markets Inc., will hire up to 60 equities traders, salespeople, and analysts over the next 18 months but has yet to select a leader for the new operation, said Louis A. "Jerry" Schmitt, a managing director and co-head of the subsidiary.
"It is not a decision to take lightly. We made the decision that, given all that we have going on with our customers in terms of their needs and our trying to be their capital markets provider, it's the right thing for us to do," said Mr. Schmitt.
The subsidiary received Tier 2 powers - authority to underwrite both corporate debt and equity issues - from the Federal Reserve Board in June 1995. It began underwriting corporate debt at that time, but "equity required further infrastructure review by the Fed," said Mr. Schmitt. The unit obtained basic securities underwriting, or Tier 1, powers in 1989.
"We wanted to exercise the debt powers and get that rolling and feel comfortable," before entering the highly competitive field of equity underwriting, said Mr. Schmitt.
First Union underwrote 33 public debt deals last year, with proceeds of $4.3 billion.
By building an equities business, First Union will compete with both securities firms and more than half of the 40 commercial banks with securities subsidiaries authorized to underwrite corporate stocks.
"It's a natural extension of what they have been doing," said Carole Berger, a bank analyst with Salomon Brothers Inc. "It's a recognition that midsize businesses are going to tap the capital markets. If you want to continue to bank that customer, you're going to have to provide not just traditional loans but capital markets products too."
First Union's equities effort will target midsize companies with annual sales of between $50 million and $2 billion. It will also focus on the cable communications and health care industries, where its bank affiliate has already established relationships.
Based in Charlotte, the operation will be focused on First Union's existing regional base extending from New Jersey to Florida, "but also in specialized lending we're nationwide, so we would expect to see some things outside our footprint too," said Mr. Schmitt.
Establishing a reputation and track record in equities will be a difficult task for the subsidiary, but Mr. Schmitt points to the lessons learned in corporate debt underwriting: "If we hired the right people with the right resumes and the right experience and we backed them, (we have found) that we've had remarkable success at having customers give us permission to work with them on deals of all types."
First Union will have to turn to Wall Street securities firms to find the experienced talent the new group needs - talent that will not come cheap. But the relatively lower cost of living in Charlotte, also home to rival NationsBank, should keep the premium First Union will have to pay for those key employees on par with those paid by securities firms based in New York, said Alan Johnson, head of Johnson Associates, a Wall Street compensation consulting firm.
Pretax earnings from the section 20 could reach $500 million this year, said Mr. Schmitt. Last year's earnings before taxes were $421 million.
The subsidiary will first look to co-manage equity issues before jockeying for the lead manager position. "It wouldn't be our intention to try to convince our customers that we ought to start underwriting deals until we've had some experience in the 'co-' position," said Mr. Schmitt.
