DALLAS -- Taxes-based First Southwest Co. last week lost a high-pressure bid to renew its longtime financial advisory contract with Austin, one of the state's biggest issuers.
The Austin City Council voted 7 to 0 on Thursday to hire Public Financial Management Inc. instead. The decision was a major victory for the Philadelphia-based company, which opened a Taxes office in May that is headed by Bill Newman, a former top executive at First Southwest.
"Their loss is our gain," said Sam Katz, co-chief executive officer of Public Financial Management.
But the Dallas-based firm did not give up without a fight. "We did everything we could to try to keep them as a client," said Robert Utley, co-chief executive officer of First Southwest. "We have no hard feelings and we will continue to be interested in their business."
Several bond market participants in Texas described Dallas-based First Southwest's battle for the Austin contract as a critical test, since it changed ownership last October. The firm is the leading financial adviser in the state.
"They had a lot riding on that contract," said one bond lawyer familiar with the firm's efforts to keep the contract. "This was a major loss for them."
In a bid to keep the contract first awarded in the 1950s, First Southwest hired a lobbyist and executives personally met with Austin officials late last week, Mr. Utley said.
The tactics surprised some in the Texas bond industry who characterized them as "high-pressure."
Austin Finance Director Betty Dunkerley said that the campaign by First Southwest included letters to city officials seeking to reverse her decision not to renew the four-year contract after it expired Sept. 15.
"They did what any firm would do when you have a staff recommendation they didn't agree with," said Ms. Dunkerley when asked if the firm used high-pressure tactics.
Others said it reminded them of a similar incident in August 1989, when Wall Street firms hired lobbyists to reverse a decision to hire J.P. Morgan Securities for a negotiated utility deal. This campaign was successful.
One city official later argued that the decision to hire Merrill Lynch & Co. and Morgan Stanley & Co. cost the city an additional $1 million. Publicity over the matter prompted the council to adopt a tougher lobbying statute.
As for First Southwest, Ms. Dunkerley said the city has worked well with the firm for the last decade. But she said the decision to hire Public Financial Management was based as much on that firm's reputation as the city's long-term relationship with Mr. Newman.
"I think we were seeking the continuity with Bill and the backing of PFM," she said. "We also had some concerns about the turnover and with the change of ownership at First Southwest."
Mr. Katz said the change of ownership from long-time investment bankers to a group of Dallas investors was also a key factor in his firm's decision to expand into the growing Texas bond market.
He said in an interview that the firm had long considered opening a Texas office, but had decided against the idea largely because of local firms' dominance in the financial advisory business.
"Obviously the change of ownership at First Southwest and a change in the competitive environment in Texas were factors," Mr. Katz said.
The loss of Austin as a high-profile client is the latest fallout in the 10 months since the new ownership prompted senior bankers to leave for competing firms. Some say as many as 40 accounts, many of which are small issuers, have followed the bankers to new firms.
"That number isn't true. I don't know exactly how many, but in dollars and cents, it isn't very much," Mr. Utley said. "The effect on business isn't a surprise to us. I think it's less detrimental than it could be."
Competitors say the resignations have hampered the presence of First Southwest outside its Dallas home base. In Houston, investment banker Jim Gilley joined Coastal Securities Inc., taking with him an estimated two dozen clients. In San Antonio, executive Bob Henderson left for a senior post at rival Rauscher, Pierce, Refsnes Inc. and has been reportedly followed by several clients.
Earlier this year, the firm lost its only Hispanic investment banker when Noe Hinojosa Jr. became a partner in the firm of Estrada, Hinojosa Securities Inc. While officials downplayed the loss, Mr. Hinojosa's exit comes as many of the state's border credits -- with whom he worked for eight years at First Southwest -- are becoming prominent and regular issuers.
As recently as mid-July, the firm lost one of its best regarded women investment bankers when Patricia Gallaher resigned. Ms. Gallaher, a key team member on accounts that include the city of Dallas, has not yet joined another firm.
A few weeks later, the firm's new chairman and chief executive officer, Dallas lawyer Tom Luce, announced he would not return from an indefinite leave of absence. He took his leave to join the presidential bid of billionaire Ross Perot.
Mr. Luce, who sold his interest in First Southwest to other investors, could not be reached for comment. However, a long-time friend said the former Republican gubernatorial candidate decided to return to law, his first profession.
"He was cut out to be a lawyer," said Ray Hutchison, senior bond lawyer at Hutchison, Boyle, Brooks & Fisher in Dallas. "I don't think there was anything else to it."
Competitors of First Southwest say the departures and loss of clients are the growing pains the firm is suffering as it expands from a public finance operation into other areas, including money management and corporate finance.
While First Southwest executives have said their expansion will not affect the firm's nationally known financial advisory business, others disagree.
"I think the wheels are coming off," one senior executive in Houston said.
Executives who have left the firm said in background interviews that they resigned for two reasons: they were not allowed to buy control of the firm, and they were not happy with the move to diversify.
"We would meet on Monday morning and they would spend three minutes discussing public finance," said one former top official who asked not to be identified. "Then the rest of the meeting was about corporates."
"I decided that it was not the firm I went to work for, that the firm had changed," the official added.
