KANSAS CITY -- When George K. Baum & Co. in 1987 was named remarketing agent for a $1 billion tollway project in Denver, it was a great coup over Wall Street for the regional firm.

While Baum officials celebrated, a senior executive at Salomon Brothers was busy dictating a letter to the director of the toll authority suggesting that the project needed a firm with "staying power" in the municipal market.

The letter arrived Oct. 13, the day after Salomon Brothers Inc. announced it was quitting the municipal bond business.

For William Coughlin, president of George K. Baum, the story offers a two-edged message: Only the strong survive, and nothing is forever. "It's a fine line between wanting your competition to go out of business and being the only game in town," he said. "You want healthy competition."

After years of conservative growth, the firm now faces what is perhaps its greatest challenge since its founding in 1928, at the start of the Great Depression.

Besides expanding its municipal business, the firm is also developing a greater corporate business, focusing on its base of institutional clients, and studying expansion of its retail sales force.

Those moves could help it join an elite class of mega-regional firms resourceful enough to compete nationally with brokerages from Main Street to Wall Street.

"I think Baum realized two or three years ago, that for the longer term, it could not be focused [solely] on underwriting municipal securities," said Perrin Long, senior vice president for research at First of Michigan Corp. in Detroit. "I think they have realized that regardless of the business you are in, you can't make money unless you spend money."

That is exactly what Baum did in April 1990, when it beat out three other firms to acquire the 100-person firm of Kirchner, Moore & Co., the municipal division of Drexel Burnham Lambert Inc. "It is true that we wanted to use our capital in a more constructive way," said Don Roberts, vice chairman at George K. Baum.

The expansion doubled the size of the firm to 250 employees, including 56 investment bankers in 11 of its offices around the nation. It was a bold departure from its previous growth path.

"Before, we would get two or three key groups and tell them to develop a presence for us in a state," said Mr. Roberts, who joined the firm in the 1950s when it had only a dozen employees.

When the firm won the bidding for Kirchner Moore, some in the industry praised the acquisition as shrewd, while others saw a troubling clash of cultures.

"You had these investment bankers at Baum that had never really developed a consistently large business on the one hand," said a banker at another Kansas City firm. "Then you had these guys out in Colorado that were deal makers with that Drexel ethic of creativity.

"I just couldn't see how it would work," he added.

But 14 months later, Baum officials have begun phasing out the Kirchner Moore name -- prominent in the Rocky Mountains since 1961 -- saying the merger has been virtually trouble free.

"There were not many conflicts," said Robert Dalton, vice chairman at Baum and president of Kirchner Moore before the merger.

Although Mr. Roberts added, "it was tough. We had a Denver office, and they were used to competing with Kirchner Moore."

Already, the merger of the two firms may be paying off. Before the merger, George K. Baum was consistently one of the top 50 senior managers in the nation, though it sometimes was ranked behind smaller regional firms, according to figures from Securities Data Co./Bond Buyer.

But since acquiring Kirchner Moore, Baum appears to have secured a spot among the nation's top 20 underwriters -- currently at No. 18 -- and it could senior manage a record $2 billion in issues this year.

"I don't believe we need any more bankers to double our municipal revenues again," said Mr. Coughlin, the firm's president. "It used to be size [of issues] that dictated what a regional firm couldn't do. Size doesn't stop us anymore."

In the last year, the firm has shifted from a mix of deals of all sizes to an emphasis on underwriting transactions in the $50 million to $100 million range. Those deals account for 48% of the $863.6 million in transactions handled by Baum so far this year -- twice the level in that range for all of last year.

Issues in that range are key to helping the firm establish itself as the largest brokerage off Wall Street. According to Mr. Roberts, "We can say to issuers that you don't have to go to Wall Street to get your financing done."

Though Mr. Roberts insists that smaller issuers will not be neglected, competitors say Baum's success with big deals eventually could provide their firms with opportunities. "They might be able to keep doing those small deals for a couple of years, but in the long run it won't be smart [for Baum] to handle a $3 million water deal in the Ozarks," said an investment banker at a St. Louis firm. "They want to handle larger deals because they will be geared to make more money that way. That can only help us."

Already, the firm is looking to develop a stronger presence in competitive regional markets. "We are interested in successful bankers with a book of business in Florida and California," said Mr. Dalton.

Competitors believe it will take more than the addition of well-known bankers to help Baum break into new markets. They say the firm will likely continue to be politically active, which some belive to be a factor in its current success.

In Missouri, for instance, the firm and its bankers are major contributors to policymakers and work on fund-raising committees, including one for Gov. John Ashcroft.

"This used to be a good-old-boy business," Mr. Coughlin said. "You do not get the kind of business we do unless you can do more than write a check."

But political involvement can have negative consequences. In Denver, bankers at the company's Kirchner Moore division were contributors and fund-raisers for the losing candidate in the city's recent mayoral election.

That move could cost the firm roles in future city financings, including the $2.4 billion Denver International Airport project. Asked if there was a downside to political involvement, Mr. Dalton admitted, "In that case, there probably will be."

Still, he defended the practice, and added, "Our political profile should be one that public officials know us and feel comfortable with us, and want to do business with us."

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