The investment banking arms of commercial bank holding companies have won the approval of mid- to small-cap portfolio managers and chief financial officers, according to a survey released by Reuters last week.

The portfolio managers ranked commercial banks slightly higher than the CFOs did, but both groups placed banks ahead of some established names in investment banking.

The top spots were snared by the bulge-bracket firms. But some observers note that the mid- to small-cap sector is the one in which banks may eventually be able to outperform Wall Street.

"It's possible that they could move into one of the top three positions in the middle market but never in the overall market," said Samuel Hayes 3d, professor of finance and investment banking at Harvard Business School.

Mr. Hayes said executives at the top three bulge-bracket firms-Goldman, Sachs & Co.; Morgan Stanley, Dean Witter & Co.; and Merrill Lynch & Co.-had decided that their high overheads meant that they couldn't afford to service smaller companies.

"They've raised the threshold of their radar level, and that means there's more room for the smaller regionals to fly in underneath," Mr. Hayes said.

And that's precisely what Ted Virtue, president of BT Alex. Brown, said he intends to do. Mr. Virtue, whose subsidiary was ranked fourth overall by the fund managers, the highest of the commercial banks, said, "We're not in this business to finish fourth."

The Bankers Trust executive vice president said BT Alex. Brown was focused on leveraged and smaller companies. "The league tables can be deceiving because they're dominated by the big deals, which aren't always that profitable," he said.

Mr. Virtue said he is confident that the recognition by fund managers and CFOs will translate into an increase in market share in the next quarter.

Bruce Herring, director of research analysts at Fidelity Investments Corp., said it's not surprising at this point that the fund managers are more enthusiastic than the CFOs about the commercial banks entering the investment banking field.

"We really do business year to year. If all of a sudden someone comes out with a much more dynamic approach, you pick up on it," said Mr. Herring. "But if you're the CFO of a company and you've been working for 10 years with a firm, it's going to take a lot to make you change your relationship."

Three of the four banks that either the fund managers or the CFOs ranked highly had made a major acquisition of a securities firm within the previous six months.

The other bank, J.P. Morgan, has been building its investment banking capabilities internally for decades.

But most observers agree that Bankers Trust Corp., BankAmerica Corp., and NationsBank Corp. would not have made the top 10 in these polls if they had not purchased Alex. Brown, Robertson Stephens, and Montgomery Securities, respectively.

"Banks are sneaking up from the bottom by trying to become investment bankers to companies who are already their clients," said Roy C. Smith, professor of finance at New York University's Stern Business School. "These acquisitions have accelerated the pace. But remember, large-cap companies don't do much traditional commercial banking."

Mr. Smith said bank executives felt they needed to purchase these firms to stay competitive in their core small to midsize business sector, which he said investment banks would pursue more aggressively when market volumes drop.

Mr. Hayes took the position that the parent companies should try to keep the investment banking subsidiaries as distant as possible from the commercial side of the operation.

Alex. Brown, Robertson Stephens, and Montgomery "were some of the most important bankers for midsize to smaller companies. These results show that they have not lost their effectiveness in the wake of being acquired by commercial banks," Mr. Hayes said.

"One of the things that should have worried the banks that purchased them," he added, "was the possibility that, when trying to integrate them into a much larger hierarchy, they ran the risk of destroying their entrepreneurial spirit."

Fund managers ranked BT Alex. Brown second in two investment banking categories: pricing of new issues, behind Goldman Sachs, and primary dealing ability, behind Merrill Lynch.

"Think about any new entry into a marketplace," said Fidelity's Mr. Herring. "One of the things you can compete on is price." He said this was not necessarily a problem, as long as the cost structure was kept in line with pricing.

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