-- path into investment banking with its $1.35 billion deal to buy Hambrecht & Quist of San Francisco.

It was hardly the blockbuster deal many analysts and bankers had expected of Chase. After all, the New York banking company had talked with Merrill Lynch & Co. And Morgan Stanley, Dean Witter & Co. had been mentioned as a possible target.

Instead, Chase picked a middle-tier player. The move would give Chase a foothold in an unfamiliar business without putting its profitability seriously at risk.

"These smaller outfits are feasibly digestible," said Ronald D. Reading, a managing vice president for First Manhattan Consulting Group in New York. "If they don't go well, they haven't destroyed a significant amount of shareholder value. It's not a big roll of the dice."

That banks are shying away from bulge-bracket investment banks suggests that three years of rapid consolidation between large banks and middle-market investment banks has done little to make bankers feel comfortable merging with their financial services counterparts.

One reason may be the high-profile problems some banks have faced. Last year, for instance, NationsBank Corp. lost Montgomery Securities CEO Thomas Weisel and 100 bankers after NationsBank's merger with BankAmerica Corp. Also in 1998, James Dimon of Citigroup Inc. resigned amid internal criticism that Salomon Smith Barney and Citibank were not integrating rapidly enough.

Stephen Biggar, an analyst with Standard & Poor's Equity Group, said integration woes have worried commercial bankers about mergers with investment banks. But he said bankers are beginning to figure out how to go about it.

"If anything, all the deals have proven that concern is overblown," Mr. Biggar said. "There was also concern about pay scales and working hours. I think banks have found the way to integrate is that these businesses can be left alone. They only really have to be merged in the financials."

Nevertheless, banks with global aspirations are starting with smaller bites. In August 1997, First Union Corp. agreed to buy Wheat First Butcher Singer Inc. for $491 million. BankBoston Corp. followed in May 1998 with a plan to buy Robertson Stephens & Co. for $800 million. A month later, KeyCorp unveiled a $653 million deal for McDonald & Co.

For growth-oriented, middle-market investment banks, having the backing of a well-capitalized, top-tier commercial banking company has become almost a necessity. Daniel H. Case 3d, Hambrecht & Quist's chairman and chief executive officer, told analysts Tuesday that his company had become vulnerable.

"The middle is a dangerous place to be," Mr. Case said. "We did not believe the level of growth we have had was sustainable."

He added that many middle-market firms are faced with two choices: Aim to be a bulge-bracket firm or a boutique.

"There were three specific things constraining our growth," Mr. Case said. "We were evolving with our clients but we were not doing enough fast enough." The company also needed the new product capabilities Chase has, he said. Third, he said, "Our ability to reach entrepreneurs outside Silicon Valley (particularly Europe) was limited, and we were constrained in our ability to attract and hire talent."

As the Hambrecht-Chase deal shows, the targets are dwindling. Analysts say Raymond James and A.G. Edwards Inc. are among the more attractive marks. But S&P's Mr. Biggar said the ranks of prospective buyers of mid-tier firms are thinning, too.

"With Chase and this deal, all of the money-centers are complete," he said. "Chase looked across the spectrum to see what was left. Someone the size of Chase, you would expect them to take on a larger investment firm in terms of financials. But it's a good starting point."

Not everyone, however, believes that smaller is better. Ronald Mandle, an analyst with Sanford C. Bernstein in New York, had been Chase's loudest critic in calling for a deal that would bring equity capability into the fold. On Tuesday, Mr. Mandle praised the deal but said his criticism would only change, not end. After all, he said, Chase serves a diverse range of corporate clients, and Hambrecht & Quist specializes in media, telecommunications, and the Internet.

"It's not enough," he said. "I'm going to ask them when they're going to get a firm that has expertise in all industries."

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