Well before Internet start-ups started their migration to New York, a small team of Chemical bankers and some former Drexel Burnham Lambert junk bond professionals in the city were involved in a start-up of their own.
Nearly a decade and several mergers later, that start-up, a junk bond shop that provided Chemical Bank's entry into investment banking, is branching out to the West Coast as Stage 2 of Chase Manhattan Corp.'s push into Silicon Valley.
Chase has a long history of working with financial sponsors, such as Kohlberg Kravis Roberts & Co., that invest in or take over companies using bank and debt financing. And its acquisition of the San Francisco investment bank Hambrecht & Quist Group last year - Stage 1 of the Silicon Valley push - gave Chase entry into the almost $50 billion venture capital industry.
The West Coast group, to be led by John Gammage, a managing director in Chase's New York acquisition finance team, is spearheading Chase's attempt to integrate its strengths and pitch them to young companies that need equity and may eventually issue high-yield debt.
"We want to expand our relationships with venture capital firms and the portfolio of companies they invest in," said Wilfred Finnegan, managing director and head of global leveraged finance at Chase.
In fact, Chemical Bank's position as a lender to buyout firms helped the bank - which bought Chase and took its name in 1996 - build a high-yield bond business that skyrocketed to No. 4 among underwriters last year.
Trying to build relationships with venture capital firms didn't make much sense before the bank was an active equity underwriter, he said. Venture-capital-backed companies generally tap the equity capital markets before the bond markets.
The five-to-10-person group, which will report to Mr. Finnegan, has a start date of March 1 and will be located in San Francisco.
"The idea is that, as they grow, Chase will be able to provide these companies with capital," Mr. Finnegan said.
The San Francisco office provides proximity to the nation's top venture capital market. Northern California attracted $17 billion of venture capital last year, more than any other region of the country, according to Venture Economics, a unit of Thomson Financial.
When Chase bought Hambrecht & Quist, it gained a name among equity underwriters for emerging-growth companies, but its leveraged finance group had already established itself elsewhere with financial sponsors.
When Mr. Finnegan joined Chemical in 1993, the same year the New York bank received its section 20 license, its junk bond operation was a work in early progress. On the fourth story of Chemical's 270 Park Ave. offices in Manhattan, which now holds over 100 of Chase's junk bond bankers, traders, and salespeople, the cement floor was still bare. Wires hung from the ceiling.
Mr. Finnegan, a former senior vice president at Drexel and a managing director at Donaldson, Lufkin & Jenrette Inc., joined Jimmy Lee, Chemical's investment banking chief, and a few others who were in the first stages of setting up the business.
The initiative was helped by Chemical's capital and clients - particularly in the chemical and energy industries - many of which were high-yield issuers. "But [Chemical] had no product expertise," he said.
But also working in Chemical's favor were its ties to financial sponsors, which Chemical had aggressively courted since the 1980s under the leadership of Mr. Lee.
Tellingly, one of the first large high-yield transactions Chemical lead-managed was a bank and bond deal worth over $1 billion. In 1994, Nashville -based UCAR International was about to be spun off from its parent, Union Carbide Corp. When Blackstone Group LP wanted to buy UCAR, Chase came in with a $650 million bank loan and a bridge to a $375 million high-yield bond issue.
That early deal showed how Chemical, and later Chase, might tap its commercial client base to win business for its fledgling investment bank. Danbury, Conn.-based chemical manufacturer Union Carbide was a long-standing client of Chemical and, incidentally, the original owner of 270 Park Ave., Chase's global headquarters.
"Chase has used its vast relationships within the institution to build the underwriting business - and more than any one thing, that has fueled their rise," said a New York-based high-yield bond investor who asked not to be named.
Chase still does much of its commercial lending business with financial sponsors. Last year it was the No. 1 lender to leveraged companies that were owned by these groups, agenting $45 billion of transactions and taking a 17% share of the market, according to Loan Pricing Corp.
Chemical's high-yield group quickly expanded to include a handful of Mr. Finnegan's former Drexel employees and other executives from established junk bond houses. Drexel, the premier Wall Street junk bond house, went bankrupt 10 years ago last week.
David Weiss, a former senior vice president in high-yield at Drexel, had already joined the bank as a senior salesperson. A year later, Peter Schmidt-Fellner, a former corporate finance partner at Drexel, joined Chemical to head high-yield capital markets after working in the private placement group at Citicorp. He now heads high yield sales, trading, and research.
He was followed by Christopher Linneman, a managing director who had spent the four previous years on the buy side at E.M. Warburg, Pincus & Co., also after leaving Drexel. And in 1995, managing director Steven Ruggiero, the former head of high-yield research at Donaldson, Lufkin & Jenrette, joined Chemical and started leading the bank's high-yield research team.
In the group's early days, it was the resume of deals done by these and the other senior bankers at the group that usually won the mandate, rather than Chemical's nascent deal list, said Mr. Linneman, now a co-head of high-yield capital markets.
"We had each done at least many deals ourselves, and in many cases knew the people [at the financial sponsors]," he said. But "you don't get those pieces of business just on relationship," he said.
The group was given perhaps its biggest boost when Chemical acquired Chase in 1996 for $9.9 billion. Chase at the time also had a 50-person high-yield business. Less than half eventually became members of the new high-yield group, though one - Mark Lightcap, a recent senior hire at the time from Credit Suisse First Boston - stayed on and is now co-head of Chase's high yield capital markets.
Chase had corporate clients in media and telecommunications, two industries that have been heavy users of the high-yield market in recent years.
"The story of the business really begins with the merger," said Mark Lightcap, now co-head of high-yield capital markets along with Mr. Linneman. "That's when the platform was established."
During the mid- to late-1990s, the bank built up its staff while working the corporate relationships it had gained with the Chase merger. The high-yield team now has over 100 people, and offices in New York, London, and most recently Germany.
Three years ago it started putting people in Europe to structure and sell deals into the embryonic junk bond market there. It reached a level of success much more quickly in Europe, thanks in part to an established infrastructure and its corporate clients in the region. It now has about 25 employees in Europe.
"Our approach was different from an institution which was just parachuting in employees," Mr. Linneman said.
The last few years haven't been stress-free, and Chase has had its share of deals that went sour. Last year, Washington, D.C.-based wireless phone provider Iridium defaulted on a $800 million loan lead by Chase and Barclays Bank PLC and a $300 million bond, for which Chase was a lead underwriter.