Beneath the stodgy surface of investment banking roars a tumultuous world where firms constantly battle each other for the next big deal.

The bankers at Lehman Brothers Inc. have been winning a lot of these hidden matches in recent months.

It shows in the latest merger advisory figures. Lehman Brothers rose to the top of the first-quarter tables, advising on more deals than such regal names as Goldman, Sachs & Co., Merrill Lynch & Co., and Morgan Stanley, Dean Witter & Co., according to Securities Data Co. The improvement from its eighth-place ranking a year earlier signals to some Lehman's return to Wall Street's elite.

"In the last 18 months to two years Lehman has become a player again," said Barry P. Taff, partner in the Washington law firm Silver, Freedman & Taff.

Lehman's reemergence speaks to the firm's hard work. It also testifies to the turmoil enveloping Wall Street.

With merger fever gripping corporate America, investment banks need more capital to meet companies' growing finance needs. To get this capital, several Wall Street firms have sold themselves in the last year and a half to more cash-rich organizations, especially commercial banks.

At the same time, competition for investment banking business- particularly lucrative merger advisory work-has never been more intense. Friendly ties between bankers and executives are seldom as important to companies nowadays as finding an investment bank that can best sell investors on their latest merger, stock issue, or bond offering.

Numerous investment banks have tried to build their M&A business to capitalize on this unstable environment. But few if any have succeeded to the degree that Lehman has.

Lehman bankers attribute their success in part to the firm's continued independence. Although Lehman is often the subject of merger rumors, it has refused to pair off with an outsider: With Lehman, its bankers argue, company managements know their investment banker's opinions won't be affected by the goals of some bigger organization that supplies the firm's capital.

"Our current autonomy is advantageous," said Philip R. Erlanger, a managing director in Lehman's financial institutions group.

Lehman bankers know full well the cost of losing that autonomy. The firm sold itself to Shearson American Express Co. in 1984 after a well- chronicled spat among its partners. After several frustrating years trying to build a "one-stop financial supermarket," Lehman was granted its independence in 1994. Today American Express gets a piece of Lehman's profits, and the companies share headquarters space in a lower Manhattan office complex.

Many of Lehman's top investment bankers cut their teeth during the Shearson years. They're familiar with how distracting a merger can be to a firm. So as consolidation roils Wall Street again, Lehman's bankers have been busily trying to nab clients from rivals undergoing their own mergers.

NationsBanc Montgomery Securities has been a particular target for rival investment banks up and down Wall Street.

Montgomery Securities sold itself to NationsBank Corp. Oct. 1 because executives of the privately held investment bank wanted access to more capital. Since the sale, scores of investment bankers have called the banks and thrift companies that traditionally hired Montgomery to see whether they'd prefer doing business with someone whose card doesn't include the word "NationsBank."

Montgomery employees privately acknowledged that longtime client Wells Fargo & Co. is no longer calling for advice because it doesn't want do business with a firm owned by one of its biggest competitors. "The fact that NationsBank openly craved a California bank until they bought BankAmerica had something to do with that," said a NationsBanc Montgomery employee.

People familiar with the situation say Montgomery lost Charter One Financial Inc., a Cleveland thrift company, shortly after advising on its acquisition of RCSB Financial Inc. The transaction closed Oct. 6, six days after Montgomery officially became part of NationsBank. Lehman advised RCSB, a Rochester, N.Y., thrift.

"You've got to be aggressive, constantly feed your clients product- companies they'd like to buy-and Montgomery dropped the ball," said a person close to Charter One. "Lehman is bringing the product now."

The firm has also attached its name to the rising star of Washing Mutual. Lehman advised the Seattle thrift company on its acquisitions of Great Western Financial Corp. and its planned purchase of H.F. Ahmanson-the two biggest thrift deals ever. Its bankers were so pleased about the Ahmanson deal, announced March 17, that they took the unusual step of speaking publicly about it.

But Washington Mutual hasn't been Lehman's only coup. The firm also won a lucrative assignment after MCI Communications Corp. dropped Lazard Freres & Co. in October. MCI then summoned Lehman for advice on its merger with WorldCom Inc., the biggest-ever merger in any industry at the time.

Other recent high-profile deals for the firm include advising Citicorp on its planned acquisition of AT&T Corp.'s credit card portfolio, specialty financier Green Tree Financial Corp. on its proposed sale to insurer Conseco Inc., and Cendant Corp. on its proposed acquisition of American Bankers Insurance Group.

Rival investment bankers say Lehman's recent run owes more to the merger mania infecting corporate America than to any particular actions by the firm.

Others say Lehman's success is evidence that the firm has learned to play Wall Street's game when getting highly profitable merger business is top priority for many firms.

"The question is whether their approach will continue to work when the bull market ends and independent, critical research reports on companies become important again," said an analyst who asked not to be identified.

Lehman's resurgence has come fairly cheap. The firm has hired about 100 investment bankers since 1995 but kept compensation and benefit levels down to 50.7% of net revenues in a business notorious for poor cost controls.

Most notably for followers of bank stocks, the firm last November hired analysts Diane Glossman and Michael Plodwick from Salomon Brothers after that firm was bought by Travelers Group and merged into its Smith Barney division.

As consolidation inexorably pushes toward fewer and bigger firms, Lehman executives figure they'll be able to continue picking off bankers and researchers not absorbed by the huge conglomerates.

"Most of us got into this business to make a difference and make money doing it," said Steven B. Wolitzer, head of M&A at Lehman Brothers. "Working for one of those big, huge organizations, it's harder to make a difference."

That said, Lehman is hardly a boutique. The firm reported yearend net revenues of $3.9 billion, ranking it fourth among publicly traded investment banks, according to Financial Services Analytics Inc.

The question now is whether those revenues are enough to let it survive in a world where big financial services companies want to get much, much bigger. Lehman's competitors are already immense.

Morgan Stanley reported 1997 net revenues of $16.3 billion, and Merrill Lynch reported $15.7 billion.

Still, Lehman tries to make a case to keep its "current autonomy." Chairman and chief executive Richard S. Fuld, a survivor from the days when Lehman was a private partnership, has said the firm operates best independently and doesn't want to sell.

Financially, the firm is healthier than it's been for many years. Ratings agencies recently upgraded its debt, and its stock price has risen 91% from a year earlier.

But some question just how long Lehman's stock can stay so high because its shares contain a healthy dose of takeover speculation, Sallie L. Krawcheck, a brokerage analyst at Sanford C. Bernstein & Co., wrote in a recent report.

The firm's effort to build business in M&A work and other investment banking areas, she said, "is still a work in progress."

So for now, Lehman Brothers' bankers are enjoying the fruits of their labors.

Their recent run of high-profile, high-fee mergers should keep the firm in the spotlight-at least until the next spate of big deals when some other firm may become king of the Wall Street hill.

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