G. Kennedy Thompson is giving First Union Capital Markets a makeover.

On the prowl to buy a retail brokerage or investment banking boutique, Mr. Thompson says he plans to achieve most of his revenue growth this year through hiring.

"We are in most of the products and industries we need to be in now, but we could be bigger," he said in an interview Tuesday.

Fresh from his promotion to vice chairman last fall, Mr. Thompson was made sole chief of the capital markets division in January upon the retirement of his former co-leader, Jerry Schmitt.

Now he plans to trim about 500 of the 5,200 employees in the unit, or 9.6% of the work force, and use the savings to hire from 100 to 200 investment bankers, analysts, and merger and acquisition advisers.

By the time he is done reshaping the capital markets unit, its head count should shrink about 6%-roughly in line with the companywide 7% work force reduction First Union announced in February.

But Mr. Thompson said he expects a 10% rise in the unit's expense base, because the investment bankers and analysts he hopes to recruit will require bigger compensation packages.

This plan conforms with earlier remarks by John Georgius, First Union's president, who said that much of the $300 million the bank hopes to save from nearly 6,000 job cuts this year would be redirected to capital markets and wealth management.

About 300 people in First Union's capital markets unit were handed pink slips in February and March as part of the restructuring, with most of the cuts coming from municipal finance, corporate finance, leasing, and support staff, according to Mr. Thompson.

"We pared back the staff in areas that were nonrevenue producing," he said.

About 200 more will be dropped from the payroll if Mr. Thompson succeeds in selling the unit's factoring group, as he hopes to do this year.

Until now the capital markets group has been growing through hiring, acquisitions, and transferred business lines from the bank. Mr. Schmitt started the unit with 700 people in 1994.

He and Mr. Thompson joined the Charlotte bank in the 1970s and climbed the commercial banking ladder. Mr. Thompson came over to co-head capital markets in 1996.

Sally Pope Davis, an analyst with Goldman, Sachs & Co., said she is not surprised by Mr. Thompson's rapid rise.

"I think he is someone to keep an eye on from the perspective of the whole corporation," she said. "He's a good builder and very quick on the uptake."

Most U.S. banking companies acquire their capital markets executives through takeovers of large securities firms or by recruiting from Wall Street. But Mr. Thompson said he does not view his years in commercial banking as a disadvantage.

"I don't believe you need to know everything about securitizing a mortgage to manage the capital markets business," the 48-year-old North Carolina native said.

He aims to take First Union's securities business global, and said it is already more national in scope than many people realize. Though First Union's corporate lending relationships are concentrated on the Eastern seaboard, about half of the unit's revenues come from outside the bank's regional base, Mr. Thompson said.

In an attempt to boost the investment banking business outside the bank's core region, First Union is plowing $100 million into a splashy prime-time television ad campaign, touting such niche products as M&A advisory. Such ads are a rarity even among Wall Street firms.

CoreStates Financial Corp. contributed to a stunning 263% rise in the so-called "traditional banking" part of the unit's business, which includes interest income from corporate and asset-based lending. First Union acquired the Philadelphia-based banking company last year and rolled some of it into the capital markets unit.

Based on 1997 pro forma figures for both banking companies, revenues for this segment of the unit, which also includes fees from correspondent banking, would have risen 20% to $1.8 billion with the CoreStates contribution.

But fee income in the capital markets division remained steady at 54% of revenues in both 1997 and 1998, including pro forma revenues from CoreStates. First Union had a companywide target last year to garner 40% to 45% of its revenues from fees.

Though its top line has grown each year since the unit was founded, its capital markets penetration has a ways to go to catch up to banks that bought some of the larger securities firms over the last few years.

First Union ranked No. 9 in syndicated lending last year, but only No. 24 last year in the domestic high-yield market. It did not make the top 25 underwriters of initial public offerings, according to Securities Data Co. The bank's junk bond share rose in the quarter ended Wednesday when it ranked No. 14, with a 1.5% market share.

Ms. Davis said she thinks First Union could eventually catch up to its rivals.

"It has been inclined to build person by person, but I think it has garnered some recognition for having fewer cultural issues," Ms. Davis said.

To increase the bank's capital markets share, Mr. Thompson is thinking of making another acquisition, though he says it probably would not be large.

Last year, the bank bought Bowles, Hollowell, Conner & Co., a privately held Charlotte M&A boutique. It also paid $491 million for Wheat First Butcher Singer & Co. of Richmond, Va., which brought the bank a large retail brokerage business and its first equity underwriting capabilities. Wheat First's president, Mark Gamble, is now the bank's head of equities.

First Union spent several years building up debt capital markets by hiring people for loan syndications, high-yield bonds, and private placements. But when executives decided to break into equities underwriting, they acquired a firm with that specialty.

"It was the fastest way to get into equity underwriting," Mr. Thompson said. He said getting into equities was a bigger divergence from traditional bank loan products than plunging into the credit markets.

Mr. Thompson has preferred to concentrate on hiring because that gives him more control in shaping the corporate culture.

"Even with a potential acquisition, we tell them up front that we value teamwork over competition. If it doesn't seem like they will fit with our culture, we give it a pass.

"Our building process has been a little slower than if we had bought something really large, but we haven't had the culture clashes that some banks have had," he said.

Ms. Davis said she thinks First Union's smooth transition to the capital markets has started to help the banking unit gain some recognition and new business.

Mr. Thompson said he plans to keep the unit focused on non-investment- grade business for companies with annual revenues from $50 million to $2.5 billion.

In January, Mr. Thompson reorganized the unit and promoted Steve Cummings and Barnes Hauptfuhrer to co-heads of investment banking. Both men report to him.

Mr. Cummings, who was chairman and chief executive of Bowles Hollowell when it was acquired, was put in charge of specialized industry groups, M&A, and private equity sponsors.

Mr. Hauptfuhrer, who joined First Union in 1988 from Kidder Peabody to found a merchant banking business, was put in charge of product groups including loan syndication, high-yield bonds, and private placements.

In recent months, the unit has also been dividing clients between investment and corporate bankers, giving the investment bankers first crack at deciding if a client will have significant capital markets needs in the near future.

First Union also has financial incentives for corporate bankers to refer business to the investment bankers, Mr. Thompson said.

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