Small, independent securities firms are beginning to feel the heat from commercial banks that have entered their business.

At the Bond Market Association's annual conference here last week, senior executives of several regional brokerages said banks are emerging as serious challengers in securities underwriting and trading businesses.

They also said banks' growing appetite for investment banking and brokerage firms is forcing regional brokerages to take dramatic steps to remain independent.

These include buying up operations that are not yet on banks' radar screens and altering internal operations to position themselves against the capital, distribution, and competitive spirit that banks are bringing to the market.

"Banks will continue to have a presence in our business," said Christopher T. Huff, executive vice president at Everen Securities, Chicago. The opportunities "haven't been lost on them."

Everen's strategy is "to continue to grow and acquire to remain competitive," Mr. Huff said.

He was one of several securities firm executives participating in a panel discussion on the changing industry. Many expressed frustration at the high prices commercial banks have been willing to pay to snap up regional brokerages and enter securities underwriting.

For instance, Dain Rauscher, Minneapolis, saw regional investment firm Wheat First Butcher Singer as a potential partner, said Nelson D. Civello, a Dain division president.

But Dain Rauscher dropped the notion after First Union Corp. offered $471 million for Wheat First, Richmond, Va.

"At four times book value we can't play that game," Mr. Civello said.

Dain Rauscher was also shaken last year when U.S. Bancorp agreed to buy Dain's crosstown rival, Piper Jaffray Inc., Mr. Civello said.

Dain Rauscher ended up with a smaller deal, for equity shop Wessels, Arnold & Henderson. It also revamped certain internal operations to reduce costs.

"These are times for uncommon decisions," Mr. Civello said. "We fully believe we will not control our destiny at the end of the day" unless new strategies are undertaken, he added. "You have to devise new products to differentiate yourself. It's becoming harder and harder."

At Wheat First, managing director J. Hamilton Scherer said price was indeed a prime motivator in the company's recent sale to First Union. "For years we felt as a strategy we wouldn't sell, period," he said.

As the higher-profile firms go to banks, securities companies that want to expand are increasingly looking at smaller, niche operations. But even these firms are becoming more rare, thanks, in some cases, to consolidation in the commercial banking industry.

"A lot of securities firms are disappearing because their bank clients are being consolidated and relationships lost," Mr. Scherer said.

Commercial banks that have bought securities firms are succeeding, the panelists said, but they are also having their share of cultural problems.

Once securities firms combine with banks, the environment "becomes very, very different," Mr. Scherer said. "It's an awakening."

"The cultures are so decidedly different that it's a stark contrast," added Mr. Civello.

There are frequently clashes when securities representatives, used to driving a Mercedes or similarly expensive car to call on a client, are forced to make calls jointly in a bank representative's economy car, the executives said.

At the same time, merger and acquisition and underwriting executives frequently chafe at getting new managers who come from the parent bank.

Sales practices and methods can also unravel as brokerage salespeople fear demands from new managers to offer unfamiliar products. "We don't tell our guys what to sell," said James Rogers, an executive vice president at Hilliard Lyons in Louisville, Ky. "That's when they would run for the hills."

Banks and securities firms are also having communication problems. They both frequently use the same words, like "safekeeping," but attach different meanings to them, Mr. Scherer said.

The result: confusion during group meetings, leaving managers unable to give appropriate direction, the executives said.

The upheaval that occurs after buyouts is about the only silver lining independent securities firms see in banks' infiltration of their turf.

"People lose focus on the business during a merger," said Leonard J. DeRoma, senior managing director at McDonald & Company Securities.

Employees are "distracted by the situation at hand and trying to figure out what job they have," Mr. DeRoma said. "They're not making a lot of calls on customers."

Securities industry representatives say that, typically, 35% of their employees leave soon after a merger, including all top managers who have not signed contracts to remain. The fallout leaves a bad feeling, the executives said.

"You can't lose top management without sending a body shiver down the line," said Mr. Rogers of Hilliard Lyons.

Bankers say they recognize how harmful such upheaval can be and are devising strategies to cushion its effects.

"It's very stressful," said Robert M. Hultgren, managing director at BancOne Capital Corp., a unit of Banc One Capital Holdings Corp.

That holding company grew from Banc One Corp.'s acquisition in 1989 of investment firm Meuse, Rinker, Chapman, Enders & Brooks.

The Columbus, Ohio, banking company has a group devoted to easing acquisition difficulties-whether with another bank or a securities firm.

"The minute an acquisition is announced, we get in and put our arms around the people, looking for who's good and who's bad," Mr. Hultgren said. "We almost recruit them because at the end of the day you may not have bought anything if the people aren't there."

Several other large banking companies also have groups that work with merger partners to ease transitions.

For their part, many independent securities firms won't go quietly.

"In order to survive in the changing landscape, your strategy can't be in concrete," said Mr. Civello. "You have to be able to constantly reassess what you're doing."

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