A decade ago Stephens Inc. was perhaps the nation's premier regional investment banking firm. These days it is struggling to find its place in a radically altered financial services universe.

Since 1987 Stephens has slipped from 15th-largest in its business to the 80th spot, according to the Securities Industry Association. Then, it had $419 million of capital and ranked ahead of Smith Barney, Harris Upham & Co. Now, with $110 million, it sits behind Morgan Keegan & Co.

Underwriting has shrunk to only $32.6 million worth of stocks and bonds through June 30, according to Securities Data Co. Its prestigious merger advisory business has generated only $600,000 in fees so far in a banner year for corporate mergers.

The troubles at Stephens Inc. vividly illustrate the challenges small investment banks face in an age of the financial colossus.

Wall Street's traditional heavy hitters such as Merrill Lynch & Co. and Morgan Stanley Dean Witter & Co., are aggressively pursuing business farther afield. Firms such as Montgomery Securities or BT Alex. Brown & Sons Inc., which just got big cash infusions by selling to commercial banks, are also deploying their troops forcefully.

It's a brave new world for quiet, gentlemanly firms like Stephens Inc., and Warren A. Stephens, its 41-year-old chief executive, acknowledged that the bank has had trouble adapting.

"My inability to recognize what was happening hurt us," he said during an interview in his office here. "For a long time we weren't even in the game" of attracting business. "We're not getting as many deals as we'd like now, but at least we're in the game."

To get back in the game, the family has hired a new generation of investment bankers, analysts, and sales staff responsible for aggressively pursuing business with small and midsize companies.

Such a mandate amounts to a tectonic shift in culture at one of the South's most tradition-bound investment banks.

For years Stephens Inc. easily thrived on close links between the Stephens family and the business elite of Arkansas.

Warren Stephens' legendary father, Jackson T. Stephens, was a power broker with inside lines to the likes of Don Tyson of Tyson Foods Inc. and Sam Walton of Wal-Mart Stores Inc. It was worth these CEOs' time to listen to Mr. Stephens because often his family was a top investor in their business (the publicity-averse family members seldom serve on corporate boards).

From time to time these relationships turned into business for the Stephenses' investment bank.

For example, Stephens Inc. co-managed Wal-Mart's initial public offering in 1970, and in 1996 it advised NationsBank Corp. in its acquisition of Boatmen's Bancshares, the St. Louis banking company in which the Stephens family owned a big chunk of stock. (Their resulting NationsBank stake is worth around $500 million.)

In short, the firm's founders practiced merchant banking, much akin to the Morgans or Barings of another era in finance.

But Jack Stephens retired as chief executive in 1986, and under his son Warren's leadership the pipeline of business between the family's holdings and their investment bank has slowed to a trickle. Though the Stephenses remain a dominant force in Arkansas business and political circles, the new generation of bankers says it must look beyond the family to turn around the firm's fortunes.

"It won't do anymore to be a regional firm," said Peter de Vos, Stephens Inc.'s manager of corporate finance who was brought in last October from BT Alex. Brown. "In today's world, with everyone connected by computers, it's no good to be focusing on just one part of the country. You have to be in entire industries, nationwide or wherever they are located."

Can it be done? Though $300 million of capital has been taken out of the firm, Warren Stephens says the family is committed to investment banking. Revenues and profits are a closely guarded secret, but Mr. Stephens insists the bank is competitive.

If anyone can afford to wait for a turnaround, it is the Stephens family. According to public filings and estimates of their private holdings, their fortune is worth about $3 billion.

In addition to its NationsBank holdings, the family owns big stakes in trucking company J.B. Hunt Transport Services Inc., telecommunications firm Alltell Corp., department store Dillard's Inc., Donrey Media Group, nursing home operator Beverly Enterprises Inc., plus natural gas fields estimated to be worth $1 billion and known in Arkansas business circles as "the goose"-as in golden.

Indeed, the investment bank is just one part of a sprawling business empire. As a banker at a big Wall Street firm put it, "Stephens Inc. is the Stephenses' toy."

This "toy" status helps explain the drop in the firm's capital. Stephens Inc. has as much money as the Stephens family allows, and money that used to be reported as capital at Stephens Inc. is now reported elsewhere in the family empire. Executives say the family could pump additional capital into their bank overnight if needed.

"We do 'rent' our balance sheet," said chief operating officer Curtis F. Bradbury. "What do you want the capital to be? $150 million? $300 million?"

Balance sheet size, he added, is not as important as the ability of bankers to pitch innovative ideas to key corporate executives.

But the sheer heft of other firms like NationsBanc Montgomery Securities or Wheat First Union creates formidable barriers for firms like Stephens.

The big firms can hire bankers just as well-connected as those at Stephens, and these firms sport huge research and sales forces. Using their massive capital, the big firms can buy blocks of their customers' stock, and their analysts can tout stock offerings and mergers to investors in ways Stephens simply cannot match.

The size of its competitors is not Stephens Inc.'s only problem. Recruitment of new, aggressive bankers is hampered because the family owns all the stock in the bank.

Big, publicly traded firms commonly recruit employees by offering stock packages, and even Michel David-Weill, head of Lazard Freres & Co., is said to be considering sharing ownership among the partners. Mr. Bradbury acknowledged it is difficult to entice talented dealmakers to Arkansas when he can only offer cash. "We struggle with that," he said.

For all these challenges, the Stephenses have an impressive history of making the most of their opportunities, ever since Warren Stephens' uncle, W.R. "Witt" Stephens, founded the family fortune in 1933 by brokering Arkansas highway bonds.

For example, Stephens Inc. emerged from the 1980s real estate bust with a new headquarters building bought from the Resolution Trust Corp. for 60 cents on the dollar, the firm says.

And signs of its revival can be seen in its M&A practice. Last year Stephens Inc. advised Fairfield Communities Inc., a Little Rock resort manager, on its $240 million acquisition of Vacation Break USA Inc. The players involved applauded the Stephens Inc. bankers' work. "They don't do a ton of deals, but they're well-regarded," said Michael J. Kollender, a managing director at Josephthal & Co., who represented Vacation Break.

Reviving the M&A business could prove essential because the Stephenses have demonstrated some difficulty in reading other market trends.

The firm last year sold StephensLink, the name given to the family's effort to sell stocks to retail investors through commercial banks. The family passed up a chance to buy Charles Schwab & Co. in the mid-1980s to devote its energies to this project.

The sale, Warren Stephens said, means the firm will focus on the nuts- and-bolts banking of merger advisory work, corporate finance, and government bonds. He added that the old Stephens connections can still work their magic.

Chairman Jack Stephens, executives at Stephens Inc. say, was the man most responsible for introducing Boatmen's Bancshares chief Andrew B. Craig 3d to NationsBank's Hugh L. McColl Jr., and easing the merger between the two companies. Stephens Inc. collected a $9 million fee for issuing an opinion that the merger was fair to NationsBank's shareholders.

But such gifts from above cannot be depended on anymore, bankers at Stephens Inc. acknowledge. Corporate America has changed too much.

Back when personal relationships counted for more than they do now, the bank says, First Union Corp. chief executive Edward E. Crutchfield might be the kind to steer some business Stephens' way, since he has been friends for years with former Stephens Inc. corporate finance chief J.D. Simpson 3d.

But given current trends in investment banking, it is unlikely that First Union would come to Stephens. "Why should they?" asked one Stephens banker. "First Union now owns their own investment bank, and their bank is bigger than us."

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