When tiny Grove Bank in suburban Boston hired Goldman Sachs & Co. recently as its investment banker, many in the industry were astonished that a giant investment house would team up with a $450 million-asset, seven-branch thrift.

But in the near future such marriages of big and small may become more commonplace. As consolidation sweeps community and midsize banks, experts say the large Wall Street advisers are increasingly forced to move down the asset ladder to look for merger and acquisition business.

"In the last six to nine months, in terms of our business, one of the trends we have seen is [that] we have tended to run into the Wall Street firms" more often, said Michael T. Mayes, the head of the financial institutions group at Advest Inc., a regional investment banking house that focuses on small-to-midsize New England banks.

The scarcity of large deals, high transaction values, and the frantic pace of consolidation among smaller banks and thrifts have forced the established Wall Street hierarchy to look at this market, he said.

Business Is Business

"They [Wall Street firms] are rediscovering the $2 billion company," agreed Christopher Quackenbush, a principal at Sandler O'Neill & Partners, whose clients' asset size ranges from $2 billion to $6 billion.

"No major firm, if you say, listen I've got a deal basically on the table, and I am willing to pay you half a million or a million dollars and I need you to come up here for a week and make sure it gets done right... would turn down that business," he said.

And what Wall Street has going for it is name recognition, he said, arguing that a bank which suddenly needs an investment banker is more apt to turn to a brand name.

But like other investment bankers at the smaller houses, Mr. Quackenbush questioned the banks' need for large Wall Street firms.

The smaller investment banking firm specializes in community banks, he said, and will have its best people work on the project. And the smaller firms don't have to charge huge fees to justify their overhead expenses, he said.

So Far, No Threat

"The trouble is, they [Wall Street firms] don't want to spend five years holding the hands of someone," he said. They want to get in to make a sale. In contrast, it is often in the smaller firms' best interest to see their clients survive.

To date, Wall Street firms are hardly a dominant force in the small-to-midsize sector.

While there may be some high-profile examples, such as Goldman representing Grove and Morgan Stanley representing $2 billion-asset Central Jersey Bancorp in its recent sale to National Westminster, by and large Wall Street has not posed a significant challenge to the local and specialized players, Mr. Mayes said.

Eric D. Hovde, executive vice president of Hovde Associates Inc., an investment banking firm in Washington, D.C., with clients ranging in assets from $200 million to $2 billion, said Wall Street is a competitor only in major market centers.

But no one questions that Wall Street firms are increasing their focus on the smaller transactions.

Salomon Brothers' recent deals include such high-profile transactions as the Society-Keycorp merger and the sale of Valley Bancorp. to Marshall & Ilsley Corp. But the firm also represented Napa Valley Bancorp. - a $600 million-asset company - on its sale to West America Bancorp.

Switching Gears

"Basically most of the big houses define their financial service efforts as being geared toward the 100 largest institutions - but the reality is that many fall outside of that screen," said Gerard L. Smith, a managing director at Salomon.

As prices rise, so do fees, he said. The overhead and distribution system is already in place, so a Wall Street firm can now afford to offer its services to smaller clients.

Don Kaplan, managing director with Kaplan & Associates, a specialty investment banking house in Washington, D.C., acknowledged that Wall Street is starting to encroach on his territory.

Just last week, Mr. Kaplan said, he met with a $500 million-asset southern thrift seeking an investment banker. The thrift met with six houses, and two were Wall Street companies.

And Mr. Kaplan said he could point to a number of instances over the last two years when Wall Street firms had snatched up potential clients.

"We are going to see those big shots, those big investment bankers focusing on and soliciting smaller institutional businesses," he said.

Right now, he said, Wall Street firms get much of the work in the smaller-asset sector because many of these banks solicit their help. But because the larger banks increasingly are using their own M&A staffs it is inevitable that Wall Street will have to actively solicit the smaller banks.

Mr. Quackenbush agreed.

"Our business strategy, which has proven to be very much on point, is that the $2 billion, or the $3 billion company, or the $5 billion company, or certainly the $500 million company doesn't have an M&A team in house," he said.

"And now it has become part of their business period," he said. M&A is a part of almost any banks' focus now, he added, and Wall Street recognizes that.

Many of the larger banks, such as Bane One Corp. and Norwest Corp., will use investment bankers only at the end of the process, often to write fairness opinions.

What the smaller investment banking firms try to emphasize to their clients is relationships. In the 1980s Merrill Lynch dominated the M&A market in New England, said Mr. Mayes of Advest. But now the firm is almost nowhere to be found in the region, he said.

Mr. Smith of Salomon predicted that within a year, however, the investment banking industry, would consolidate because of overcapacity, and the big firms would have the upper hand.

Mr. Smith argued all investment banks, in the end, offered the same service: ideas and financial brainpower. What sets Wall Street apart is its capital muscle, he said.

Wall Street investment banks are also emphasizing acquisition by banks of money managers, mortgage companies, data companies, and other nonbanks - deals that might tax the capabilities of a bank specialist.

Mr. Quackenbush was not impressed. "For really intellectual people that's fun to think about. But that's 10 years away and [immaterial] for 90% of the industry."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.