BANKING ON THE VALLEY
INVESTMENT HOUSES MAKE EXODUS FROM SAN FRANCISCO TO GET CLOSER TO THE ACTION WITH ENTREPRENEURS

By making the move, Morgan Stanley became the first investment bank to start what has become an exodus of investment bankers from San Francisco to Silicon Valley. In the past six years, eight major national investment banks have shifted more than 820 bankers to the valley -- more than a third of the 2,235 investment banking employees that those banks still have in San Francisco and a sign of the increasing importance of Silicon Valley as a financial center for high-tech companies.

Ironically, the Internet age was supposed to do away with the need for face-to-face relationships. But in fact, virtual contacts aren't passingmuster for people who spawned the Internet revolution: Silicon Valley's investment bankers, venture capitalists and entrepreneurs who start small firms and take them public.

Bankers say that San Francisco, though serving as a regional headquarters for New York-based banks for decades, is now too distant to allow the kind of rubbing of elbows with prospective entrepreneurs that makes deals happen. Most high-tech companies are still based in Silicon Valley, and when they plan to go public, their executives are more likely to contact the bankers they meet at their children's soccer or swimming leagues, at local restaurants or even stores, like Palo Alto's Fry's Electronics.

What's more, traffic congestion makes it impossible to dip down to the valley from San Francisco for a quick lunch, even as clients demand more face time. ''It used to be that you could set up a lunch in the valley, and leave at 11 a.m. and be back by 2 p.m.,'' says J. Stuart Francis, managing director of Lehman Brothers Inc., explaining why he, too, is moving his office to the valley. ''Now you have to leave at 10:30 a.m., and you're back by 3 p.m. at the earliest. It doesn't work.''

Still, San Francisco remains the home for many of their brokers, sales and research employees -- those who don't depend as much on personal relationships with entrepreneurs. Despite this, consider the hemorrhage, all from San Francisco, and almost all from the same Bank of America building, at 555 California St.:

(box) In February, Banc of America Securities LLC moved 60 investment bankers to Palo Alto, leaving in place 1,500, many of them brokers and researchers.

(box) In June, Salomon Smith Barney began moving its technology investment banking division of 90 to new offices in Palo Alto. It is keeping its equity and sales force in San Francisco.

(box) This month, Lehman Brothers also moved all of its 60 investment bankers to Menlo Park and has allowed analysts to have offices in both areas.

(box) In October, Thomas Weisel Partners will move 13 people into the same complex as Lehman's, a small fraction of their 650 employees. But the number could expand to 50 within the next two years.

(box) JP Morgan Securities has just broken ground on a new building of 29,000 square feet on Page Mill Road in Palo Alto. Executives say they will move their entire tech investment bank team, around 125 bankers, some time during 2001. The company still hasn't announced the plans.

(box) Merrill Lynch & Co., which first moved to Palo Alto in 1996, will expand its investment banking office from 80 to 150 within the next nine months.

If history is any guide, the moves will pay off. It did for Morgan Stanley, whose managers in New York agreed to the move only after Quattrone insisted. That same year, Brady visited the restroom of his new building when he bumped into Jeff Drazan, a venture capitalist at Sierra Ventures. At the urinal, Drazan told Brady about a computer management software company he was backing, Attachmate Corp. Within six months, the contact flourished into another deal: Morgan Stanley advised Attachmate in its acquisition of rival firm, DCA.

Battle for No. 1
With billions at stake,
rivalry is intense

Since Morgan Stanley moved in 1994, the bank has consistently been leading the competition in the intense battle over billions of dollars of proceeds from taking Silicon Valley's high-tech companies public. Since the move by Goldman Sachs Group from San Francisco to Menlo Park last year, however, the two banks have vied intensely for the No. 1 spot.

In fact, the Goldman Sachs' bankers moved into a building across the courtyard from Morgan Stanley. The next day, Paul Chamberlain, the head of Morgan Stanley's office, sent over a house-warming present. Tucked inside the basket of fruit and wine was a hand-scribbled note from Chamberlain and Michael Grimes, co-heads of Morgan Stanley's West Coast practice: ''Welcome. I guess this means 'There goes the neighborhood.' ''

Matt L'Heureux, co-chief of Goldman's high-tech investment banking, says he first tried commuting from New York to San Francisco, but soon realized he needed to be closer to the action: ''People run into each other at soccer games in Atherton and Woodside,'' he said.

Lehman Brothers' Francis, who has lived near San Mateo for 20 years, wantsto keep his bank in Silicon Valley's top ranks, too. He sits on a couch, peering out of his office window on the 30th floor of the Bank of America building. It offers a splendid view of the bay, with Alcatraz Island glimmering in the distance. His colleagues at Lehman Brothers say that he has the most striking view of any of the bank's 45 worldwide offices. But it's time to give it up, he says. ''That shows the economic clout of the valley,'' he says.

Francis says he has already built up a list of contacts, but the tremendous flow of deals is making it impossible to serve his clients properly out of San Francisco. The bank's revenues from technology investment banking doubled in 1998, and again in 1999. ''Every minute of time you save is helpful to your clients,'' he says.

Down the hall, analyst Dan Niles sits in his office, humming away at several tasks at once. Under the table, he clicks his black shoes rapidly against each other. He answers a client's questions over the phone, clicks through e-mail on his computer and chomps on a sandwich at the same time. He hangs up the phone after precisely 15 minutes, the time he allotted.

For Niles, everything comes down to time. When asked whether he'll miss his view of the bay, he responds: ''Who looks at the view anyway?'' Niles says he'll have more time to spend with companies after the move. ''You never have too many contacts,'' he says.

Bigger is better
Small banks pressured
by lack of resources

The move is putting pressure on the smaller investment banks with headquarters in San Francisco -- like Chase H&Q, Robertson Stephens and Deutsche Bank Alex. Brown -- that have resisted a partial move of their offices south.

Lehman's Niles is an example. Until May, he'd been an analyst at Robertson Stephens. But he left for Lehman partly because he fears the bank remains too small and unable to offer the kind of financing services that fast-growing companies demand. In the second quarter, as the stock market took a downturn, Robertson Stephens' IPO underwriting business dropped 80 percent, according to Thomson Financial. That drop was worse than any other bank. In a sign of how much contacts matter, Niles took eight potential IPO and merger and acquisition deals with him, say Lehman's executives. Three have already gone through.

''People still trying to provide technology investment banking from S.F.,'' says Barry Newman, Banc of America's lead banker in Palo Alto, ''They just don't get it.''

Indeed, it is the early birds in Silicon Valley who are now raking in the most cash. Morgan Stanley's Brady and Quattrone left that bank in 1996, taking with them a large group of investment bankers, and joined Deutsche Bank. But in 1998, they made another move with 150 of their employees to Credit Suisse First Boston, in turn opening CSFB's office in Palo Alto. Since then, CSFB has rocketed in the ranks of high-tech underwriting fees, from eighth two years ago to fourth so far this year.

The rush is on
Early successes spur
others to make move

Now other banks are scrambling to follow. Salomon Brothers' John Denniston, director of the firm's technology investment banking, is trying to keep Salomon among the leaders. He lives in Los Altos Hills, and he says several of his team of 90 are moving their residences south in conjunction with the office move to Menlo Park. ''We like San Francisco, but this is the center of activity for technology,'' Denniston says, sitting in his brand new Menlo Park office.

David Crowder, an investment banker at Thomas Weisel Partners, learned how Silicon Valley relationships work when he signed up to coach his son's soccer team shortly after he arrived in Menlo Park in 1997. Also randomly assigned to his son's team was the son of venture capitalist Jeff Brody, who worked at the time for Brentwood Associates. Watching the soccer games together over the season, Crowder and Brody developed a friendship, helped by the fact that Brody's wife was referee of the team's games.

Then, in early 1999, on behalf Weisel Partners, Crowder made a pitch to underwrite the initial public offering of an online credit card company,NextCard Inc. It didn't hurt that Brody sat on the company's board. Sure enough, Thomas Weisel was awarded co-management of the deal. ''It was a huge victory for us to be awarded that,'' Crowder says. Thomas Weisel Partners was only four months old at the time. ''We were so young,'' he says.

His success, in turn, has persuaded Thomas Weisel to send more of its bankers down to Menlo Park, including the venture capital group working under Andy Sessions.

Meanwhile, during office hours, the spiffy Carnelian Room, the formal restaurant on the 52nd floor of the Bank of American building, is looking decidedly slow these days. Its management requires even the bankers who have offices at the building to wear sport-coats to lunch. CSFB's Bill Brady says his venture capital clients would rather wear open shirts, and that San Francisco's restaurants are too far away.

Indeed, it was over dinner in Palo Alto in early 1995 that Brady and Quattrone met with venture capitalist John Doerr and Netscape executives Jim Clark and Jim Barksdale and agreed to take Netscape public. ''That was the landmark transaction that started all of this Internet frenzy,'' Brady says.

CHART:

Relocating to the valley

In The past six years eight major national investment banks have shifted more
than 820 bankers to the valley. Investment banks with offices in Silicon
Valley:



Bank                               Date moved       City moved to People moved



Bank of America Securities         2/2000           Palo Alto             60

Credit Suisse First Boston         7/1998           Palo Alto            260

Deutsche Banc Alex. Brown          Fall 1999        Menlo Park            10

Goldman Sachs & Co.                2/1999           Menlo Park           130

JP Morgan                          2001*            Palo Alto            125

Lehman Brothers                    8/2000           Menlo Park            60

Merrill Lynch                      9/1996           Menlo Park            80

Morgan Stanley                     Summer 1994      Menlo Park           125

Salomon Brothers                   6/2001           Palo Alto             90

Thomas Weisel                      11/2000*         Menlo Park            13



*The exact date of JP Morgan's move has yet to be announced

** Estimated date