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Learning to Play With the Big Boys

FBR Finds Formula to Create a Niche in Investment Banking

By Kenneth Bredemeier and Terence O'Hara
Washington Post Staff Writers
Monday, August 23, 2004; Page E01

Last summer, J. Brett Harvey, chief executive of Consol Energy Inc., a major U.S. coal-mining company, was faced with a daunting task: His firm's controlling investor, RWE Power AG of Essen, Germany, had decided to unload its 74 percent stake in Consol. But how could $1.3 billion in stock be sold quickly without depressing its value?

Harvey went to what he described as marquee German and U.S. investment banks, but stock experts there told him that it would take two to five years to find buyers for the 58 million shares RWE wanted to sell and 11 million shares in new stock that Consol wanted to sell. That was a time frame RWE rejected.

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Harvey then turned to a lesser-known investment bank, Friedman, Billings, Ramsey Group Inc., which had researched Consol's coal-mining operations. He asked the firm if it could find investors for the stock and do so within months, not years.

"FBR didn't have the credibility the other banks did because of its size," Harvey said. But he said Emanuel J. "Manny" Friedman, one of FBR's co-chief executives, went with him to Germany and persuaded RWE officials to let FBR handle the sale.

Within six months, Harvey said, FBR had found institutional investors for RWE's stock . Consol's share price has risen since the stock sales began in September 2003.

For its part, FBR collected 50 cents for each of the shares it found buyers for -- a $34.5 million payday.

"All parties came out happy," Harvey said.

The Consol deal is a prime example of why FBR has vaulted into the top echelons of U.S. underwriters of stocks. Though it is a fraction of the size of major Wall Street underwriters such as Goldman Sachs Group Inc., Credit Suisse First Boston LLC, Morgan Stanley and Merrill Lynch & Co., which have huge armies of stockbrokers to sell new stock issues, the Arlington investment house has developed a reputation for being able to move stock and make money in ways its larger competitors simply can't, or won't.

In part, FBR is merely benefiting from the decline in the number of mid-size investment banks that focus on mid-size companies -- those valued at less than $10 billion, potential clients that Wall Street often ignores. In recent years, FBR's mid-size competitors, such as Alex. Brown Inc., Robertson Stephens Inc. and Hambrecht & Quist, have either shut down or been bought by larger financial institutions. In a recent interview, Friedman cited as a model Alex. Brown, an old-line Baltimore investment bank that, before being merged out of existence in the 1990s, was perennially the largest underwriter of IPOs.

But more than just investment banking trends are at work here. FBR has become a peculiar kind of money machine, a major investment bank run like a family business, an alchemy of unusual ideas and entrepreneurial chutzpah.

Building Relationships

FBR managed eight company IPOs that raised $2.1 billion last year, making it the third-biggest underwriter, measured in dollars raised, behind Goldman Sachs and Credit Suisse, and it has continued among the biggest IPO underwriters this year, according to Dealogic, a research firm that tracks deals on Wall Street. So far this year, FBR is ranked seventh, having managed deals that raised $1.09 billion.

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