Dain Rauscher Corporation
Dain Rauscher Corporation
Incorporated: 1909 as Kalman & Co.
Sales: $944 million (1999)
Stock Exchanges: New York
Ticker Symbol: DRC
NAIC: 52312 Securities Brokerage
Dain Rauscher Corporation, formerly known as Interra Financial and Inter-Regional Financial Group briefly before that, is a full-service regional brokerage and investment banking company through its subsidiaries Dain Rauscher Inc. and Insight Investment Management Inc. The firm, the product of successive amalgamations of small midwestern brokerage firms, provides investment advice and services to individual investors primarily in the western United States, as well as investment banking services to corporate and government clients nationwide. In terms of its number of brokers, Dain Rauscher is the tenth largest brokerage in the United States.
Dain Rauscher’s roots reach back to 1909, when Oscar Kalman started a small brokerage shop in St. Paul, Minnesota. The venture, dubbed Kalman & Co., began selling stocks and municipal bonds to local customers. Kalman’s shop was just one of many brokerage businesses that opened in the United States during the early part of the century. In fact, a surging industrial base generated huge markets for stocks and bonds, particularly during the 1920s. Several of the companies created to serve those markets would eventually be consolidated into the company that would become Dain Rauscher.
Kalman was the earliest of those companies. It was followed in 1916 by a Denver, Colorado, venture named Bosworth, Chanute, Loughridge & Co. That firm was formed by Arthur Bosworth, Octave Chanute, and Paul Loughridge. They created the company to take advantage of, and facilitate, municipal growth during a boom in Denver’s economy. Other companies that would later join to form DRC included Quail & Co., which was founded in Davenport, Iowa, in 1922, and Sullivan & Co., another Denver firm that opened in 1927. However, J.M. Dain started the enterprise that would later be credited with engineering the amalgamation of a brokerage network in the western United States in 1929, shortly before the infamous stock market crash that triggered the Great Depression.
J.M. Dain had moved to Minneapolis in 1922 to represent a Chicago investment firm. In 1929 he decided to branch out on his own with J.M. Dain & Co., a municipal bond trading house. He hired a secretary and opened a small office in Minneapolis. His timing couldn’t have been worse. The stock market crash and ensuing depression devastated financial markets. Despite tough times, Dain persevered and, unlike many of the more established trading houses, managed to survive. Another company that started and managed to survive during the Depression was an enterprise that would become Rauscher Pierce Refsnes. That venture would become Dain’s sister firm in the 1970s.
Growth Through Acquisition: 1960s
Merrill Cohen took control of Dain & Co. in 1933 and helped steer it through the crisis and into the 1940s. Dain & Co.’s growth was relatively slow, but by the late 1950s the organization was employing 75 workers in eight offices. Dain began to expand much more quickly in the 1960s. That progress was largely the result of the efforts of Wheelock Whitney, who became chief executive of Dain in 1963. It was under his direction that Dain launched an aggressive growth and diversification drive. To that end, J.M. Dain & Co. merged with Kalman & Co. in 1967. Shortly thereafter the company purchased Quail & Co. The resultant organization became Dain, Kalman & Quail, Inc.
In addition to the mergers, Dain launched a new real estate affiliate in 1968 (later called Dain Corporation). By the late 1960s Dain, Kalman, & Quail, Inc. was sporting 17 offices in six uppermidwestern and western states including the Dakotas and Wyoming. Its headquarter offices swelled to house 400 employees and the name of its office building, the Rand Tower, was changed to Dain Tower to reflect the prominence of its major tenant. More acquisitions ensued: J. Cliff Rahal & Co. in Nebraska in 1969; Minneapolis-based, Platt, Tschudy & Co. (the forerunner of Investment Advisers Inc.) in 1970; Woodward-Elwood, also of Minneapolis, and Ralph W. Davis of Chicago, both in 1972. By the close of 1972, Dain had become a public company through the sale of 250,000 shares on the New York Stock Exchange.
The IFG Years: 1973-97
In 1973, the company bought out Bosworth, Sullivan & Co., which was the successor to Bosworth, Chanute, Loughridge & Co. and Sullivan & Co. Inter-Regional Financial Group, Inc. (IFG) was then formed as a holding company that effectively existed to own the assets of the new acquisition and Dain, Kalman, & Quail, Inc. The two firms would operate as separate entities until 1979, when they were fused into Dain Bosworth Incorporated. Thus, Inter-Regional had become a major regional broker with offices in the Midwest and the western United States through Dain Bosworth.
As it labored to expand its sprawling brokerage network in the Western United States during the 1970s and early 1980s, IFG simultaneously stepped up its effort to diversify into new markets. Accordingly, the company launched a number of new ventures and initiatives. Besides its Dain Corporation real estate affiliate, IFG started an investment consulting business (Investment Advisers) and even purchased a life insurance company (Midwest Life), among other ventures. In the early 1980s it also laid plans to open up its own savings and loan business, although federal regulators ultimately thwarted that effort.
IFG took note of the synergies that existed between Dain and Rauscher Pierce Refsnes (RPR). Like Dain, RPR had its beginnings during the Depression era; it shared similar values for client service, integrity and quality; and the company had grown through acquisitions. By 1972, RPR occupied offices in Arizona, Colorado, Florida, Illinois, Missouri, New Mexico, New York, Oklahoma and Texas. In 1981, RPR and IFG executives met to explore working arrangements. With IFG’s solid upper Midwest presence, an arrangement with RPR would allow it to expand into promising Southwest markets. In early 1982, an agreement was formalized. Rauscher Pierce Refsnes and Dain Bosworth became separate companies under IFG.
The merger allowed both companies to prosper. RPR added offices in lucrative San Antonio, Austin and Oklahoma City markets. New businesses were also added, such as Shatkin Lee Securities of St. Louis, the predecessor to RPR Clearing. Dain began developing a strong presence in the Pacific Northwest, and by the end of the decade, the firm had opened nine new Washington and Oregon offices. In 1988, Dain acquired The Milwaukee Company along with its 12 Wisconsin and Illinois offices. The Rauscher acquisition boded well for IFG’s securities-related ventures. Such was not the case for other ventures.
Among IFG’s most successful endeavors during the 1970s was IFG Leasing, a subsidiary that derived most of its income from leasing farm and office equipment. The business took off during the mid-1970s and, at its peak, was accounting for roughly 50 percent of IFG’s entire earnings base. Unfortunately, IFG Leasing’s prosperity began to wane in the late 1970s, signaling a period of misfortune for Inter-Regional Financial Group. Indeed, IFG Leasing’s profits started tumbling in the late 1970s and continued to fall into the early 1980s. IFG Leasing finally became such a drag on IFG’s bottom line that it almost forced its parent into bankruptcy. Ultimately, the company wrote losses of $157 million.
IFG Leasing’s problems began with the recession of the late 1970s and early 1980s. During the mid-1970s, the company profited from heavy leverage; it borrowed money to purchase equipment, which it leased to customers. The profit margin consisted of the spread between the lease rate charged to customers and the interest rate charged by IFG Leasing’s lenders. The strategy failed when interest rates exploded under the Carter administration. Furthermore, because of the recession, many customers simply couldn’t pay their bills. The net result was that IFG Leasing began hemorrhaging cash, paying high interest rates and generating insufficient cash flow from its troubled customer base.
By the mid-1980s IFG was teetering on the edge of bankruptcy. Augmenting problems with the leasing division was the disappointing performance of the Rauscher Pierce subsidiary and the Midwest Life unit. IFG managed to obscure problems with its leasing division until 1983, when the dilemma began to climax and IFG decided to shutter the subsidiary. As its troubles became more obvious, IFG’s stock price plummeted, from about $25 in 1983 to less than $10 in late 1985. By 1985, in fact, the company’s long-term debt had climbed to $73 million (from just $10 million in 1981). Furthermore, IFG had lost $60 million between 1983 and 1985. Investors feared that the company was barreling toward bankruptcy. In spite of the company’s losses and tarnished reputation, it was able to protect clients and vendors from losses.
PURPOSE: We are dedicated to helping our clients achieve their financial goals. VALUES: Clients first. Trust through integrity. Excellent service to clients and each other. Great people, working together to win. Leadership in our communities and industry. VISION: We aspire to be one of the top three performers in each of our chosen market niches.
Rising to the chief executive post during IFG’s management shakeout in the mid-1980s was Richard D. McFarland, who succeeded Thomas Holloran in June of 1985. McFarland had started with Dain as a salesman in the 1960s and had progressed through the ranks before he became president of IFG in 1982. He was moved to the top slot in 1985 by a board of directors that was eager for a turnaround. Among IFG’s first moves under McFarland’s direction was to put Investment Advisers and Midwest Life on the auction block. Both subsidiaries were profitable at the time. The sale of the money management unit helped to reduce IFG’s debt and allowed management to begin refocusing its attention on its core brokerage businesses.
Management’s streamlining efforts were augmented by rebounding trading markets in 1986 and early 1987. Surging stock markets allowed IFG’s core trading business to post record revenue and income figures. Meanwhile, new management continued to chip away at past problems. Among other moves, executives fired and successfully sued IFG’s auditors, and managed to sell the life insurance business. During the late 1980s, moreover, the company began to reduce its brokerage staff and to improve the average commissions earned per broker. Although IFG posted a net loss in 1988, it appeared as though it had emerged from its crises by the end of the decade.
IFG’s rebound during the late 1980s and early 1990s was largely attributable to the efforts of Irving Weiser, the man that McFarland had hired to serve as president of IFG. Weiser had served as an attorney for IFG’s outside counsel before McFarland lured him away in 1985. The 38-year-old Weiser, a Polish Jewish immigrant, had experience in the industry, although he had never made a trade. His problem-fixing skills became valuable to IFG. Among other moves, for example, he helped to reorganize the real estate division after that industry collapsed in the late 1980s.
IFG continued to draw on Weiser’s management skills during the early 1990s, during which he was promoted to chairman of the company. Also during that period IFG emphasized its core securities businesses, cut costs, and managed to boost revenue and profits. To that end, Weiser eliminated some poorly performing offices and continued to shrink the company’s total work force. Healthy markets helped IFG to grow its revenue from about $312 million in 1990 to more than $500 million in 1993, about $47.6 million of which was netted as income. In 1993, in fact, the company started to expand again.
In late 1993 and 1994 IFG opened 14 new offices for a total of 93 in 23 states. It also started hiring new brokers, bringing the total brokerage staff at its two firms to a record 1,250 by year’s end. Furthermore, IFG expanded eastward with the acquisitions of Clayton Brown Holding Company, a privately held, Chicago-based firm specializing in fixed-income securities. By late 1995, IFG was the tenth-largest full-service regional brokerage house in the nation and the leading broker in its region. The company posted record revenues in 1995 and 1996. More industry changes; however, were on the horizon.
Bigger is Better: 1998-99
As a result of regulatory reform undertaken by the Federal Reserve in 1997, a surge of consolidations swept the securities industry as large banking institutions began acquiring securities firms. This trend resulted in cost-prohibitive prices for securities firms, thus interfering with the long-standing IFG acquisition strategy. The company determined the best response to this new and changing environment was to optimize its large firm resources. As a result, IFG, renamed Interra Financial in February 1997, was dissolved and replaced by a new entity—Dain Rauscher Corporation. Under the reorganization, subsidiaries Dain Bosworth and Rauscher Pierce Refsnes combined in January 1998 to create a single, more powerful brand name and one of the largest securities firms west of the Mississippi River. This action also effected a more streamlined management and prudent cost structure for the firm.
The new company wasted little time in further strengthening its competitive position. In March 1998, Dain Rauscher acquired the rival Minneapolis investment bank Wessels Arnold & Henderson for $150 million. Analysts viewed the deal as an excellent, albeit expensive, strategic move. The deal gave Dain Rauscher depth in some areas where it had faltered, especially in underwriting stock for technology companies and then selling such stock to institutional clients. The alliance was also beneficial because it boosted the firm’s corporate finance sector; Dain Rauscher trailed the much smaller Wessels in equity issues. As part of the deal, Dain Rauscher restructured its equity capital markets group to become the Dain Rauscher Wessels division, and Kenneth Wessels was named to head the division.
- J.M. Dain & Co. founded in Minneapolis.
- Rauscher, Pierce & Co. chartered in Dallas.
- J.M. Dain merges with Kalman & Co. and Iowa-based Quail & Co. to form Dain, Kalman & Quail Co.
- Rauscher, Pierce & Co. merges with Phoenix bond house Refsnes, Ely, Beck & Co.
- Dain, Kalman & Quail goes public.
- Inter-Regional is created as a holding company for Dain, Kalman & Quail and Bos worth, Sullivan & Co. of Denver.
- Bosworth, Sullivan merges operations with Dain, Kalman & Quail; the firm becomes Dain Bosworth in 1979.
- Rauscher, Pierce & Co. changes name to Rauscher Pierce Refsnes, Inc.
- Inter-Regional Financial Group acquires Rauscher Pierce Refsnes and goes public.
- Dain Bosworth acquires Clayton Brown Holding Company, a Chicago-based bond house; merges operations into Dain Bosworth and Rauscher Pierce Refsnes.
- Inter-Regional changes name to Interra Financial.
- Interra combines Dain and Rauscher and changes corporate name to Dain Rauscher; company opens its first California brokerage office in San Diego.
- Dain Rauscher opens first international office in Paris.
In August 1998, Dain Rauscher opened its first California brokerage office in San Diego; six months later, in January 1999, the company expanded its California presence and gained access to Florida and the Northeast through the purchase of Artemis Capital Group Inc., a national investment bank and Wall Street’s first women-owned public finance company, based in New York City. Its strategic locations and strength in municipal bond underwriting would bolster Dain Rauscher, while Artemis would be joining a large firm with greater credibility and resources.
Despite its aggressive response to increased competition, Dain Rauscher company experienced an 84 percent decline in net income in 1998. This severe earnings decline was the result of several factors occurring that year, including expenses associated with the Wessels purchase, litigation expenses to settle the company’s alleged involvement in the Orange County, California, bankruptcy, the failure of its former subsidiary, Midwest Life Insurance, a sluggish initial public offering (IPO) market, and increased competition. By 1999, having settled some of the previous year’s issues and bolstered by a good economy and strong stock market performance, the company was able to get its earnings progression back on track with an increase in net income of 730 percent over 1998.
On Track for the Future
Dain Rauscher approached a new millennium with heightened focus on improving service to clients and acknowledging the impact of a global economy on its business. For example, Dain Rauscher Wessels, the firm’s equity capital division, signed a strategic partnership and cooperative agreement with Israeli investment Bank, Tamir Fishman & Co. Partnering with the prestigious Israeli investment bank would allow Dain Rauscher to sharpen its focus on technology and growth companies, while also significantly expanding its ability to manage international transactions. In May, the Wessels division took the next step in international growth by opening its first international office in Paris. In February 2000, Dain Rauscher announced that it would also roll out a new large venture capital fund. While venture capital was regarded as a riskier investment vehicle, the stock market remained strong, and that boded well for Dain Rauscher.
Dain Rauscher Incorporated; Insight Investment Management Inc.
Dain Rauscher’s Private Client Group; The Fixed Income Capital Markets Group; Dain Rauscher Wessels; Dain Correspon-dent Services.
U.S. Bancorp Piper Jaffray Inc.; The Charles Schwab Corporation; Morgan Keegan, Inc.; Morgan Stanley Dean Witter & Company.
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—updated by Ana G. Schulz