Piper Jaffray Companies Inc.
Piper Jaffray Companies Inc.
Total Assets: $923.74 million (1996)
Stock Exchanges: NASDAQ
SICs: 6211, Security Brokers & Dealers
Through three wholly owned subsidiaries, Minneapolis-based Piper Jaffray Companies Inc. offers general securities brokerage, investment management, corporate and public finance, and trust services to both individual and institutional investors. The company operates 79 branch offices in 17 states. In fiscal 1996, ended September 30, the company posted revenue of $553.9 million and net income of $7.29 million.
In 1892 a former cashier named George Bishop Lane arrived in the thriving northern prairie town of Minneapolis to start a commercial paper business. Over the preceding century, commercial paper had become a means by which needy merchants could more easily get loans for short-term operating capital in exchange for their signature on a six- to eight-month promissory note. These notes were then turned over to a note dealer, who typically sold them to financial institutions like banks, who in turn used this “commercial paper” as a short-term investment.
To George Lane, it seemed clear that the promissory notes generated by Minneapolis’s growing grain elevator and milling industry represented a sizable potential market. Therefore, he began participating in commercial paper transactions with major Minneapolis merchants such as Cargill Elevator Company (the forerunner of agricultural giant Cargill Inc.). In 1899 he enlisted George Lang to help him manage his growing volume, and within eight years he already had handled more than $16 million in commercial paper transactions.
Enter C. Palmer Jaffray and Harry Piper: 1913-29
In 1913, as Lane’s business continued to thrive, C. Palmer Jaffray and Harry Piper, the sons of a prominent Minneapolis banker and a leading entrepreneur, respectively, decided to leave their steady but dull jobs at the First National Bank of Minneapolis and strike out on their own. Only a year out of Yale University—where their shared Minnesota backgrounds had sparked a close friendship—Jaffray and Piper soon formed Piper, Jaffray and Company, a commercial paper house whose first clients included growing enterprises like Archer Daniels Midland and Pillsbury. Harry Piper quickly emerged as the young firm’s salesman and deal maker—the risk taker and entrepreneur who drummed up new business—and Palmer Jaffray became the numbers man, the financial wizard who understood the banking industry and the ins and outs of running a business.
As World War I raged in Europe, George Lane began to take admiring note of his new competitors. Already in his fifties, he needed new blood to keep his business competitive, and in 1917 he convinced Piper and Jaffray to merge their firm with his to form Lane, Piper, and Jaffray, Inc. Despite the Great War’s devastation, it spurred a mighty economic boom in the United States, where between 1915 and 1920 alone GNP doubled to $80 billion. A brief recession in 1920-21, however, made it difficult for midwestern grain companies to secure loans from banks, and Lane, Piper, and Jaffray stepped into the breach by persuading small town banks throughout Minnesota and the Dakotas to loan these firms the needed capital.
The economic boom resumed stronger than ever in 1922 and, seeing the growing profits to be made on Wall Street, Lane, Piper, and Jaffray expanded from commercial paper to investment banking. Between 1922 and 1929 they underwrote the stocks and bonds issued for the public stock market by such emerging companies as Minneapolis-Honeywell, Cream of Wheat, Minnesota Mining and Manufacturing (3M), Munsing-wear, and Greyhound. Since new companies were not yet required to disclose their financial operations, Lane, Piper, and Jaffray had to determine their client’s financial stability through diligent spadework. This scrupulous concern for the facts led them to establish one of the first statistics and research departments in the U.S. investment banking industry.
Showing a willingness to embrace new technologies, Piper and Jaffray also joined with two competitors to participate in a national wire service system for stock transactions. The system enabled them to boast in ads that they could complete a transaction with New York “in less than 10 minutes.” While many Americans were allowing the giddy growth of the Roaring Twenties to color their investing judgment, Lane, Piper, and Jaffray kept an even keel, and in one year alone they declined the stock underwriting applications of 692 new firms. In part as a result of such caution, by mid-decade Lane, Piper had offices in four Minnesota cities and Fargo, North Dakota and had purchased an interest in the Chicago firm, Rickards, Roloson & Company. It also expanded its investment products portfolio, adding municipal and construction bonds, debenture, and notes for public utilities to its stable.
The Great Crash and After: 1929-40
In late October 1929, the irrational exuberance that had seen the volume of shares traded on Wall Street rise 500 percent in only seven years was dealt a fatal blow when stocks on the New York Stock Exchange began a precipitous and protracted swoon that liquidated $30 billion in investor’s wealth in a matter of a few weeks. Investors who had bought their stocks on margins of only ten to 25 percent cash were ruined when their brokers demanded they make good on their outstanding balances. Many stockholders had no savings outside of their investments, and roughly 25 million of them were ruined almost overnight. Banks across the country failed, businesses were wiped out, and unemployment reached crisis proportions.
Despite its conservative underwriting practices, Lane, Piper was also hit hard and was soon posting a negative net worth. Although the First National Bank of Minneapolis loaned Lane, Piper the money to stay in business and the firm’s focus on commercial paper and underwriting rather than speculative trading softened the blow, the Great Depression began to hammer farm commodity prices and Lane, Piper’s commercial paper business revenues plummeted from $45.2 million in 1929 to $8.6 million in 1932. Convinced that it had survived the brunt of the Crash’s clout, in 1931 Lane, Piper presciently purchased the nearly bankrupt Minneapolis brokerage house, Hopwood & Company (founded in 1914). Hopwood’s selling point was its seat on the New York Stock Exchange, which offered the newly christened Piper, Jaffray & Hopwood a way to enter the broader securities market in expectation of the day—if it ever returned—when Wall Street would no longer be a dirty word.
In 1933 Congress took a step toward ensuring that day’s arrival by passing the Securities Act of 1933, which required companies offering public stock to submit their books to the public scrutiny of certified accountants and by forming the Securities and Exchange Commission to regulate exchanges and brokers. Fueled by federal funds for public works projects, the municipal bond industry began to turn around in the mid-1930s, and Piper Jaffray aggressively pursued the “muni” market with cities, counties, and school districts across the country. It also began to make money hedging the sale of commodities, that is, offsetting the sale of one commodity against a future sale as a way of countering fluctuations in prices. By 1935 it was posting modest, if temporary, profits, and by 1937 assets totaled $2.8 million.
World War II and the 1950s: 1941-60
During World War II, Piper Jaffray benefited from America’s economic resurgence by financing the Minnesota-based firms that supplied the U.S. military. It also contributed to the war effort by selling war bonds, and although U.S. sales of commercial paper fell dramatically during the war, in Minnesota they grew. By 1944 Piper Jaffray’s commercial paper revenues had climbed to $18.2 million. Moreover, by 1945 its net profits, which had been a meager $1,000 in 1940, rose to $177,000. With the war’s end in sight, Piper Jaffray opened a new office in Great Falls, Montana, reflecting its long-standing presence in that region’s brokerage and municipal bond markets.
As Minnesota corporations ramped up for the postwar economy, Piper Jaffray teamed with Wall Street investment powerhouse Goldman Sachs to handle their multimillion-dollar stock offerings. In 1946 Harry Piper’s son, Harry “Bob” Piper, Jr., joined the firm as a runner in the cashier’s “cage.” He worked his way up the ladder by winning investment accounts for the firm and by the early 1950s had been named a partner. In 1949, as the great 16-year postwar bull market began, Piper Jaffray opened a new office in Billings, Montana.
Our Mission: We, the people of Piper Jaffray Companies, believe serving our clients is our basic purpose. By placing the interests of our clients first, we serve the best interests of our employees, our shareholders, and our communities. We believe service is the chief contributor to our growth and profitability.
As we serve, we commit to: Work in partnership with our clients to understand their objectives and earn their confidence and respect; provide sound advice, creative financial strategies and suitable investments to meet our clients’ objectives; communicate effectively and frequently with our clients; maintain the confidentiality of all client communications; cooperate with each other, promote the personal growth of each employee, and preserve a high-quality work environment; and contribute to the communities in which we live and work.
With the U.S. economy booming, the stock market underwent a major transformation. More and more major companies offered stock (more than 9,000 separate public offerings took place during the decade), the modern mutual fund was born, and institutional investors’ share of the stock market rose to an unprecedented 25 percent. Despite these changes, Piper Jaffray remained a traditional firm dominated by informal decision making and training methods, a close-knit family spirit, and a hard-working culture. Nevertheless, in 1954 it set a precedent that few other firms in the industry could match when it appointed Ruth Cranston as its first female partner.
It also improved the speed with which it placed customers’ orders on Wall Street by replacing its New York telegraph connection with a teletype, cutting transaction delays from 15 minutes to one minute. By the late 1950s Piper Jaffray’s traditional handwritten ledger system for recording transactions had also been replaced by a mechanical keypunch accounting system and it had invested in its first mainframe computer, setting the stage for its rapid adoption of computing innovations in the coming years.
The “Go-Go” 1960s: 1960-70
In 1963, with revenues well more than $3 million, the Minneapolis Tribune celebrated the half-century-old partnership of founders Harry Piper, Sr., and Palmer Jaffray, now in their seventies, by touting their firm as “the largest locally owned entity in the Upper Midwest.” In 1964 Piper Jaffray installed its first Stockmaster, an electronic stock monitoring system that replaced the now antiquated magnetic tape stock ticker system, Quotron. More important, Piper Jaffray acted on expansion plans set in motion in the 1950s by acquiring Minneapolis-based Jamieson & Co. (founded in 1939). The purchase doubled Piper Jaffray’s revenues and size and extended its territory to Duluth, to Eau Claire, Wisconsin, and to unpenetrated regions of the Dakotas. These new branches added to the recent opening in Rapid City, South Dakota (1962) and were followed in 1967 by four- or five-broker offices in Omaha, Nebraska and Bismarck, North Dakota. In 1968 Piper Jaffray acquired the Wausau, Wisconsin-based over-the-counter (OTC) securities firm Altenburg & Gooding and a year later—as Harry Piper, Jr., became Jaffray’s chairman and CEO—the company opened an OTC trading office in New York.
Piper Jaffray’s formation of a formal Corporate Finance department in the late 1960s also signaled its intent to take on the complicated paperwork it had traditionally farmed out to Goldman Sachs. In 1969 Piper also took a step toward becoming a public stock itself when it incorporated, giving its principals the limited financial liability they would need to remain independent as they grew the business.
The technology, military, and aerospace boom of the 1960s had fueled a growing market that enriched many U.S. investment firms, who increasingly sought to expand through acquisition. Piper Jaffray found itself among this fast-growing lot, and throughout the 1970s it absorbed smaller, middle- and small-market investment firms. To fund this expansion, it first had to raise capital. In 1971, therefore, it held its first public stock offering, raising some $5.7 million, which during the next decade helped it acquire the faltering securities giant Goodbody & Company as well as firms in Minnesota, Iowa, and the Pacific Northwest. It also opened new territories by launching offices in Lincoln, Nebraska, and in Appleton, Madison, and Milwaukee, Wisconsin.
In 1972 Harry Piper, Jr., told the Wall Street Journal that by 1977 “20 to 25 percent of our business may be in things we now do modestly or not at all.” In the early 1970s most of Piper Jaffray’s business still revolved around buying and selling stock, trading municipal and corporate bonds, and underwriting stock offerings, but Harry Piper declared that the company would attempt to increase its business with institutional investors (then only eight percent of sales) and establish a corporate finance department that would rival the biggest Wall Street operations. In July 1972 Piper Jaffray endured much unwelcome publicity when Harry Piper’s wife, Virginia, was kidnapped by an unknown group demanding $1 million in ransom. Harry Piper provided the money, and three days later Virginia was found tied to a tree near Duluth, Minnesota, dazed but alive. (Neither the ransom nor the kidnappers ever surfaced.)
Although the recession of 1973-74 pummeled Piper Jaffray’s bottom line and stock, its newly enlarged Corporate Finance department began to establish a profitable new business for the firm—mergers and acquisitions (M&A). By the end of the decade Piper’s M&A activity exceeded $760 million. Corporate Finance also entered the private placement market (in which firms raised capital by selling financial instruments to private investors) and the new venture capital market, underwriting the initial public offerings (IPOs) of new-breed companies like supercomputer maker Cray Research.
In 1974 Piper Jaffray reorganized itself into a public holding company, Piper Jaffray Inc., which became the parent company of the operational broker/dealer business, Piper, Jaffray & Hop-wood. A year later it established an employee stock ownership trust (ESOT) to encourage its employees to identify more closely with the company’s fortunes. When it attempted to raise capital for the ESOT through six public stock offerings, however, some of its shareholders claimed Piper Jaffray’s offer price was too low and sued (a jury ruled in their favor in 1981).
In 1978 Piper Jaffray continued its tradition of technological innovation by installing the $4 million “Piper Pipeline,” an electronic information and stock monitoring system that gave its customers the same real-time access to Wall Street data as the most sophisticated Manhattan brokerage. The same year, to help keep the Minnesota Vikings football team from leaving town, Piper Jaffray stage-managed a last-minute agreement to construct a new domed stadium for the Twin Cities, for which it oversaw the bond sale.
The Third Generation: 1980-89
By 1981 Piper Jaffray boasted more than 55,000 clients, 37 offices in 11 states, and annual revenues of $50.4 million, a more than threefold increase over 1971. In 1983 Harry Piper, Jr.’s son, Addison (“Tad”), who like his father had started his career in the firm’s cashier’s “cage,” was named CEO. When the Hartford Insurance Group paid $29.3 million for 309,000 Piper Jaffray shares (25 percent of the firm’s total shares) the same year, Piper Jaffray suddenly found itself with a new income stream—insurance products. Between 1980 and 1985 Piper Jaffray opened new offices in Denver, Kansas City, and Green Bay, Wisconsin, positioning itself to ride the bull market that began in 1982. Piper Jaffray’s Fixed Income department, which handled public and private bond issues for state and local public institutions, was enjoying the success, meanwhile, that the Corporate Finance department had begun enjoying in the 1970s; by 1985 Piper Jaffray was managing or comanaging almost 250 bond issues a year with a total value of some $3.2 billion.
The firm moved into the new 42-story Piper Jaffray Tower in 1985 and in October of the same year opened a new “Piper Capital Management” operation to offer mutual funds and manage the money of pension funds, public asset funds, and large individual accounts. Within eight months Capital Management’s portfolio had grown to more than $125 million in assets and by mid-1988 to almost $1.5 billion. In 1986 Piper Jaffray moved its stock listing from the Midwest and Chicago exchanges to NASDAQ and in 1987 introduced its first mutual funds. Early the same year it also unveiled a comprehensive five-year corporate plan, christened “Vision 1992,” that set ambitious goals for growing retail sales, expanding Piper Capital Management and its fixed-income/public finance markets, and gaining leadership in equity capital markets (the new umbrella term for Corporate Finance, equity trading, and institutional equity sales). Many of the firm’s departments were reorganized and unified to streamline the company’s operations and emphasize its customer-driven philosophy.
On Black Monday, October 22, 1987, the Dow Jones index dropped a stomach-churning 508 points, wiping out an estimated $500 billion in market value in the span of seven hours. Just as the Great Crash had left Piper with fewer scars than many of its competitors in 1929, however, so again in 1987 Piper Jaffray emerged intact. Its computerized data and reporting systems had handled the surge in trading volume smoothly, its employees had pulled the extra hours needed to calm frantic customers and process mountains of paperwork, and its banking allies had extended the financial resources needed to cover the transaction costs that some its customers were unable to ante up. Moreover, Piper Jaffray had refused to join the general panic, seeing the sell-off as an opportunity to market some of its favorite stocks at bargain-basement prices. As the “me decade” closed, Piper Jaffray could boast annual revenues of almost $200 million, a new institutional sales office in London, and a new fiduciary trust services subsidiary, Piper Trust Company. Best of all, Forbes magazine named Piper Jaffray first among all U.S. investment bankers for its post-IPO performance during the decade.
Centennial Triumph and Tribulation: 1990-97
By the 1990s Piper Jaffray had established itself as one of the largest regionally based brokers in the United States, with a reputation for expertise in food, agricultural, and medical technology industry stocks. In August 1990, Harry Piper, Jr., died, symbolically completing the passing of the baton of leadership to his son Tad that had begun in the 1980s. With one dramatic exception, Tad Piper’s stewardship of the firm in the 1990s seemed to quicken the company’s financial and geographic growth and range of investment products. In 1990 Piper Jaffray opened offices in Denver and Los Angeles, expanded its line of mutual funds to 17, and began installing the latest generation of computerized real-time investment data systems. Known as Stockmate, the $3.5 million system used a satellite data feed and a mainframe computer to give its far-flung offices the capability to make ever faster and more accurate trades. Its 1991 year-end revenues stood at $267.8 million—a threefold increase in less than a decade.
In 1992 Piper Jaffray ranked as the fifth largest security underwriter in the nation and before the year was out it had added securities firms in Kansas City and San Francisco to its roster of strategic acquisitions. It also opened offices in Tucson and Phoenix, Arizona and reorganized itself into three new core businesses: Individual Investor Services, Capital Markets (including equity and fixed income investment products), and Investment Management Services (encompassing Piper Capital Management and Piper Trust). In a reflection of its new identity it also dropped “Hopwood” from its corporate name, officially closing a six-decade-old chapter in its history.
By 1993 Piper Jaffray had 78 retail offices in 17 states and five straight years of record-setting growth. Moreover, with its tradition of multimillion-dollar annual charity giving and its reputation for conservative, ethical, customer-loyal investing (it had refused to participate in the hostile takeover craze of the 1980s), the firm’s stature as it approached its centennial year celebration seemed secure.
In 1994, however, a little understood investment vehicle known as derivatives dealt a serious blow to Piper Jaffray’s fortunes. Worth Bruntjen, one of the architects of Piper’s Capital Management operation and the manager of its successful Institutional Government Income Portfolio (a short-term bond mutual fund) had attempted to boost his funds’ returns by using derivatives, a financial instrument in which the return is tied to—or “derived” from—the performance of another instrument such as currencies, commodities, or bonds. Because the link between these interwoven instruments can be so substantial and so complex, the unexpected collapse of a derivative’s underlying assets can quickly balloon into an enormous, snowballing loss.
Bruntjen had invested as much as 90 percent of his funds’ $3.5 billion assets into such derivatives (in his case, derivatives based on residential mortgages grouped together as securities) and exacerbated his risk by borrowing to fund his purchases. Bruntjen’s derivatives were based on his expectation that interest rates would decline, as they had in 1990 and 1991. When they began to rise in 1994, however, Bruntjen’s funds rapidly accumulated a roughly $700 million paper loss, an embarrassment that one industry insider called “one of the most incredible debacles in the financial services industry.” To add to its injury, Piper had marketed Bruntjen’s funds as conservative investments for the risk-averse. When the funds’ investors learned of the catastrophe they filed suit against Piper for misleading shareholders and making “monumental purchases of highly speculative securities.” Amidst front-page coverage in the Wall Street Journal, Piper’s carefully built reputation as the “little old lady of brokerage firms” seemed about to vanish. Tad Piper told the press, “We do not believe we have done anything wrong,” but later admitted, “We got caught in a market that we thought we understood.” Piper Jaffray then closed the funds to new investors and added an additional $10 million to “show faith in the fund.”
The lawsuits wound their way through the courts—Piper Jaffray claiming all the while that it had fully disclosed all the funds’ risks and investment tactics in its prospectuses and investors maintaining they had been defrauded. Beginning in 1995 it began paying out more than $100 million in settlements, and in 1996 the National Association of Securities Dealers levied a $1.125 million fine against it for its marketing practices in connection with the funds. In October 1997 the last class action lawsuit was settled for $24 million. Piper Jaffray could begin rebuilding its reputation anew.
Piper Capital Management Incorporated; Piper Jaffray Inc.; Piper Trust Company.
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—Paul S. Bodine