Jefferies’ New Age

It wasn’t long after he hired a close-knit team of junk bond refugees from Drexel Burnham Lambert that Frank E. Baxter realized he had to confront a potentially explosive personnel problem.

As chairman and chief executive of Jefferies & Co., the Los Angeles investment banking firm, Baxter found himself at odds with one trader over how much risk was best for his company. But the ego-driven team, hired just weeks after the infamous House of Drexel went bust in 1990, was making big money for Jefferies. The danger was the whole group might quit if one was ousted.

No matter. According to inside accounts, Baxter arranged an early-morning meeting and told the trader in his amiable and plain-spoken way: “Look, it’s not going to work.” And he fired him.

It’s not for nothing that Baxter is known as the “smiling assassin” to his far-flung network of 1,200 employees in 18 offices around the world. At once tough, direct and always smooth, Baxter has quietly rebuilt Jefferies & Co. from the ashes of its founder’s criminal problems in the mid-1980s. He and the firm now rank at the top of Southern California’s financial elite.

“He meditates and he runs the marathons, but at the same time, he’s taken Jefferies literally from the ashes and built it into an important investment banking institution in Los Angeles,” said Leonard Green, head of a leveraged buyout firm in Los Angeles that bears his name.

Among Baxter’s accomplishments as CEO:

* He took over Jefferies in 1987 when its freewheeling founder Boyd L. Jefferies pleaded guilty to stock fraud. He kept the firm’s client base intact and made the decision to keep the Jefferies name.

* He used some of Michael Milken’s army to expand the company in 1990 when the market for junk bonds was all but dead and many of its workers were under a cloud. Now Jefferies houses one of the best high-yield trading groups around.

* Most recently, he has established the 36-year-old Jefferies & Co. as a niche player in investment banking for growing mid-sized companies. The number of equity analysts has grown from zero to 38 in 1993. Revenue from investment banking jumped 127% last year.

Along the way, this third-generation Californian has managed to become a multimillionaire and develop a philosophical New Age bent rare in the cutthroat world of bulls and bears.

Baxter keeps framed pictures of Mahatma Gandhi and the Rev. Martin Luther King Jr. on his desk. He is on a first-name basis with New Age guru Dr. Deepak Chopra--author of books such as “The Path to Love”--and last year traveled to India to attend Chopra’s daughter’s wedding.

Seemingly as concerned with soul-searching as he is with the bottom line, Baxter, 61, meditates at least once a day and has brought Chopra in to speak to Jefferies’ workers.

“People think meditation is all airy-fairy stuff,” Baxter said. “But it’s a good way of getting your thoughts out of the box.”

This reflective nature has its roots in a small town above Sacramento called Baxter that his grandfather founded as a stagecoach stop during the Gold Rush. Baxter’s father was an accountant and his mother ran the household. His brother still has a cattle ranch in the area.

Baxter served in the U.S. Air Force for four years before attending UC Berkeley. After graduating in 1961 with a degree in economics, he got married the next year. After working for a bank in San Francisco, he joined Jefferies as a salesman, then went to manage the New York office. He opened the London office in 1985 and became CEO in 1987.

Baxter’s troops seem to tolerate their chairman’s spiritual bent with a “That’s Frank” shrug. (In fact, the meditation room Baxter opened at Jefferies was closed for lack of use.)

Baxter’s nonconformist approach has not hurt the firm financially. Jefferies has never had a losing year during Baxter’s tenure, even during the early 1990s, and last year it earned $18 million, up 46% from 1996. Its revenue reached nearly $800 million in 1997, up 47% from the year before.

That’s why Baxter increasingly fields the same questions: Is he about to sell? Will Jefferies join NationsBanc Montgomery Securities and BancAmerica Robertson Stephens in the takeover fever sweeping the finance industry?

In a recent interview, Baxter said Jefferies would do best to remain independent. Still, brokerage firms are hot these days, selling for as much as six times their book value. And Jefferies recently hired J.P. Morgan & Co. as part of a “preparedness plan” to evaluate options for the firm.

A purchaser, insiders say, would likely pay twice--once for the shareholders and again in incentives to keep the company’s best assets: its employees. More than 50% of the firm’s outstanding shares are in the hands of its 1,200 employees.

“Given the culture of this organization, it would be a very risky acquisition to make,” said one high-level Jefferies executive. “I came here because I didn’t want to be in a big shop. And I think most other people did too.”

Last week, Jefferies became a more attractive acquisition target when it separated from Investment Technology Group Inc., a $620-million company specializing in computer-based stock trading. Jefferies Group, the holding company, said it will spin off its 100%-owned brokerage unit Jefferies & Co. and the 82.3%-owned ITG Group to shareholders.

Persistent takeover rumors last year helped more than double Jefferies’ stock price, which hit an all-time high in December of $89.63 a share before the stock split. In fact, the stock is currently trading at nearly four times Jefferies’ estimated book value (Jeffries Group closed unchanged Friday at $51.88 a share in New York Stock Exchange trading).

After the employee stock-ownership plan, Baxter is the second-largest shareholder in Jefferies, with an 8.4% stake worth about $80 million. In 1996, he earned $400,000 and an added $1.1 million in bonuses and other compensation. His 1997 salary package, with bonuses still being determined, is likely to be much higher because of the company’s increased profit.

An early bird, Baxter is up each morning by 4 a.m. He spends about a third of his time in Los Angeles, another third in New York and the rest on the road. He and his wife have an apartment in midtown Manhattan, a home in Pacific Palisades, a ski chalet on 20 acres in Vermont and some timberland in Northern California.

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Despite the impressive real estate holdings, Baxter maintains thrifty habits. When going to run one afternoon on the beach, he parks on a street off Pacific Coast Highway and walks there to avoid paying a $6 beach parking fee.

Although he moves in prominent circles, his colleagues--including former Chrysler Corp. Chairman Lee Iacocca and SunAmerica Chief Executive Eli Broad--invariably describe him as a low-key gentleman whose ego is under control.

“He’s not all full of himself and aloof in some ivory tower,” said one analyst who follows the company. “He’s ethical, sincerely a good manager. But he’s very tough. If you push hard on something, he smiles at you and cuts you right off.”

Behind the smiles, Baxter has transformed Jefferies into a one-stop financial shop for growing mid-sized companies. In past decades, Jefferies pioneered off-hour trading in stock, selling large blocks of shares off the exchanges for big institutions that wanted to remain anonymous. Its client roster once read like a Who’s Who of 1980s corporate raiders.

Jefferies now markets itself to entrepreneurial companies as a “custom shop” that offers more services, more creative financing and better pricing than the Wall Street giants.

“By most measures, Jefferies could have disappeared in the late 1980s if it wasn’t for Frank,” said Michael Flanagan, an analyst in Philadelphia. “Now this mid-cap strategy is working well for them.”

The emphasis on investment banking, while still in the initial stages, is paying off big time in this bull market.

One of the firm’s best bets so far has been in the volatile oil and gas business: a series of deals for TransTexas Gas Corp., an exploration venture led by colorful oilman Jack Stanley. Stanley, a multimillionaire who has twice sought Chapter 11 bankruptcy protection for his company, has earned a reputation in Houston as an aggressive operator.

“When that deal came around in 1993, every guy on the Street passed,” said one banker at a major Wall Street firm.

Chris Kanoff, head of corporate finance for Jefferies and former Drexel banker, made dozens of calls to check out whether Jefferies should get involved.

“The noise factor was huge on this guy, and I came to the conclusion it was just crap,” Kanoff said. “I remember this from my Mike Milken days--perception vs. reality. And here the perception was much worse than the reality.”

Since then, Jefferies has raised nearly $4 billion for TransTexas in 13 transactions, including a $1.6-billion junk bond deal in early 1997. Jefferies made about $40 million in fees off the deal and won a highly coveted deal award from Institutional Investor magazine.

Stanley sounds like another successful wildcatter: Boyd Jefferies, who founded Jefferies in 1962 with just $30,000 while working as a trader on the floor of the Pacific Stock Exchange.

Jefferies, known for arriving at work at 3 a.m. and staying until 6 p.m., worked on a cattle ranch before becoming a trader. At the height of his career, he built a Laguna Beach mansion for himself.

In 1987, he was indicted for parking stock for Ivan Boesky and barred from the industry. Jefferies later retired to Colorado, sold his stake in the firm he founded and got involved in youth scholarships and golf programs. He could not be reached for comment for this story.

Baxter, who joined the firm in 1974, remembers it was on his own 50th birthday in 1986 that he walked into the company’s New York office and found Jefferies reading a front-page newspaper story implicating Jefferies and Boesky.

Baxter stepped up to take command. His internal memo to Jefferies’ employees in July of that year shows his style: “The odds were not good, but each and every one of us fought hard to preserve our firm. . . . I’m ready to fight them with everything in me. Will you join me? Semper Plurima Operatio. [Always a lot of effort.] Frank E. Baxter.”

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A few years later, Baxter made a move that proved lucrative. Less than a month after Drexel collapsed, Baxter hired about 40 junk bond traders and investment bankers at a time when the market for high-yield securities had all but disappeared. It was the biggest mass hire of ex-Drexel employees.

John H. Kissick, then running Drexel for Milken and now at Apollo Advisors, a private investment firm with offices in New York and Century City, remembers long phone calls and several meetings with Baxter.

“I can’t remember who called who, but Frank seized the opportunity. There was a cloud surrounding the Drexel people which made it possible for a firm like Jefferies to get people he probably never would have been able to,” Kissick said.

Baxter agreed that the former Drexel workers could work on the Westside, not in downtown Los Angeles where Jefferies was based. (Despite the firing, none of the other traders quit at the time.)

Eventually, Baxter moved the entire firm to the Westside, and now Jefferies is situated in what some call Wall Street West, a group of white buildings near the San Diego Freeway that are home to several money managers and investment banks.

These days, Baxter has been increasingly shifting his focus from day-to-day operations to long-term strategy, especially with the addition of Michael Klowden, the company’s president and chief operating officer.

Although Klowden is clearly a possible successor, Baxter shows few signs of slowing down--both at and away from work.

As a marathon runner, Baxter runs along the beach in Santa Monica about three times a week after the stock markets close.

Although he keeps his beeper and cell phone handy, his mind often turns to spiritual issues.

“Sometimes I’ve thought, ‘Am I really of service? Wouldn’t it be better if I was teaching in South-Central?’ ” Baxter asked as he dodged cyclists and roller-bladers on the Santa Monica bike path. “But I’ve come to realize that what I’m doing is my calling. I’m creating wealth for large pension funds that invest for thousands of individual people.”

Baxter is involved in several outside organizations. He sponsors an elementary school in South-Central and is on the boards of the Los Angeles Opera and the National Assn. of Securities Dealers.

Still, Baxter said, there was a time when he couldn’t muster the enthusiasm to join much of anything: “There was a point in my life when it was like the Peggy Lee song ‘Is this all there is?’ I had so much, but something was missing.”

In 1991, he met Chopra, who was featured in a seminar hosted by Laurance Rockefeller in New York. On hand were a select group of Rockefeller’s friends, including Steve Ross, then chief of Time Warner Inc.

Now Baxter spends about two weekends each year with Chopra in La Jolla and the two speak once a month on the phone. Chopra’s other loyal clients include Milken and actress Demi Moore.

“Mike came into spiritualness because of his cancer,” Chopra said. “Demi’s interest is in her desire to improve herself. Frank, I think, is looking for God.”

And it may be that eventually Baxter’s search could demand even more of his attention. In fact, many executives said they wouldn’t be surprised, given current prices, if he sold Jefferies.

Baxter’s office may hold the answer. Although he could clearly afford to have any musings he wants chiseled in marble, Baxter has glued a small stuffed dinosaur on a piece of construction paper. Underneath, on paper, he’s written with felt-tip pen the words: “Adapt or Perish.”

“Every assumption that worked for you yesterday is suspect today,” Baxter said. “We’ve tried to put together a virtual company that will respond to today’s environment as it is, not as we want it to be.”

FRANK E. BAXTER

Title: Chairman, chief executive, Jefferies & Co.

Age: 61

Birthplace: Baxter, Calif

Education: UC Berkeley

Family: Married, two daughters, one son

Hobbies: Meditation, long-distance running, Vermont art collection