The Courting Of Ragen Mackenzie -- Just How Long Can An Old- Fashioned Brokerage Hold Out?

There's a little slice of Wall Street on the 43rd floor of the First Interstate Center in the heart of downtown.

In an open office facing Mount Rainier, about a dozen stock and bond traders stare unblinkingly into computer screens, their heart rates rising and falling with the share prices that cruise across their monitors.

The men and women working in the trading room at Ragen MacKenzie seem tethered to their desks, unable to risk even a moment's distraction. Every blip in the stock market sets off a flurry of hurried telephone calls absent any hint of pleasantries.

By 9 a.m., neckties are loose, shirtsleeves rolled up and brows damp with sweat.

Despite the pressure-cooker atmosphere, things at Ragen MacKenzie seem decidedly small-time compared with the silk-stocking sweatshops of New York's biggest brokerages. But the Seattle-based firm makes up in financial strength and regional reputation what it lacks in size.

Considered a boutique brokerage for clients with big bucks, Ragen MacKenzie handles about $8 billion in various investments, up from about $5 billion last year. Its 77 brokers watch about 40,000 active accounts in 13 offices in Washington, Oregon and Alaska.

As it grows, there is continued speculation that Ragen MacKenzie, the Northwest's largest independent brokerage house, will be swallowed by a large financial institution. Changes in federal regulations allow banks greater freedom to acquire nontraditional

operations such as brokerages, and multibillion dollar transactions are sealed almost every month.

Ragen MacKenzie has been courted by corporate match-makers, but so far it has not found an appropriate suitor.

"We'd always listen to anyone who had a serious interest. It's not independence at all costs, by any means," said Stanley Freimuth, chief executive officer. "We'd do it if we were able to offer our clients something we are not able to now. So far, that's never been the case."

Acquisition rumors are nothing new to Ragen MacKenzie.

Last year, news reports cited widespread talk in the financial community that Washington Mutual was poised to buy the firm for about $50 million.

Founders Brooks Ragen and John MacKenzie stopped the speculation by releasing a statement saying that the firm wasn't entertaining any serious offers and wished to remain independent "for the foreseeable future."

Since then, however, merger mania has claimed several large brokerages around the country.

On July 1, NationsBank, based in Charlotte, announced its $1.2 billion acquisition of San Francisco-based Montgomery Securities.

Earlier this year, Bankers Trust New York bought Baltimore-based Alex. Brown & Sons for $1.7 billion. Meanwhile, BankAmerica is buying Robertson Stephens & Co. in San Francisco for $540 million, and Swiss Bank is buying New York-based Dillon, Read & Co. for $600 million.

Federal Reserve Board rule changes, which allow banks to earn as much as 25 percent of their total revenue from their securities subsidiaries, have spurred most of the deals.

"The world of securities firms and the world of banks are coming together," said Craig Tall, head of mergers and acquisitions at Washington Mutual. "Banks have never had more capital, but they have questions about where they are going to grow."

Tall would not comment on any specific Washington Mutual deal, but sources say the Seattle-based thrift is no longer interested in acquiring Ragen MacKenzie.

Most of the big money in the brokerage business comes from underwriting stock offerings - the marketing of securities to the public, with a commitment to buy any shares that are not sold.

Ragen MacKenzie is considered more a retail brokerage, meaning it relies more on income from managing the investment portfolios of individual clients rather than stock offerings. But that may be changing.

Last year, Ragen MacKenzie was an underwriter for four companies' stock offerings: Esterline Technologies, Columbia Banking System, Cascade Natural Gas and Icos. The firm is interested in doing more.

"Many of us think we should become more involved in raising capital for companies that are about to go public, to be more of an underwriter," Freimuth said. "We'll do it when we find out how to do it without distracting from our loyalties to our clients."

In the meantime, Ragen MacKenzie will continue to open offices in other states, looking as far south as the San Francisco Bay area of California and as far east as the Great Lakes in Michigan.

"We're probably way too cautious in our expanding," Freimuth said. "Our growth is dependent on finding the right kind of brokers."

The firm's competition, he said, is "anyone and everyone people turn to for advice for money."

By comparison, the other large regional brokerage operating in the same markets, Minneapolis-based Dain Bosworth, has 54 brokers in its Seattle office and 850 firm-wide. Operating in 17 states, Dain Bosworth manages assets of about $30 billion.

The history of Ragen MacKenzie begins with the firm Cable, Howse & Ragen in 1982. In 1988, Tom Cable and Elwood "Woody" Howse wanted to focus exclusively on their Bellevue-based venture-capital firm, investing in new, cash-hungry companies. Brooks Ragen joined with John MacKenzie, a stock analyst and head of research at Foster & Marshall, a subsidiary of Shearson American Express, to form Ragen MacKenzie in 1988.

The firm grew by attracting clients who typically had significant money to invest. It has never advertised and acquires new business by "referrals, referrals, referrals," said Freimuth, who joined the firm in early 1989, also from Foster & Marshall.

One measure of a brokerage's financial strength is the fee revenue or commissions generated by each broker. The industry average is about $300,000 annually, but brokers at Ragen MacKenzie bring in about 50 percent more, John MacKenzie said.

Since its inception, Ragen MacKenzie has been owned by its employees, and it is controlled by its 200 employee-shareholders.

The welfare of its employees will be one of the most important factors in any future merger, said MacKenzie, and management wouldn't seriously consider any deal that includes sweeping layoffs.

"I'm sure that there will be institutions like banks that will look at us. But we have a responsibility to our employees," MacKenzie said. "It would also have to have some advantage to our clients. They pay our bills. If it ever comes up, it'll be a tough decision."

Although he's often asked to speculate on which bank may be interested in buying Ragen Mackenzie, Jay Tejera, a banking analyst with Dain Bosworth, wonders whether it would make a sensible acquisition.

Banks want the brokerages that do major underwriting. Ragen MacKenzie, on the other hand, prospered in the old-fashioned stocks and bonds trade, a slower-rowing segment of the financial-services market.

Even if a new owner promises to keep the same payroll, there's no guarantee that the key people wouldn't leave and take their clients with them.

Brokerages, much like law firms, depend on their ability to attract and retain people who bring in business. If they go, the worth of the firm goes with them.

"The assets go up and down the elevators," Tejera said. "Retention can be a problem."

As the firm's founders grow older - Ragen is 64 and MacKenzie is 60 - its future may have to be decided in a couple of years, Tejera said.

"The exit strategy for Ragen MacKenzie has always been an interesting question to me," he said. "You either plan for the next generation or literally stop the clock and liquidate all the assets and go home."

Even though MacKenzie and Ragen have children who work at the firm, creating a lasting legacy doesn't seem a top priority. Both men say they are unconcerned about the possibility that the firm that bears their name may disappear in an acquisition.

"It's really not important to me," MacKenzie said. "We have a strong obligation to our employees not to make a deal that would hurt them. That's foremost in our minds."