Andrew Duff, CEO of Piper Jaffray in Minneapolis, likes to tell a little story to his troops about why Piper's 1998 marriage to neighboring U.S. Bancorp ended up an amicable divorce in 2003.

An affluent Piper client was seated in a conference room at the combined headquarters building, surrounded by his new, all-purpose financial team: a Piper financial advisor, a trust attorney, a private banker and a couple other representatives — theoretically, the one-stop shop incarnate.

At the end of the meeting, everybody thrust forward a business card at the client, and many hands were shaken. The client said, yes, he did understand the opportunities for an expanded, integrated relationship for all of his financial needs — one that would result in a larger share of his wallet going to “U.S. Bancorp Piper Jaffray.”

Only one problem: The client sensed the broker wasn't that crazy about the mortgage service. Oh, and the client already liked the trust lawyer he was using from an independent law firm. And, there's another thing: The client thought the private banker and the broker seemed as competitive as they were cooperative. In the end, the client just wasn't sure who was in charge.

“The promise of a retail supermarket was exciting for all of us in the beginning, to offer a lot of different products — mortgages, credit cards, a full-service banking and trust operation,” says Greg Mekler, a Piper financial advisor for 24 years in its flagship downtown Minneapolis office. “Some of the delivery was good. But the promise was largely unfulfilled. Bigger isn't necessarily better in this business.”

U.S. Bancorp bought century-old Piper Jaffray for $730 million in 1998, a merger driven by the year-earlier decision by the Federal Reserve Board to permit banks, insurance companies and securities firms to get into each other's businesses — businesses, visionaries argued, that belonged together. In short, a cross seller's dream. And so “U.S. Bancorp Piper Jaffray” was born. To many producers, however, the new entity was still just “Piper.”

Reality Sets In

“The major premise was a one-stop shop, and it became clear that a large segment of the [clients] didn't want that,” says Steve Berghs, a 28-year Piper veteran who manages a 100-broker office in Minneapolis. “A large part of the population likes to bank somewhere, buy insurance somewhere else and make investments somewhere else. There wasn't a lot of, and I hate to use this word, ‘synergy.’ I don't think any of these deals have worked very well.”

On Dec. 31, 2003, USB spun out 830-broker Piper Jaffray as a tax-free dividend to shareholders. The divorce is going better than the marriage. Piper's shares rose from $41 to a recent $51 per share, near a 52-week high. And USB's stock, depressed for several years, has also recovered to its late-1990s highs. The separation of USB — the nation's eighth-largest banking company — and Piper Jaffray generally has been received well by employees of both firms, too.

“We thought when we acquired Piper that we needed to do it for competitive reasons,” says USB general counsel Lee Mitau, who helped draft both the marriage and divorce documents. “If every other big bank is affiliated with a broker/dealer and we weren't, we though it might hurt. There are still reasons for banks to affiliate with brokerages.”

But, Mitau says, reality set in. “We thought we could migrate into a better cross-selling focus at the corporate-customer level, but we didn't achieve it. There were some synergies in wealth management for individuals. But people put their money in banks and brokerages for different reasons. There were cultural differences. And the compensation systems are different. It created tension.”

Piper added a couple hundred million bucks to the bottom line of USB during the last couple years of the boom market. But the integration initiatives between the two companies basically ceased after the first two years.

On the capital markets side, Piper was an investment banker to many small, fast-growing companies, some of which were unprofitable and not bankable. There were some opportunities to offer a wider-array of balance-sheet products to larger companies, particularly in the area of cash management and debt financing.

Then-USB chief executive Jack Grundhofer and chief financial officer Rick Zona took a go-slow, test-it approach to marrying the two organizations from the get-go. They avoided the cut-and-consolidate model they'd used in buying up smaller banks, recognizing that brokerage was a different animal, and that they would lose producers to other shops if they moved to cut compensation. Eventually, systems, human resources and some back-office functions were merged with little-to-lousy success.

“I'll never forget moving into the new building, and somebody forget to put in a second line in my new office,” says Mekler, the Piper advisor. “I used to just call our telecom person, and it would take a day or two. Now I had to call the new telecom office, and I was told that it would take two or three weeks. I kind of hit the roof.”

Kim Jenson, a Piper regional director in charge of eight states and several hundred financial advisors, says both Piper and USB private-client personnel approached the merger with some optimism, due to a modicum of client overlap and the conventional wisdom that private banking, trust and brokerage would work well under one combined roof. After all, the two organizations knew each other and shared some client relationships.

But the potential was never realized. “In reality, it was extremely confusing for the client,” Jenson says. “Most high-net-worth individuals view their investment person on the brokerage side as their financial advisor, so when we would come together with the trust and private banking person from USB, it was sometimes confusing for the client in terms of who was the go-to person.”

Even employees were frustrated. “Frankly, it was confusing to us as well,” says Jenson. “We were scratching our heads as to how to orchestrate this. I think we learned that it wasn't as valuable for the client as we thought. In the end, the client determines who the go-to person is, and it's up to the rest of us to orchestrate the rest of it around the client.”

Can't We All Just Get Along?

Can banks and brokerage culture ever get along? Executives obviously think so; consolidation continues. The announced $47 billion acquisition of Boston-based FleetBoston Financial by San Francisco-based Bank of America creates another, coast-to-coast financial empire designed to mimic the likes of Citigroup, the original bank-brokerage monolith.

One Piper executive characterized the bank culture as customer-contact people bringing the diverse resources of the bank to bear on a customer in return for recognition and a modest year-end bonus. The broker, on the other hand, is focused on the client, and less so on where the products come from, and wants to get paid as a result of a transaction. In a bank environment, customers generally are viewed as customers of the bank, while in a brokerage, the customers are viewed as clients of the individual financial adviser.

“I think the lesson learned is that in an advisory business, it's all about the people,” says Paul Grangaard, an 18-year Piper veteran who runs its private-client business. “It's hard to take a smaller, partnership-oriented business and leverage it across a larger organization.” Or, as one senior Piper manager bluntly puts it, “We had a strong clash of cultures.”

Piper's small asset-management unit was merged into the bank's larger family of mutual funds and separate accounts. However, a 2000 decision to merge USB's bank-lobby sales force into Piper's larger, more-productive force was delayed indefinitely.

“Rick Zona liked our business, understood it and told us to go slow about merging the operations,” Grangaard recalls.

Sage advice. Duff, Zona and the other senior managers watched as some of the other bank-brokerage mergers blew up. Bank of America bought technology-focused Montgomery Securities for $1.2 billion, then watched as about 100 investment bankers, led by their leader, went off to form their own outfit, Thomas Weisel Partners. FleetBoston bought Robertson Stephens in a deal that never worked and finally walked away, taking a $400 million charge in 2002. Hambrecht & Quist, Alex. Brown and others of Piper's mid-market size disappeared into larger organizations.

By 2000, USB CEO Jack Grundhofer was struggling with a sinking stock price, and with troubles in his Midwest-to-Pacific Northwest banking empire. Zona left the company. Piper was left to operate as an autonomous unit.

Later that year, the USB Board voted to merge with Milwaukee's Firstar Corp. CEO Jerry Grundhofer, Jack Grundhofer's younger brother, took over in 2001 as CEO of the consolidated U.S. Bancorp. By then, the stock market was tanking, Piper's revenues declining and its investment bank was in regulatory trouble over allegations that an analyst had cut research coverage when a biotechnology CEO chose another investment bank over Piper.

Piper, its fortunes depressed by the 30-month stock market swoon, was generating about 1 percent of USB's earnings. Jerry Grundhofer, a career retail banker, was focused on developing annuity-style businesses of low volatility. Piper, essentially orphaned, was getting little-to-no air time at analyst presentations. Speculation mounted in 2002 that Grundhofer wanted out of the full-service securities industry.

The announced spinoff was greeted by cheers on both sides of the aisle. Piper is a leaner, more productive machine than it was five years ago. As at its rivals, management cut staff and improved productivity during the bear market to the point where revenue per employee is $263,000 — the same as it was in 2000, a record revenue year. Piper, profitable in 2003 on $787 million in revenue, boasts two business groups: the 830-broker private client services, its retail arm, and capital markets, its investment banking arm. Piper's retail brokerage, with $50 billion in client assets, operates 96 branch offices in Minnesota and other Midwestern and western states. Over the last year, the firm let go of about 100 brokers who were averaging annual fees and commissions of less than $100,000. The remaining brokers average close to $450,000 in annual production and oversee an average of $60 million-plus in client assets. The spinoff back to an independent, public company, along with an upticking market (and therefore better paydays) has buoyed spirits at Piper. Ironically, Piper and USB have agreed to partner on certain services and products, including mortgage placements.

“This is the best of all possible outcomes,” Jenson says. “We were never integrated into the bank to lose our identity, as happened in the other brokerage mergers. And we've always had an entrepreneurial culture of a smaller organization. This is absolutely uplifting.”

Says USB general counsel Mitau, “In many ways, I'm proud of the way we handled Piper and the spinoff. The battlefield is littered with Piper competitors who were acquired by banks. We did not go in with hobnail boots and impose our discipline and culture on them. We kept it together … during the worst years. And it's going out into a good marketplace with a compelling story.”