"So, when are you guys going to add a public-equities capability?"

That exchange, of course, never happened. It was a joke that Harrison told at a recent conference, poking fun at the mounting speculation over which investment bank Chase might acquire to fill out its line-up of financial services. Now everybody knows the answer. Chase agreed Tuesday to buy San Francisco investment bank Hambrecht & Quist Group Inc for $50 a share, or $1.35 billion. The cash transaction is expected to be completed by year end.

Yet the deal raises another question: Is this really the prize deal that will make Chase a winner in the investment-banking and stock-underwriting business?

The market, for now atleast, is unconvinced, both because Hambrecht is so small compared with Chase and because most previous acquisitions of investment banks by other commercial banks have proved to be disappointments or disasters. On the New York Stock Exchange, Chase shares edged lower after the announcement in heavy trading, closing down 31.25 cents at $73.8125 in composite trading. Meantime, Hambrecht shares, also trading on the Big Board, soared on news of the deal, climbing 19 per cent, or $7.625, to $48.6875.

The deal closes a chapter -- though probably not the book -- on Chase's two-year effort to acquire an investment bank. During that time, according to people familiar with Chase, it has held merger talks with rival financial heavyweights, including Merrill Lynch & Co. and Goldman Sachs Group Inc. Yet negotiations with these firms stalled, in part because of the huge premium the investment bankers demanded for their businesses, according to one official familiar with the discussions. So, unlike Citicorp's blockbustermerger last year with Travelers Group Inc. to form Citigroup Inc, Chase ended up buying a niche player, albeit in what may be the most important niche of all: technology.

Nor did Hambrecht come particularly cheap. Merrill broke off talks early last year to acquire Hambrecht for about $1 billion, according to people close to the talks, and that was before Hambrecht began losing market share on its home turf in Silicon Valley to bigger Wall Street rivals. The purchase price represents a 22 per cent premium above Hambrecht's closing price on Monday, in line with purchases of other brokerage firms in recent years, according to Donaldson, Lufkin & Jenrette. The price tag represents about 13 times Hambrecht's expected net income this year and 2.8 times the firm's book value, a tad below recent brokerage deals.

If the Hambrect purchase works as Chase hopes, it will give the bank its first real toehold in the markets for the underwriting, trading and selling of publicly traded stocks. For Chase, the world'sbiggest arranger of financing for mergers and acquisitions, the deal means that its bankers will not just fund such deals, but actually play a bigger role in generating them -- garnering fatfees.

The Wall Street Journal