Dealmakers seek niche markets as big transactions fade. (Banking & Finance: Special Report - To Deal or Not to Deal).

As a top investment banker with BancAmerica Securities, Todd Jadwin put together media deals worth nearly $3 billion, including Microsoft Corp. founder Paul Allen's investment in America Online Inc. and his acquisition of a major stake in Charter Communications.

Then the deal flow stopped, and since March 2001, Jadwin has been on his own. That will likely change in the coming weeks, when Jadwin begins working at a newly formed Los Angeles investment banking boutique he can't yet name. There, with a practice that includes restructuring, he will go to work undoing deals similar to the ones he was involved in just a few years ago.

"Every single (entertainment) company needs to be restructured," Jadwin said. "A lot of the key assets are either driven by L.A. or based in L.A."

It's a start. In Los Angeles, as in other parts of the country, scores of investment banking jobs have been lost since the stock market's peak in 2000. Now, with talk of activity in beaten-down areas such as media, there are signs that the investment banking downturn has bottomed - even if no one's quite ready to call it a rebound.

"I can't predict when the economic upturn will arrive -- all I can say is we're two-and-a-half years closer to it than we were at the beginning of the down turn" Jadwin said.

Since December 2000, 80,300 securities industry jobs have been lost nationwide, according to the Securities Industry Association. Many of the cuts have occurred at the so-called bulge bracket firms, with much of it happening in places like Los Angeles.

"Whenever the market's tough on Wall Street, the larger firms tend to cut staff more at regional offices such as L.A., and they try to serve (those markets) from their headquarters," said Gregg Feinstein, managing director and director of mergers and acquisitions at Jefferies & Co.

Some locally based firms have turned the cutbacks to their advantage. During boom times, large bankers like Credit Suisse First Boston gobbled up smaller competitors, and turned their attention to blockbuster deals. This left an opening for firms serving the so-called "middle market," variously defined but usually referring to deals valued at $2 billion or under.

"Most of the large investment banks who have acquired smaller firms have either shut down their M&A effort specifically targeting the middle market or have thresholds in terms of fees that they have to earn in order to garner the attention of their most senior bankers," Feinstein said.

With deal size decreasing, L.A. bankers like Lloyd Greif of Greif & Co., Jon Kutler of Quarterdeck Investment Partners and James Freedman of Barrington Associates report business at record levels. All are niche players focusing on areas that have remained strong in Los Angeles, such as the defense industry, some sectors of technology and sales of small, growing companies to larger players.

"What we've seen is a pretty active market, just smaller deals," said Michael Montgomery, president of Digital Coast Partners, a Santa Monica firm focusing on technology.

He said entrepreneurs realize they need to find a larger partner to continue their growth. "The sellers are no longer delusional about going public," he said.

Greif, whose firm typically represents sellers in deals too small for major investment banks, plans to hire four to six bankers before summer to add to the firm's existing roster of 10. "There's quite a bit of senior talent in the marketplace looking for new homes," Greif said.

Jefferies, now based in New York but maintaining a large L.A. presence, recently acquired Quarterdeck Investment Partners, a niche investment banking firm serving the defense industry. It also hired a group of 20 bankers in the services sector from Robertson Stephens. The head of that group, David Reilly, just moved to Los Angeles from San Francisco.

"Our firm has increased in size probably about 100 percent on the investment banking side in the last two years, Feinstein said.

Despite some optimism, it's still hard to get a deal to the finish line, said Larry Lewis, senior associate at Gerard Klauer Mattison & Co. in Los Angeles, who noted, "I think a lot of people are using the (Iraqi) war threat almost as an excuse to sit tight."

And a few bright spots aren't going to make up for the lack of blockbuster deals, which not only provide jobs for investment bankers, but they typically spur competitors into defensive counter-moves.

"What you're going to start seeing happen is probably a slow, gradual pickup in M&A activity, but it's going to take a long time to recover," said Christopher Allen, a research analyst at Putuam Lovell who follows investment banks.

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