Jefferies Group roars back to industry prominence.

It builds a reputation on handling complex transactions

Jefferies Group Inc. recently reported a whopping 55 percent jump in earnings for 1993 and its 10th consecutive quarter of improved year-to-year quarterly earnings comparisons. But nobody at the diversified West Los Angeles securities firm is letting down his guard.

"I'm pleased with the results of the company, but not satisfied," said Frank E. Baxter, Jefferies' 57-year-old chairman, president and chief executive. "When you're satisfied, you stop growing."

Jefferies' growth binge is a welcome change from the doom-and-gloom days of the late 1980s, when the firm teetered on the financial brink after its founder and CEO, Boyd L. Jefferies, was implicated in the Ivan Boesky insider trading scandal and banned from the securities industry for five years.

Today, happily, all that has changed. In 1993, Jefferies posted net earnings of $28.9 million, or $4.88 a share fully diluted, compared with a posted net of $18.7 million, or $3.08 a share, in 1992.

Securities research firm Philo Smith & Co. of Stamford, Conn., has forecast that Jefferies will earn $7.15 a share, fully diluted, this year.

As of mid-February, Jefferies' 6 million shares of over-the-counter stock, about 50 percent of which is employee owned, was trading at $29.75 a share, about mid-way between its 52-week high of $40.50 and its 52-week low of $22.50. Jefferies, which since its inception in 1963 made its name in equity sales among institutional investors in the so-called third market -- where Big Board stocks are traded 24 hours a day on an over-the-counter basis -- has been branching out relentlessly in related securities businesses over the last seven years. "We want to ultimately serve every complex need of the institutional community," said Baxter.

Departing from its core equity business, which represented about 40 percent of the firm's total $318 million in annual revenue for 1993, Jefferies ventured into the unchartered terrain of electronic trading systems in 1987, the first year Baxter was at the helm.

Through its wholly owned subsidiary, Investment Technology Group, Jefferies runs the Portfolio System for Institutional Trading, or POSIT, a Jefferies computerized "crossing" system. More specifically, POSIT is an electronic mechanism for matching buyers and sellers, enabling clients to order trades directly through a computer.

Investment Technology Group reported $28.8 million in revenues in 1992, the most recent year for which financial figures are available, up from $14.3 million in 1991.

Baxter said these days POSIT trades about 5 million shares a day, compared to a little more than a hundred thousand shares traded per day at its start. He also noted that Jefferies charges each side a cut-rate brokerage commission of two cents for each share traded.

Investment Technology Group also launched the Quantitative Execution System, another computerized trading system which uses artificial intelligence to enable clients to make trades directly with the exchange at the most propitious moment. (The system is programmed to place orders as soon as the computer spots certain programmed "opportunities.")

It's an "avant-garde trading system used by some of the most sophisticated traders in the industry," said analyst Michael Flanagan of Lipper Analytical Securities in New York City. But he noted that Jefferies' trading systems are just one of several factors that make the company "absolutely unique" among American securities firms.

In his view, it is the people at Jefferies, the 604 employees in 12 offices around the world, who really make the difference.

"(They're) of a different cut than other Wall Street employees," he said. "They're quick to identify opportunities, and Jefferies is quick to support them."

Flanagan said nowhere is this more evident than in Jefferies' corporate finance department, which got its start in 1990, along with the firm's taxable fixed income or junk bond trading department, by hiring former Drexel Burnham Lambert employees.

Last year, the corporate finance department was further enhanced when Jefferies hired nearly everyone in corporate finance department of New Orleans-based financial services firm Howard, Weil, Labouisse, Friedrichs. Specifically, Jefferies hired about 18 professionals experienced in the oil and gas industry from Howard, Weil. Now, the new staff is raising capital for Jefferies' clients in the energy business.

"Here again, Jefferies found a talented group of people who didn't have opportunities," said Flanagan. "So Jefferies acquired the talent and gave them the opportunities."

According to David Eisner, Baxter's chief lieutenant and a Jefferies executive vice president, the corporate finance department raised about $4 billion in capital for clients in 1993, double the $2 billion raised in 1992. Of that $4 billion, $750 million was raised in equity alone, up from a negligible amount in 1992. Also, corporate finance revenues at the company in 1992 were reported at $23.9 million, up from $16.7 million in 1991.

In the same 1992 period, taxable fixed income revenues at Jefferies were reported at $33.4 million, compared to $32.1 million the previous year.

"At this point, (Jefferies) is becoming more of an investment banking firm," noted analyst Flanagan.

The convertible bond divisions of Jefferies have seen similarly spectacular growth. Revenue for international convertibles was reported at $14.6 million in 1992, nearly double the $7.4 million reported in 1991. Domestic convertibles, the smallest division of the firm, reported $6.7 million in revenue in 1992, compared to $5.2 million in 1991.

Jefferies now is moving to expand even further its investment and trading businesses. In early February, it formed a "strategic alliance" with former Chrysler Corp. Chairman Lee Iacocca, who is starting a merchant bank that will look for deals in the entertainment, airline and gaming industries.

"We will help Iacocca target investments or transactions in those areas," said Baxter, noting that the new venture, called Iacocca Capital Partners, will be housed with Jefferies in its Santa Monica Boulevard headquarters.

With all the bustle and growth at Jefferies, one would think that the competition might be nervous -- whoever the competition is. "There really isn't an apple-to-apple comparison with Jefferies," said Flanagan. "They're one of a kind."

One of the firms that comes the closest, though, is Bernard L. Madoff Investment Securities in New York and London, a securities company that also specializes in third market trading. "We are and we aren't competitors," said Bernard L. Madoff, the company's founder and CEO, explaining that his clients are broker-dealers, whereas Jefferies' are all institutional, and that Madoff deals exclusively in the third market.

"But I have nothing but the highest praise for Frank Baxter and the Jefferies people," Madoff said. "They're a class act. They've built a business most people would envy."

According to Jamie Inglis, director of research at Philo Smith & Co., Jefferies has had "more growth and greater profitability than other securities firms, especially when you consider that the securities industry generally grows faster than banks, S&Ls or insurance companies."

Inglis cited Jefferies' 22.7 percent average annual return on equity over the last 12 years, from 1980 to 1992, compared to only 11.4 percent return on equity for New York Stock Exchange member firms. He also noted that Jefferies' revenues grew 10.7 percent per year over the last 12 years, compared to 6 percent growth per year for Big Board member firms.

"Fundamentally, it is a better-than-average company in a better-than-average business," said Inglis.

Flanagan also noted that the 30 securities industry stocks he has followed regularly since December 1992 have increased an average 34 percent over that 14-month period, while Jefferies stock increased about 73 percent.

"The challenge now is for Jefferies to keep the momentum going," he said.

"Striving to be better is part of our DNA, our genetic code," Baxter said. "You grow or you go."

The chief executive -- a transcendental meditator who encourages his employees to try it, too, as a way of tapping into one's entire consciousness -- seems downright eager for the challenges ahead.

"We want to be known as the home of the hard ones, the hard transactions," he said. "That's our specialty. If it's a no-brainer, if it's easy to do, we'd just as soon let someone else do it.

"The firm has been very successful, yes, but I think you ain't seen nothin' yet," Baxter said.