Of all the times an investment bank could choose to make an acquisition, these turbulent times would not be an ideal choice.

But there is an upside, as San Francisco-based Thomas Weisel Partners Group Inc. has found. This period of lessened activity has allowed for the smooth integration of Toronto-based Westwind Capital Corp. , the holding company of investment bank and broker Westwind Partners. TWP acquired Westwind on Sept. 30, 2007; the deal closed on Jan. 2, 2008; and it added a listing on the Toronto Stock Exchange on Jan. 9.

TWP specializes in growth sectors and acquiring Westwind means adding two sectors — energy and mining — to its areas of expertise. Launched in 1998, TWP focused on strong U.S. sectors: technology and some health care, consumer products and service companies. While it survived the bursting of the dot-com bubble earlier this decade, it did broaden its strategy. It expanded its health-care and consumer-products coverage and added coverage of financial services, Internet and media and telecommunications companies. Then it bought Westwind and entered the Canadian market.

Lionel Conacher, the co-founder of Westwind and now TWP’s president and chief operating officer, says TWP’s comparative advantage is its deep relationship with the venture-capital community developed by founder, chairman and CEO, Thomas Weisel. Weisel started building this relationship in 1971, when he launched San Francisco-based Montgomery Securities, which was sold in 1997.

What attracted Conacher, then president and CEO of Westwind, to TWP as an acquirer for Westwind was Weisel’s long track record — as well as TWP’s ability to survive during tough economic times, as it did following the dot-com meltdown, when so many of its competitors disappeared.

Going forward, Conacher sees opportunities in the small- and mid-cap growth companies TWP targets. As a result of injuries sustained in the global credit crunch, many big investment banking firms are retreating to the large-cap space, creating an opening for more nimble dealers. Some big firms are determining whether they want to be in that business at all and, if so, on which sectors they want to focus, Conacher adds.

The big firms have also had to reduce the number of employees. TWP has already made some good quality hires and expects to make more.

And Conacher doesn’t believe that the current credit crunch will end any time soon. “There are no signs of recovery yet,” he says. “There is a huge slowdown in the industry and a lack of confidence in the marketplace.”

This is probably the worst environment since the early 1930s, he says; it is certainly as bad as the 1987 crash and the tech meltdown in 2000. Firms everywhere are restructuring, he adds, and laying off employees. The only exceptions are firms in Hong Kong, which remain strong because Hong Kong continues to benefit from China’s and India’s industrialization.

TWP was not directly hurt by the credit crunch, as it had only US$10 million in exposure to U.S. auction-rate securities, an insignificant amount given the $538.6 million in assets on its balance sheet as of June 30. (All figures are in U.S. dollars unless otherwise noted.)

However, it has certainly been affected by the lack of public issues this year. Its investment banking revenue was $34.4 million in the six months vs $68.9 million during the same period a year earlier. Factor in Westwind and it declines further, from a pro forma $98.5 million a year earlier. Overall revenue was $108.9 million in the six months vs $148.4 million pre-merger in the same period in 2007, and a pro forma $190.3 million. Conacher says the normal mix of business for a successful investment bank is about 60% investment banking and 40% brokerage

As a result, TWP reported a net loss of $27.9 million in the six months vs a $12.2-million pro forma profit a year earlier. Net cash flow after the change in non-cash working balances was negative $43.3 million vs negative $38.6 million a year prior. There was $23.1 million in notes payable as of June 30.

Conacher believes the drop in revenue is temporary. Once the credit crunch is over, he expects investment banking to bounce back. And TWP is in an excellent position to grow investment banking once markets return to normal, he says, given its strong balance sheet.

@page_break@In the meantime, TWP is cutting costs. Although the dealer has hired a few employees from competitors recently, it has let go of others. In total, the number of employees dropped by 139 in the six months, to 614 from 753. In addition, TWP is also reducing non-compensation-related costs such as real estate, as much as possible. “We are becoming as lean as possible,” Conacher says.

TWP’s goal is to reach $1 million in annual revenue per employee, based on a workforce of 600. This would be more than a 60% increase from the pro forma revenue of $374 million in 2007.

Other targets for TWP include a 20% return on equity and a 10% operating margin.

Conacher expects growth to be fuelled partly by joint ventures. Following an unsuccessful experience in India -— in which TWP went on its own — the preferred route is formal strategic arrangements for referring business between partners. The dealer currently has two such arrangements: one in Israel and one in Japan with Nomura Securities Co. Ltd.

Acquisitions are also a possibility. Besides Westwind, TWP acquired Prudential Equity Group LLC’s European sales team in July 2007. But culture is an important factor in acquisitions. TWP’s culture was about as perfect a fit with Westwind’s as you could find, Conacher says. Both companies are hard-driving firms, entrepreneurial and team-oriented. In addition, they both have numerous former professional and Olympic athletes on staff; Conacher himself was both an amateur decathlete and a football player.

TWP went public in February 2006. When it acquired Westwind, it paid $146.7 million: $45 million in cash and seven million TWP shares, 6.6 million of which are exchangeable shares with voting rights. (Each share may be exchanged for one common share of TWP at any time.) As of April 1, 2008, there were 31 million shares outstanding, including the 6.6 million exchangeable voting shares of TWP Acquisition Co. (Canada) Inc. Weisel owns 2.4 million, or 7.5%, of the shares and Conacher has 1.6 million, or 4.8%, of the shares. Other executives and directors own another 9.4% of the shares combined.

As with other financial services sector stocks, TWP’s shares have been on a roller-coaster ride. Listed on the TSX, on which trading volume is thin (it did not trade from Aug. 15 to Sept. 11), and on Nasdaq, the share price closed at $7.02 on Nasdaq on Sept. 12, way down from the 52-week high of $15.63 a share in November 2007, but well up from the 52-week low of $3.90 in July.

Senior executives include Tom Carbeau, head of institutional sales; Mark Fisher, general counsel; Keith Gay, head of research; Bill McLeod and Brad Raymond, co-heads of investment banking; Paul Slivon, chairman of wealth management; Tony Stais, head of trading; and Shaugn Stanley, chief financial officer.

Bill Verner, formerly with UBS Securities Canada Inc. — at which he worked in trading, sales and research — has just been hired as president of Thomas Weisel Partners Canada Inc. Conacher had been filling this role previously in addition to his other responsibilities.

Here’s a closer look at TWP’s main activities:

> Investment Banking. Given the difficult market conditions, it’s not surprising that revenue in this division was way down for the six months to $34.4 million. Although there were more transactions — 55 vs 40 — the average value of each transaction was $600,000 vs $1.7 million. Part of the drop in average value was because revenue per Canadian transaction tends to be lower than for U.S. transactions.

Capital-raising revenue accounted for about 62% of investment banking revenue in the six months vs 60% for the same six months in 2007. The rest came from strategic advisory services, such as advice on mergers and acquisitions.

TWP is trying to offset the impact of difficult market conditions and the dearth of initial public offerings by focusing on mergers and acquisitions activity, as well as private equity and debt placements.

Investment banking is carried out in Europe as well as in the U.S. and Canada. The London and Zurich offices target energy and mining companies that wish to list on North American or London exchanges.

> Brokerage. Brokerage activities, which includes sales, trading and research, are carried out in Canada and Europe as well as in the U.S.

TWP’s research includes technology: Internet, media and telecom companies. Included in consumer products and services are gaming, lodging and interactive market services; lifestyles and sports retailers; restaurants; and general retailing.

Of the 500 companies that it covers, those in technology, media and telecom make up the largest area by far, accounting for 45% of the 500 as of June 30. Health care accounted for 19%, consumer 14%, energy 14%, mining 6% and others for 2%.

TWP has two financial services analysts. Horst Hueniken, a co-founder of Westwind in Toronto, covers Brookfield Asset Management Inc., Canaccord Capital Inc., DundeeWealth Inc., GMP Capital Trust, Onex Corp. and Quest Capital Corp., as well as a number of U.S. companies. David Grossman, a founding member of TWP in San Francisco, covers firms that supply technology to the financial services sector.

TWP launched its electronic trading platform in 2007, which, Conacher says, is going very well.

One area that hasn’t been doing well is convertible trading, and this is being scaled back, although it will continue to be offered and will continue to complement investment banking services.

Besides sales, trading and research, the division also has a special situations group that focuses on sourcing liquidity, as well as a non-deal road shows division that helps institutional clients maintain and build corporate contacts.

Revenue for the brokerage division was $71 million in the first six months vs $55.1 million for the pre-merger firm and $62.5 pro forma during the same period in 2007. The increase reflects the Westwind acquisition.

> Asset Management. This includes a private-client business, which had $8.3 billion in assets under administration as of June 30, and a line of investment funds, which had assets under management of $1.3 billion.

Investment funds are managed by Thomas Weisel Global Growth Partners LLC, Thomas Weisel Healthcare Venture Partners LLC, Thomas Weisel India Opportunity LLC and Thomas Weisel Venture Partners LLC. TWP recently negotiated terms to partner with a third party for the management and marketing of the India fund.

In addition, some products are managed by a small- and mid-cap growth public equity investment team, which receives about 50% of the profits generated by those products. There are also some funds invested in long and short positions in publicly traded equities, related options and other derivative instruments. TWP expects to expand this lineup in the future.

The private-client services division currently operates only in the U.S. and offers its services to high net-worth clients, including entrepreneurs who have recently sold their companies. Private-client advisors sell TWP products when it’s applicable, but also tap independent money managers for recommendations for their clients’ portfolios.

The division plans to expand into Canada. Several of the firm’s U.S. brokers have Canadian licences and will offer their services to Canadians once requisite approvals have been received.

There are no specific plans to offer private-client services in Europe, although this may happen. TWP is continually looking for opportunities in Europe and, Conacher says, Zurich is an obvious fit for private-client services.

Revenue for the private-client division plunged in the six months to $2.2 million from $24.7 million pro forma because of mark-to-market losses stemming primarily from two private companies held in the Healthcare Venture fund. IE