SSCC Smurfit-Stone Container Corp. Common Stock

Wells Fargo & Co. (WFC) has finally landed Warren Buffett's Berkshire Hathaway Inc. (BRKA,BRKB), the bank's biggest shareholder and an owner of the stock for more than 20 years, as an investment-banking client.

In January, Buffett hired the San Francisco bank, the second largest in the U.S. by deposits after Bank of America Corp. (BAC), to help underwrite a $1.5 billion bond offering.

For Wells Fargo's modest investment bank--the smallest by far of the four largest U.S. commercial banks--the deal shows it is starting to gain some muscle.

Wells Fargo's goal now is to boost revenue at the investment bank, which has a staff of about 700, by 10% to 20% a year in the foreseeable future, said Jonathan Weiss and Robert Engel, the co-heads of investment banking and capital markets, in a recent interview.

Expanding the investment bank would help Wells Fargo overcome limits it faces in commercial and retail banking, where it is already so large that growth is difficult.

Wells Fargo will face challenges. Its brand isn't well known in investment banking, and "they don't appear interested in hiring expensive bankers" to grow, said Frederick Cannon, Keefe, Bruyette & Woods Inc.'s chief equity strategist.

Engel said, "Our biggest challenge is to continue to deepen the relationships Wells already has so that more CEOs and boards view Wells Fargo as the trusted advisor for all their strategic banking needs, including accessing the capital markets and M&A."

Wells Fargo is using its $1.3 trillion balance sheet to help lure investment-banking customers by offering loans along with bond and stock underwriting deals. "Wells is a bank that likes to lend money. Not every investment bank has that approach," Weiss said. Wells Fargo will also rely on its tested cross-selling strategy--selling more to customers the bank already has. It isn't looking for big acquisitions and is unlikely to go on a massive hiring spree.

The unit's contribution to Wells Fargo's bottom line isn't disclosed. It's part of Wells Fargo Securities, which also includes the bank's trading, derivatives, and large-corporate-banking businesses. The bank did say investment banking revenue from underwriting and merger and acquisition advising increased 44% in 2010 from a year earlier.

The bank remains far behind rivals in equity and bond underwriting, according to data from Dealogic. But in some businesses Wells Fargo has been catching up fast since its acquisition of Wachovia Corp. in late 2008.

In U.S. leveraged lending, Wells Fargo didn't figure and Wachovia ranked ninth and eighth in 2007 and 2006, respectively; the combined firms ranked third in 2009 and 2010. Further, Wachovia wasn't among the top 10 banks making financial-sponsor-backed loans; last year, Wells Fargo ranked No. 5, according to Dealogic.

Keefe Bruyette's Cannon, who follows Wells Fargo, estimates it might generate $3 billion or $4 billion a year in investment banking revenue. "If you can grow that... it can become meaningful." J.P. Morgan booked than $6 billion in advisory and underwriting revenue last year, and Bank of America's investment banking revenue was $5.5 billion. In trading, however, J.P. Morgan and Bank of America dwarf Wells Fargo's equivalent operation.

Wells Fargo is the nation's second-largest commercial lender--Bank of America is the largest, according to SNL Financial--the largest mortgage lender, and has the most bank branches. "A lot of investors are generally skeptical about Wells' ability to grow because they have such big market share" in banking, Cannon said. Investment banking is "one of the few businesses where Wells has such a small market share they can drive really strong growth."

Before buying Wachovia, Wells Fargo had only dabbled in investment banking. Chief Executive Officer John Stumpf told investors last year investment banking "has changed a lot." There are fewer competitors now and Wells Fargo is a bigger company with more clients who need capital-market access.

Dole Food Co. (DOLE), a long-standing Wells Fargo client that hadn't used Wachovia's investment bank, added Wells Fargo as bookrunner when it went public in October 2009. Dave Delorenzo, CEO of the fruit and vegetable company, said in an interview Dole already did commercial banking with Wells Fargo, and "We think they have a very good team in place" in investment banking.

Wells Fargo's balance sheet may well be its sharpest weapon.

Wells Fargo advised RockTenn Co. (RKT), a paper products company and Wachovia client, on its pending $5 billion purchase of Smurfit-Stone Container Corp. (SSCC), and led a $3.7 billion loan to finance the transaction. RockTenn Treasurer John Stakel said the big balance sheet of Wells will help build its investment banking platform.

-By Matthias Rieker, Dow Jones Newswires; 212-416-2471; matthias.rieker@dowjones.com

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