The merger engineers themselves get invitations to merge
The marriage brokers are suddenly receiving proposals from their customers. This is what is happening as Wall Street firms that engineer and profit from many of the huge corporate takeovers are themselves becoming the object of takeovers.
First, the Prudential Insurance Company, the world's largest insurer with assets of $60 billion, swallowed Bache Group. Now, American Express ("Don't leave home without it") and Shearson Loeb Rhoades Inc. announced Tuesday they had reached agreement for a merger. Under terms of the agreement, Shearson would become an independently operated subsidiary of American Express.
And rumors on Wall Street are flying that still more of the brokers might be ripe for such mergers.
Wall Street has become the scene of such takeovers because of a change in the nature of the brokerage business. It no longer is purely a "ticket writing" type of business where stock brokers phone customers touting stocks. Now, brokerage houses offer what they term "full financial" services, ranging from money management to life insurance and even, in the case of Merrill Lynch, the giant in the industry, relocation services, specializing in moving families around the country.
At the same time, the buyers offer the brokerage industry a "cushion" against hard times. The entrance of such financial giants as the Pru and American Express on Wall Street might possibly accelerate the trend among other brokerage houses since these brokers will feel the competitive heat to bolster their financial resources.
Frank De Santo, an analyst at Value Line Investment Survey, adds that "I expect the mergers could certainly pick up the competition among the brokerage houses for analysts and brokers."
However, Robert Fomon, chairman of E. F. Hutton Group Inc., says the mergers don't put any pressure on his firm to find a partner. "I have more capital now than I know what to do with," said Mr. Fomon, in a phone interview. Mr. Fomon commented that he didn't believe that Shearson was in need of additional capital either, although an American Express merger could be a "fine deal" for the shareholders. Bache, Mr. Fomon said, probably needed the extra capital since it was somewhat shaken by the Hunt fiasco.
A broker at Shearson noted that the merger had been viewed extremely positively by the salesmen at his northern New Jersey office. "With the financial resources of American Express, we can practically do anything," he noted.
Additionally, he commented American Express had a sophisticated computer system that Shearson could use to its advantage and the American Express connection would boost the firm's public image since it (Shearson) was mainly viewed as a conglomeration of bankrupt brokerage houses.
The American Express deal will also be beneficial to Shearson shareholders. They will receive 1.3 shares of American Express stock in exchange for their Shearson stock. This has an approximate value of $60 per share. Shearson stock last traded at $42 1/4 on Friday.
The Bache merger also will benefit both the firm and its shareholders. Robert Farrell, senior executive vice-president at Bache, says the Pru capital will allow it to pursue its five-year plan of increasing its market share and adding new brokers at a more aggressive clip. And Bache has been assured by the Pru that it will continue to receive its fair share of the Pru's brokerage business. (When the merger was first announced, the Pru said it wouldn't deal with Bache as a broker any more to ease other Wall Street firms' fears.)
The brokerage industry has also been riding a wave of higher trading volume. During the first quarter of this year, trading volume averaged 47.3 million shares per day, only a shade below last year's first-quarter volume. And, as the Dow Jones industrial average moves above the 1,000 mark, the market's intensity begins to pick up, prompting still more trading activity. Since 40 percent of the industry's revenues still come from commissions, higher trading revenues are quickly reflected on the "bottom line." Value Line is expecting trading volume will be up again this year.
If interest rates decline this year, the industry could see a surge in bond underwritings. The commissions on bonds, although lower than stocks, is more stable. At the same time, declining interest rates will reduce inventory carrying costs for the brokers. Conversely, it will reduce interest income.
Even though most of the brokerage houses have their own money market mutual funds, they are generally not big moneymakers. Bache Halsey Stuart Shields Inc. , the brokerage subsidiary of the Bache Group, says its $2.2 billion money market funds is only marginally profitable. However, a Bache spokesman points out, the firm considers the money in the fund an asset that can be diverted into the stock market when its brokers push stocks.
"The money is mobile," says the spokesman. The Pru says it is devising a strategy to offer Bache's money market fund to its 50 million customers.
Even though trading volume is lagging somewhat behindlast year's record pace, brokers are optimistic this will be another excellent year. Mr. Fomon of E. F. Hutton, says the outlook for the industry "is most optimistic I've seen since the 1960s." That's probably why the brokers are being acquired.