Wall Street takeover talk centers on brokerages themselves
Election day draws nigh, but there's still a passel of corporate players seeking running mates. And rumors are rife on Wall Street about possible match-ups. Last week, brokerage firms captured the imaginations of tongue waggers and speculators. The stocks of Morgan Stanley & Co. and E.F. Hutton shot up as word circulated that American Express's subsidiary Shearson Lehman Brothers was shopping for a partner. PaineWebber Inc., which hit a 52-week high, was also said to be on Shearson's candidate list.
To some extent, brokerage stocks are proxies for the overall market. When investors are active, brokers profit. And the market has shown strength and heavy trading volume of late. The Dow Jones industrial average picked up 45.55 points last week, closing at 1,877.81.
But Shelley Moen, a technical analyst with Piper, Jaffray & Hopwood Inc., notes that speculators have pumped brokerage up stocks four times as much as the Dow industrials over the last three months. The top voter getter, E.F. Hutton, has soared 56 percent.
``Hutton is selling at close to peak valuation,'' says Nancy Young, with Tucker, Anthony & R. L. Day. ``The top valuation of a full-line national firm is two times book. Hutton's book is $26 or $27 per share. So the peak value is $54. If you want to speculate on a takeover, there might be something left. But frankly I wouldn't.''
``All three are fully valued. I'd be a seller at these prices,'' opines Perrin H. Long, brokerage industry analyst at Lipper Analytical Services.
Based on past price charts, Ms. Moen at Piper, Jaffray continues to recommend PaineWebber (``It could go to $45'') and Morgan Stanley (``We're looking for $80'') for short-term traders.
As to the substance of the rumors, analysts were skeptical. For the last two years Merrill Lynch, E.F. Hutton, and PaineWebber have been subject to similar bouts of merger speculation, or ``rumortage,'' as Ms. Young calls it.
``There's no compelling reason for anyone to own a national full-line firm,'' she contends. ``The stocks are fully valued, earnings are reasonably strong. And there have been enough examples of acquired brokerage firms -- Sears, Roebuck with Dean Witter Reynolds, and Prudential-Bache -- that haven't yielded the expected returns.''
But Mr. Long points out that if a large bank, mutual fund, or insurance company ``wants to be a marketer of financial services, it needs a sales force. Securities are sold, not purchased. There are only a few firms left with national distribution networks. It's cheaper to buy a Hutton than develop it from scratch.''
And Hutton offers the most room for improvement, Long says. ``Management has been unable or incapable of managing costs relative to revenues.'' Hutton has ``one of the worst'' pretax profit margins: 1.3 percent of revenues (for the 12 months ending in June), he says. He pegs PaineWebber's pretax margins at 5.6 percent, Merrill Lynch's at 5.9 percent, and Shearson's at 12.4 percent.
If Hutton were taken over, ``I would sell my [Hutton] stock and immediately put it into PaineWebber. They would be next,'' Long says.
Outside the takeover realm, Young calls Salomon Inc. ``a screaming buy.'' Third-quarter earnings were dragged down by the commodity subsidiaries. The stock is now trading near its 52-week low. She predicts that unless the earnings improve on the commodity side within the next two or three quarters, the unit will be sold.
Looking out two or three months, Long recommends the Advest Group Inc., a brokerage based in Hartford, Conn., and First Boston - ``They're going to have good earnings next quarter.'' But beyond that, he's telling clients to invest in money market funds. ``Inflation will be higher, interest rates will be moving up, and the equity market lower.''
Be that as it may, investors weren't cowed last week. Buying in consumer staples and financial stocks was fueled by the Bank of Japan's cutting its discount rate from 3.5 to 3 percent. That gives the Federal Reserve leeway to drop American interest rates.
Merger plays, meanwhile, kept a number of stocks on the move.
Goodyear Tire & Rubber Company, a Dow stock, rose on reports that Sir James Goldsmith, a financiar, was teaming up with Hanson Trust, a British conglomerate, in a takeover bid. Sir James reportedly holds at least a 15 percent stake.
USX Corporation, another Dow member, continues negotiating with the United Steelworkers (to end a strike) and Carl Icahn (to end a takeover). Last week, USX announced it was raising $1 billion in cash for possible restructuring. Mr. Icahn, with an 11.6 percent stake, has threatened a hostile bid if restructuring does not occur.
First Interstate Bancorp upped its bid for BankAmerica last week to $22 a share (in stocks and debt) from $18. BankAmerica's board, scheduled to meet today, is expected to reject the offer.
And Lucky Stores Inc. appears to have outmaneuvered New York investor Asher Edelman, who has dropped his $37-a-share takeover bid.