Hutton Looks Like Good Buy in Slow Week
E. F. Hutton, one of the nation’s largest brokerage firms, put itself up for sale on Monday and seems to have no trouble finding a buyer. And the stock market showed some strength on Tuesday. Does that mean it’s morning again on Wall Street?
Don’t bet on it. Yes, the company that made its slogan, “When E. F. Hutton talks people listen,” part of the language will find a buyer. In fact, rumors in the securities business have several potential bidders lining up for Hutton.
But the price is likely to be $30 a share or less, where a year ago Hutton turned down $50 a share. And scuttlebutt among brokerage company executives in New York is that the New York Stock Exchange was worried about Hutton’s financial weakness and urged it to find a buyer--a bit of meaningless gossip because Hutton’s own directors urged the sale of the firm.
Talk is cheap, of course, and more so than usual these days as brokers have time for gossip because business is so slow.
Merger Business Off
Yes, stock prices are capable of rising sharply as they did on Tuesday, but that appears to be a trading rally in an otherwise weak market. And brokerage firms don’t make their big money from commissions paid by pension fund and other institutional traders anyway.
The heart of a Wall Street firm’s business is acting as intermediary--or underwriter--for companies borrowing money from the public, either by issuing bonds or stocks. Underwriters often get 7% of the total raised by a public offering, and there is continuing business as the firm becomes a dealer in the securities. Wall Street firms also have earned big fees in recent years for advising on mergers or for playing a lead role in financing them.
But there is no merger business these days because there are no buyers, reports Barry Friedberg, head of investment banking for Merrill Lynch. Buyers are afraid that stock prices will fall further or that deals cannot be financed.
And there are practically no companies issuing stock to the public, because there are neither sellers nor buyers. First, entrepreneurs don’t want to go public for the low valuations being offered for young companies these days. And investors don’t want to buy small companies when they can put their money into a big company at apparently attractive prices and feel secure.
That’s more emotional than rational, remarks managing director James Sepenzis of Needham & Co., an underwriter of high technology companies. “They buy Alcoa and International Paper, saying the falling dollar will help them export, but sell good small companies like Applied Materials that are actually doing the exporting now.”
Bargain Prices
Yes, it may be dumb to invest in companies just because they’re large, but it’s understandable, says Stephen Robert, chairman of the Oppenheimer & Co. brokerage firm. “The market’s going through a period of convalescence,” says Robert. “People are shocked by the change of values.”
So why should anyone want to buy a brokerage house now? Because the time to buy straw hats is in the fall and the time to buy a company is when conditions have made it a bargain. That’s the case with Hutton--where the attraction is its 6,700 stockbrokers, the third-largest sales force in the securities business (after Merrill Lynch and Prudential-Bache). So acquiring Hutton would make any buyer a major player in the business.
But if the buyer turns out to be Shearson Lehman Bros., with whom Hutton is holding discussions, the merged company would be the largest in the business. And Shearson has other reasons to want Hutton. Backing a brokerage force with Quotrons and computer systems is costly, and Shearson has one of the industry’s biggest computer operations. It is so big, say Wall Streeters, that Shearson could absorb Hutton’s 6,700 brokers--more than doubling its own sales force--without adding computer power.
Still, Shearson may have to bid against such big insurance companies as Metropolitan Life or Equitable, which are presumed to be interested in Hutton’s sales force for the long-term prospect of selling investment funds and other financial products to the public. “I’d be surprised if the insurance companies let it go without a bid,” says one investment banker.
But the bidding isn’t likely to get high-priced. Whatever the long-term outlook, the short term is extremely uncertain. Most Wall Streeters are deeply gloomy--although a few remain optimistic. “Next year will be a great year for mergers and acquisitions,” says one hopeful investment banker. Is he right? Who knows, but talk is cheap these days and Wall Streeters have lots of time to dream.
