$1-Billion Sale of E.F. Hutton to Shearson Seen

E. F. Hutton Group is expected to announce today that it has agreed to be acquired by Shearson Lehman Bros. in a $1-billion cash-and-securities deal that would create the nation’s largest securities firm.

Hutton has accepted an offer worth $30 a share barely a week after its waning financial strength and clouded prospects forced it to consider a buyout, industry officials said. The merger would be the largest ever among U.S. investment firms and would create a company with more than 12,000 stockbrokers, 726 brokerage offices and more than $4 billion in capital.

Firm Founded in 1904

The acquisition of Hutton, founded in 1904 by financier Edward F. Hutton, marks another step in an industry consolidation that has seen some of Wall Street’s biggest names seek alliances to expand their capital. Shearson itself, which is 60% owned by American Express Co., was formed through a series of mergers, including its 1984 acquisition of Lehman Bros. Kuhn Loeb.

The largest merger to date among U.S. investment firms was Primerica Corp.’s acquisition of Smith Barney Inc. for $750 million, announced last July.

Shearson executives were preparing to announce the deal early Wednesday evening after two days of round-the-clock negotiations. However, they abruptly put off the public announcement, saying final details of the deal remained to be worked out.

But sources at the company said that only minor details remained. Industry officials said Hutton President Robert P. Rittereiser had used the company’s public address system to break the news of the deal to employees.

John J. Phelan, chairman of the New York Stock Exchange, predicted that even more firms will combine, or sell stakes in their companies, as Paine Webber Group did this week. “Everybody needs more capital,” he said in an interview in Boca Raton, Fla.

Shearson has not been the only company poring over Hutton’s books in the last week. Also discussing a merger with Hutton were Dean Witter, the big retail brokerage firm that is a unit of Sears, Roebuck & Co.; Merrill Lynch, and the Equitable Life Assurance Society, analysts said.

If the Shearson deal falls through for any reason, one or several of those firms may try to negotiate separate deals, they said.

The merger announcement would end a saga of misfortunes for Hutton, whose fast growth in the 1970s was a marvel of its industry. The profitability of the 10th-ranked securities firm began to sag in the early 1980s as it sought vainly to become a major investment banking house as well.

Compounding its difficulties was a 1985 check-kiting scandal, in which the firm was convicted of 2,000 counts of mail and wire fraud. Hutton went through major reorganizations and last year appointed Merrill Lynch executive Rittereiser to be its president, but he was not able to quickly reverse the firm’s decline.

Last January, the company was forced to set aside a reserve of $130 million, largely to cover customer losses on securities that had been improperly marketed. Hutton lost $90.3 million last year as competitors raked in profits from the bull market.

With the stock market’s collapse threatening a downgrading of its credit rating, Hutton announced on Nov. 23 that it would entertain offers to buy the company or a part of it.

Analysts said the $30-dollar-a-share deal was a good one for Shearson, which was rebuffed last year when it offered $50 a share for Hutton. The stock market’s collapse has darkened the outlook for the brokerage business, causing the sharp drop-off in values.

Still, “if you have any faith in the capital markets, this is a good time to buy a brokerage,” said John Keefe, an analyst with the Drexel Burnham Lambert investment firm.

Shearson has been trying to buy a brokerage house to make more efficient use of its large computer system and securities transaction-processing capacity, Keefe said.

Hutton has about 18,000 employees, including about 6,500 brokers, and Shearson has about 21,600, with 5,700 brokers. Shearson’s $3.1 billion in capital ranked it No. 2 among U.S. investment firms at the end of last year, following only Salomon Inc., which led with $3.2 billion.

Hutton had about $1 billion in capital, which ranked it 10th but put the firm at a decided competitive disadvantage in merchant banking, securities trading and underwriting, analysts said.

In fusing the two companies, Shearson may lay off more than 5,000 employees, including many of the so-called back-office personnel who handle administration and transaction processing, investment industry analysts speculated. Those layoffs are likely to fall hardest on the New York area.

But employees in other parts of the country may be laid off, too, as Shearson tries to eliminate overlap in its operations. Hutton executives said they were unable to provide a count of their employees in the Los Angeles area but said the brokerage has 46 offices in California, including 31 in Southern California.

The challenge for Shearson will be to hang on to the high-profit brokers, who are the key ingredient in the brokerage business and who may grow disaffected in the turmoil of a merger.

Benjamin F. Edwards III, chairman and chief executive of the A. G. Edwards & Sons brokerage firm, said his firm has already received “lots of calls” from Hutton and Shearson brokers concerned about their futures.

“A lot of them are looking around,” he said in an interview from his firm’s home office in St. Louis. “If we can pick off some good ones, all this may work in our favor.”

Hutton stock fell 25 cents a share to $27.375 in New York Stock Exchange trading, while Shearson’s edged up 50 cents to $15.

Paul Richter reported from New York and Debra Whitefield from Boca Raton, Fla.

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