Shearson and Hutton Agree on Biggest Investment Firm Merger

Investment giants E. F. Hutton Group and Shearson Lehman Bros. formally announced Thursday a $960-million merger that ended troubled Hutton’s long struggle to remain independent.

Shearson said it will pay $821.9 million in cash and $139.8 million in 10-year debt securities in the deal, the largest ever among U.S. investment firms. Officials said the definitive agreement, which will create the largest U.S. investment firm in terms of capital, was reached Wednesday night at about 10:30 p.m.

At a Manhattan press conference, Hutton President and Chief Executive Robert P. Rittereiser insisted that the 83-year-old brokerage was on the verge of a turnaround before the stock market’s crash drained away capital and darkened the outlook for the retail brokerage business. Rittereiser, brought in last year to save the faltering firm, said he was proud of his effort, though it had not succeeded.

Referring to a starting pitcher for the Houston Astros, Rittereiser said he felt “a little like Nolan Ryan on one of those days when he strikes out 12 men, gives up three hits and loses three to nothing.”

Rittereiser said the discussion that led to the deal began on the evening of Oct. 20--one day after Black Monday--when he held a joint conference call with other directors of the investment firm to discuss its condition. Within a few days, Rittereiser had concluded that a sale of part or all of Hutton would be necessary.

After Black Monday, Hutton had to find a partner, “rather than have the world change on us,” Rittereiser said.

But though the chief executive contended that the firm had nearly succeed in remaining independent, another source close to Hutton’s management said many on the board felt there was an “inevitability” in the merger. While the company’s capital--a key measure of viability--was $1.1 billion, placing it 10th in the industry, several other firms on Wall Street had resources of more than $3 billion with which to compete in world investment markets.

Peter A. Cohen, Shearson chairman and chief executive, voiced a similar view at the press conference. “Our industry is more and more becoming an oligopoly,” he said. “We’re a very high fixed-cost business.”

Shearson said the merged firm will have about $3.75 billion in total capital, according to the definition of capital used by the Securities Industries Assn., as well as more than 600 offices and 12,000 brokers.

Shearson will still be far smaller in capital resources than the four largest Japanese investment firms, Cohen said.

Shearson officials said they have not decided whether to keep the Hutton name but acknowledged that its high public recognition made it a valuable asset. They said the two companies will continue to operate separately for the next six months as the transaction-processing “back offices” of the firms are combined.

Revolt Over Rules

The deal came after nine frenzied days of negotiations during which dozens of investment bankers, takeover lawyers and investment executives trooped through Hutton’s executive offices. The potential bidders, which also included the investment firms Merrill Lynch and Dean Witter and the insurance company Equitable Life Assurance Society, were originally told to submit sealed bids that would be opened in a joint meeting, knowledgeable sources said.

But the principal bidders revolted against those ground rules, began trying to learn their competitors’ bids and sought to set up exclusive negotiations with Hutton. Finally, Hutton assigned specific hours for each company to discuss its offer, with Shearson given the first opportunity.

Cuts by Attrition

Negotiations with Hutton began substantially below the $29.25-a-share figure that was eventually agreed upon, according to sources.

Executives of the two firms insisted that they would minimize layoffs, keeping the figure far below the 5,000 figure that has been speculated by industry officials. Together, the firms have some 45,000 employees.

Cohen said the firms hoped that normal attrition would make large cutbacks unnecessary, since on average 40% of clerical and operations personnel leave their jobs in investment firms each year. Industry officials have speculated that there may be heavy cuts among the operations and clerical staffs, as well as in the securities trading and research arms and in Hutton’s investment banking department.

While many expect that Rittereiser will be among the departures, Cohen said Shearson officials “want him to stay in a very important role.”

Cohen said $400 million was “a good target” for the cost savings that officials expect from the merger.

He also said the company did not plan to abandon any lines of business, though both firms have municipal bond departments, which have been unprofitable recently for many firms.