Morgan Olmstead, Wedbush Call It a Definitive Deal

Times Staff Writer

It began with a power lunch last spring that truly earned its name.

G. Tilton Gardner, chairman of Morgan, Olmstead, Kennedy & Gardner Capital Corp., was convinced that his brokerage firm needed to find a suitable merger partner. The October stock market crash had brought a slowdown to business and a pickup in mergers, particularly for regional brokerages that, in essence, disappeared when they were swallowed by large insurance companies or other big organizations.

Gardner cast his eye on Wedbush Corp., a larger regional securities brokerage that shared the same Los Angeles roots. And so he and Wedbush President Edward W. Wedbush began to cut a deal last spring at what ultimately would become a roughly $7-million lunch.

“I would like to say it was at McDonald’s, but it was the California Club,” Wedbush said. “Actually, mergers should be done at Carl’s Jr.,” a short block away from the tony club in downtown Los Angeles, “because you’re not supposed to do business at the California Club,” he quipped.


The two securities firms on Wednesday signed a definitive merger agreement under which Morgan Olmstead will be merged into Wedbush.

“I would like to think of it as a major step in the direction, if we’re not already there, toward being the strongest broad-based brokerage firm headquartered in the Western United States,” Wedbush said.

Difficult to Value Stock

“We wanted to affirm our independent natures,” Gardner said. “Going through October and having been through these cycles before, and knowing we might get to a slow, stretched-out period, it was a good opportunity to take advantage of.”


Although the company will have offices in New York and seven Western states, its strongest focus will continue to be Southern California, the two executives said in an interview.

Under the agreement, public shareholders, who own about 36% of Morgan Olmstead, will receive $2.50 per share in cash. The amount--a total of about $3 million--was approved by a special committee of non-management Morgan Olmstead directors. The last transaction in Morgan Olmstead’s stock was Tuesday at $2.125 in over-the-counter trading.

In addition, about 15 principal shareholders of Morgan Olmstead will exchange their 64% stake in the company for common stock of Wedbush. For every seven shares of Morgan Olmstead stock they hold, shareholders will receive one share of Wedbush stock.

Because Wedbush is a privately held firm, its stock changes hands only infrequently and is difficult to value. The most recent transaction was at $14 a share, said Morgan Olmstead Chief Financial Officer Ronald J. Consiglio. Although that might indicate a value of $2 per share, some shares in the swap will be held in escrow for a time and could ultimately be worth less, he said.


The final name of the merged company has not been decided yet, nor has it been determined who will hold what titles, Wedbush said. That will be determined by the time the deal closes, which is expected to be by Oct. 31. The merged company will be privately held.

Although some overlap will exist between Wedbush’s 20 offices and Morgan Olmstead’s five, no layoffs are planned, Wedbush said.

“We don’t have a prognosis for layoffs, but there will be some overlapping that I’m sure we will ultimately identify. And if business conditions continue to be slow as they have been for some months, we will have to do some paring of staffs,” he said. Wedbush said he expects the combined staff to range between 750 and 800 people.

The merger brings together two independent firms whose recent fortunes have been quite different.


Morgan Olmstead, with about 250 employees and equity capital of about $12 million, lost $2.8 million in the first half of the year. Wedbush, with about 540 employees and about $63 million in equity capital, has been profitable for at least the past 15 years, Wedbush said.

Together, the firms will have between $70 million and $75 million in capital and assets of more than $500 million.

Wedbush has been characterized as a conservatively managed, well-run firm with tight expense controls.

Morgan Olmstead has been aggressively expanding its investment banking and corporate finance operations, but has been troubled by operational and legal problems--including the departure of an unhappy president and allegations of trading improprieties--since it went public in July, 1986.


But despite the differences, the two companies have much more in common, including offering a full range of services such as retail brokerage, investment banking and securities clearing operations for other brokerages, the two executives said. The combined firm will make markets for about 1,000 stocks and will clear and execute transactions for about 200 other brokers, Gardner said. Wedbush traces its roots back to 1925, while Morgan Olmstead was founded in 1936.

“There are people in our business, peers in our business, who are skeptical about mergers between stock brokerage firms,” including the merger between Wedbush and Morgan Olmstead, Wedbush said. “My response to that is, wait and see. This is going to surprise everyone.”