Pru-Bache Plans to Buy Smaller Retail Brokerage : Some Analysts See Risks in Thomson McKinnon Deal
Prudential-Bache Securities, moving to expand its retail brokerage operations amid an industrywide slump, said Tuesday it had agreed in principle to acquire smaller rival Thomson McKinnon Securities.
The deal, for a price expected to total less than $100 million, would thrust Prudential-Bache past Dean Witter Reynolds into third place behind Merrill Lynch and Shearson Lehman Hutton among the nation’s retail stock brokerages serving individual investors, based on number of brokers at the end of last year. Prudential-Bache now ranks fourth while Thomson McKinnon, whose primary business is retail, ranks eighth.
The deal, still subject to regulatory approval and other formalities, illustrates the profit and cost pressures squeezing small and medium-sized securities firms in the wake of the 1987 stock market crash. That has prompted some, such as Thomson McKinnon, to merge or seek capital infusions.
Advantages Cited
The deal also is part of a strategy by Prudential-Bache and its chief executive, George L. Ball, to achieve greater economies of scale in retail brokerage by bringing in more brokers to sell its existing investment products and benefit from its marketing programs. Those sales operations have lagged behind those of major competitors, in part because of a lower quality of branch managers, said Perrin Long, industry analyst at Lipper Analytical Services in New York.
“We have excess capacity to support more retail production,” W. James Tozer Jr., Prudential-Bache’s president and chief operating officer, said in an interview. “We can bring them on board and cover them with expanded advertising and products in a very efficient manner. Even in these tough times for the securities business, this is a transaction that ends up making a lot of sense.”
“All in all, it’s going to be very beneficial to Bache longer-term,” analyst Long said.
However, the merger may be something of a gamble for Prudential-Bache, coming as it does in the depths of a slump stemming from an exodus of small investors after the 1987 crash. That has resulted in firms laying off thousands of brokers and support staff and has reduced morale at many firms.
Some top producers at Thomson McKinnon could jump to other firms after the merger, or a worsening of the slump could force more layoffs, analyst Long said.
But by making the acquisition in the middle of the slump, Prudential-Bache officials said they obtained a lower price for Thomson McKinnon, which Tozer described as “well under $100 million.”
“We’re contrarians,” Tozer said. “We’ll get them for a uniquely good price. We expect a lot of questions from competitors saying what a dumb idea this is. But in the fullness of time, we’re convinced we’ll have the last laugh.”
Some Are Apprehensive
Thomson McKinnon, whose retail operations have suffered in the post-crash environment, has been seeking additional capital from Asian sources and is said to have entertained inquiries from Dean Witter as well as from Smith Barney, Harris Upham & Co. and Oppenheimer & Co. about purchasing parts or all of its businesses.
Prudential-Bache officials said they were confident the two firms’ cultures would fit. However, some of the firms’ brokers disagreed.
“We never viewed Thomson McKinnon as a particularly great firm,” said one Prudential-Bache broker in Southern California. “They are a low-level, average producer, not a Kidder or a Morgan Stanley or a Paine Webber.”
A Thomson McKinnon broker in Southern California expressed apprehension over the proposed deal, noting that some brokers of both firms and most of Thomson McKinnon’s back office support staff are likely to get pink slips.
“No one knows what the new rules are going to be,” the Thomson McKinnon broker said.
Prudential-Bache’s Tozer acknowledged that some less productive brokers and others may be let go, but he said that would have happened even without a merger.
The proposed merger comes a few days after Prudential-Bache announced a major reorganization of management aimed at injecting life into its lagging investment banking operations.
Prudential-Bache, a unit of Prudential Insurance Co. of America, has 320 offices and 6,000 brokers worldwide, including 22 offices and 450 brokers in Southern California. Thomson McKinnon has about 154 offices and 2,200 brokers nationwide.
Under the merger agreement, the retail arms of both firms would be combined into a new firm to be called Prudential-Bache-Thomson. Prudential-Bache’s investment banking and other non-retail operations would remain separate under its existing name.
Ball, as chairman and chief executive of Prudential-Bache, would retain those posts in the new firm. J. Ronald Morgan, chairman and chief executive of Thomson McKinnon, would become a vice chairman.
Prudential-Bache would acquire the outstanding shares of privately held Thomson McKinnon from the latter’s management and its employee stock ownership trust. Completion of the transaction is subject to a due diligence review by Prudential-Bache and regulatory approvals, all expected to be completed within a month or so.
WHERE THOMSON McKINNON RANKS
Number of Brokers
1 Merrill Lynch 12,600 2 Shearson 11,000 Lehman Hutton 3 Dean Witter 7,588 Reynolds 4 Prudential- 6,000 Bache 5 Paine Webber 4,595 6 Integrated 4,000 Resources 7 A. G. Edwards 3,402 & Sons 8 Thomson 2,200 McKinnon 9 Smith Barney 2,150 10 Goldman, Sachs 1,881
Capital
$ Millions 1 Merrill Lynch $3,484 2 Salomon Bros. 3,137 3 Goldman, Sachs 1,876 4 Shearson 1,746 Lehman Hutton 5 Morgan Stanley 1,599 6 Drexel Burnham 1,292 Lambert 7 First Boston 1,130 8 Prudential- 1,103 Bache 9 Paine Webber 1,051 10 Bear, Stearns 1,033 . . . 26 Thomson 204 McKinnon
Source: Institutional Investor
