Bankers Trust Agrees to Buy Alex. Brown
Bankers Trust New York Corp. agreed to purchase Alex. Brown Inc. for $1.64 billion in stock in one of the biggest acquisitions of a securities firm by a U.S. bank, sending brokerage stocks soaring.
The acquisition further topples the walls that have separated banks from the brokerage industry since the Great Depression. The division crumbled last year when the Federal Reserve Board allowed banks to increase the revenue they get from securities underwriting and other non-lending businesses.
The purchase of the Baltimore brokerage would give Bankers Trust the stock underwriting and sales capacities it needs to reach its goal of becoming a full-service investment bank. Bankers Trust has built large bond underwriting and merger advisory staffs and has been trying to move into the lucrative world of stock sales.
“Building is very long and hard,” said Bankers Trust Chairman and Chief Executive Frank Newman, who will retain the title at the merged companies. “In one fell swoop, we get what we need.”
Alex. Brown shares, which jumped 28% Thursday and Friday on speculation of a Bankers Trust takeover, rose $10 to $63.125 on the New York Stock Exchange. Bankers Trust fell $2.75 to $79.50, also on the NYSE, reflecting delays in realizing profits and savings from the takeover.
“Bankers Trust is paying a rich price for Alex. Brown,” said Karen Finkel, manager of the $145-million PaineWebber Financial Services Growth Fund.
The announcement sent shares of other securities firms soaring, as investors bet banks will pay a premium for the ability to underwrite and sell stocks and other securities.
New York firms PaineWebber Group Inc. rose $2.125 to $33.50, Lehman Bros. Holdings Inc. gained $3 to $33.50, and Donaldson, Lufkin & Jenrette Inc. rose $2.625 to $40.875, on the New York Stock Exchange. St. Louis-based A.G. Edwards Inc. gained $1.75 to $35.25, also on the NYSE.
“There are a lot of big banks with a lot of capital who want to get into the higher-margin brokerage business,” said James Schmidt, who manages $6 billion for John Hancock Funds in Boston.
Bankers Trust will pay 0.83 share of its stock, or $66.99, for each Alex. Brown share, a 24.2% premium over Alex. Brown’s closing price Friday. The offer is 65% more than Alex. Brown’s closing price Wednesday, before the stock went on a two-day tear on speculation about the takeover.
Bankers Trust also will pay about $200 million to convert Alex. Brown executive stock options and retain top executives.
The move is the most dramatic result to date of banking regulators’ gradual steps to allow banks to do more stock underwriting and trading.
Congress has been debating the repeal of the 1933 Glass-Steagall Act, which prohibits banks from underwriting stocks. Enacted in the aftermath of the 1929 stock-market crash that led to the Great Depression, the bill was aimed at preventing banks from taking huge risks in the stock market.
But banking regulators, impatient with Congress’ slow movement on the issue and bolstered by recent court rulings, have moved ahead of lawmakers to allow commercial banks to perform almost all of the functions of stock brokers.
Last year, regulators allowed banks to derive 25% of their revenue from securities businesses, up from a previous cap of 10%, if they do it through a separate subsidiary.
The combined Bankers Trust-Alex. Brown would derive about 20% of its revenue from stock underwriting.
The nation’s oldest investment bank, Alex. Brown was the No. 6 stock underwriter in the first quarter, with 500 brokers, 100 analysts, 22 offices in 13 states and the District of Columbia and a list of 115,000 wealthy customers.
Bankers Trust still will be dwarfed by the underwriting machines at Merrill Lynch & Co., the newly combined Morgan Stanley Group Inc. and Dean Witter Discover & Co. and other major Wall Street securities firms.
“The others have a huge lead,” said John Harley, head of Price Waterhouse’s mergers and acquisitions business in London.
Bankers Trust said it will take an $80-million charge for merger-related expenses and expects $80 million in annual savings within a year of the transaction closing. Within two years, the purchase would generate $120 million to $200 million a year in new revenue.
The companies expect to complete the sale by the fourth quarter. The acquisition would boost per-share earnings two years after the transaction is completed, Bankers Trust said. Alex. Brown shareholders would own about 20% of Bankers Trust.
