A. Brown merger draws praise But failures of similar deals bring warnings


The blockbuster merger between Alex. Brown Inc. and Bankers Trust New York Corp. was widely praised yesterday, but some analysts warned that history could be their greatest enemy because so many similar deals have failed.

"This is a road strewn with corpses," said John F. Olson, a securities lawyer with Gibson Dunn & Crutcher in Washington. "History has some cautionary tales that are worth remembering."

BankAmerica Corp., American Express Co. and Prudential Insurance have all had problems integrating brokerage companies they acquired, analysts pointed out.

But both Alex. Brown and Bankers Trust officials, as well as most Wall Street analysts, called the match a perfect fit.

In a teleconference held in New York yesterday, Frank Newman, chairman and chief executive of Bankers Trust, said the fit between the two companies is "striking."

"Alex. Brown is the only firm that we had serious interest in and serious discussions with because we thought the fit was so good," Newman said. "The business logic is so eminently clear." Newman was patched into the conference from Calgary, Alberta, where he was visiting his son, who was recovering in a hospital from a rock climbing accident.

A. B. "Buzzy" Krongard, chairman and chief executive of Alex. Brown, who was in New York yesterday, said: "I don't know of an organization that will be able to compete with ours. We set out to think about the perfect partner lo and behold we found a partner that met the criteria."

The combination of Alex. Brown and Bankers Trust creates a formidable company, analysts said.

The companies will have nearly $123 billion in assets, 18,000 employees working in more than 50 countries, and offer an array of products that competitors will be hard pressed to match.

Alex. Brown has specialties that Bankers Trust doesn't: It is a strong regional brokerage house, renowned for bringing technology and health care companies public. It also has a sizable business managing money for wealthy individuals.

Bankers Trust has little in the way of equities operations, but it has a huge junk-bond financing operation, manages risk for large corporations and lends to some of the world's biggest companies.

One concern is whether Alex. Brown and Bankers Trust will match culturally.

"There is a different culture in brokerage houses than there is in banks," said Joan Goodman, a banking analyst with the Chicago-based Pershing Division of Donaldson Lufkin Jenrette. "Certain investment houses think they [banks] are stilted once a bank takes them over. A brokerage house is nothing but employees. If you cannot retain those employees, that is a problem. That is the danger I see."

Atypical bank

But Bankers Trust is unlike most other banks.

"They don't have ATMs, they don't have branches, they don't take deposits, they don't write checks," Krongard said. "To think that Bankers Trust is a bank, I think is a mistake."

But deals in the past that have tried to marry banks with brokerages and insurance companies with investment banks have either soured or haven't panned out.

BankAmerica Corp. acquired Charles Schwab & Co. in 1983, but when the San Francisco-based banking company ran into trouble, it fired hundreds of Schwab employees, and finally sold the discount brokerage back to Schwab.

Prudential Insurance bought Bache Group Inc. in 1981 and invested more than $1 billion in the company, only to see small returns.

American Express Co.'s acquisition of Shearson Lehman Bros. didn't work either, and contributed to the departure of James Robinson, American Express' chairman.

"Integrating the culture of an investment bank and brokerage firm with a bank is not an easy task," Olson said. "A lot of folks have failed to do it successfully."

Daniel Theriault, an analyst at Baltimore-based T. Rowe Price Associates Inc., agreed that marrying financial companies can be difficult: "That is the major risks in these type of transactions."

But Theriault and other analysts praised the merger.

"I think it is a good deal," said Steven Eisman, an analyst with New York-based Oppenheimer & Co. "Both sides together can be better than the sum of their parts."

"It is a good complementary fit," Theriault added. "Bankers Trust, they really are an investment bank. It is a heck of a lot more of a corporate fit than there would be with a NationsBank or a Bank of America. Bankers Trust has a decent chance of pulling it [the merger] off."

Most big mergers involve large layoffs, but Krongard said as few as 100 people could be laid off.

"One of the extraordinary things about this is there is so little redundancy and so little overlap it is almost virtually to the point where you would say none," Krongard said.

Newman said Alex. Brown would be virtually untouched.

"This is very much of an electronic business and also Bankers Trust is very comfortable operating with multiple locations; we are just used to it."

He also said the Alex. Brown name will continue to be used.

Although analysts applauded the deal, some in the Baltimore business community expressed regret.

'Some sadness'

"Certainly there was some sadness, in part for the community of Baltimore and in part for an almost 200-year-old name that's going to be changed in a material way," said T. Rowe Price Managing Director James S. Riepe. "But also, I understood the business side of the decision."

Industry experts believe the merger will spark other deals.

"I think what this represents is a beginning of major consolidation between the securities industry and the banking industry," said Gilbert Schwartz, a banking attorney with Schwartz & Ballen, a Washington-based law firm.

Stocks of brokerage and mutual fund companies jumped yesterday as if more deals were in the works.

Alex. Brown's stock shot up $10 yesterday on the news of its merger to close at $63.125 a share, while shares of Bankers Trust sank by $2.75 a share to close at $79.50.

Baltimore's Legg Mason Inc.'s stock jumped $4 a share to close at $49, and shares of T. Rowe Price were up $1.875 a share to close at $41.875.

The companies must clear several hurdles before they merge, including receiving approval from the Federal Reserve Board.

The Glass-Steagall Act has barred banks from underwriting corporate securities. It is still enforced today, but Congress has watered it down so that banks may acquire brokerage firms and house them in a separate subsidiary.

The law, however, puts stiff limits on how large these subsidiaries can grow in terms of total revenues.

But the companies should have little problem winning the Fed's approval, experts said.

The deal has already won the backing of Rep. Jim Leach, chairman of the House Banking Committee. "It's a very natural fit and sensible," the Republican from Iowa said on CNBC, the cable financial network.

Pub Date: 4/08/97

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