Brown deal start of a trend? Local peer firms deny interest in pairings; investors betting on it


Alex. Brown Inc. may have swung open the door for Baltimore financial services firms to pair up with national suitors, but don't look for the city's other major, locally based investment houses to merge anytime soon.

Legg Mason Inc., T. Rowe Price Associates Inc. and Ferris, Baker Watts Inc. staunchly maintain they have no plans for corporate marriages, and feel no pressure to follow Alex. Brown's lead.

"We've spent 30 years getting Legg Mason to the point it is today, and it is not our objective now to be acquired by somebody," said Raymond A. "Chip" Mason, chairman and chief executive. "There's nothing going on that causes us to revamp our thinking. We don't feel any pressure at all to merge. In our primary business, size is not a big issue."

But in the wake of Alex. Brown's $1.7 billion deal to link with Bankers Trust New York Corp., Wall Street expects that other specialty brokerages will be snapped up by commercial banks and larger investment houses in an attempt to keep pace.

In trading Monday, investors sent shares of A. G. Edwards; Bear, Stearns Cos.; Donaldson, Lufkin & Jenrette Inc.; Lehman Brothers Holdings Inc.; PaineWebber Corp.; and Raymond James Financial Inc. up more than 5 percent, on speculation that other acquisitions could and would occur.

Legg Mason's shares rose 9 percent at the start of the week and T. Rowe Price's stock price increased as well, although both companies' per share value slid somewhat yesterday, along with several other investment firms. Ferris, Baker's stock is employee-owned.

"Given our strategy, we don't have the same demands that Alex. Brown had to be successful," said James S. Riepe, a T. Rowe Price managing director and one of four members of the 60-year-old company's management team.

"Bankers Trust is filling some very important needs for Alex. Brown, and in our case, I don't see that we have the same needs," Riepe added. "Even at a high price, we wouldn't feel pressured or inclined to merge."

Differences abound between Alex. Brown and the remaining independent financial services firms headquartered here, executives and analysts say, making it unlikely that they would take a similar route.

"Being a regional firm, we're not in the scope of the major banks," said George M. Ferris, chairman and chief executive of Ferris, Baker Watts. "And that makes a significant difference. We wouldn't impact anyone's earnings to the extent that an Alex. Brown can. Besides, we have no interest in selling out. Everyone here believes in what we're doing, and in the progress we're making."

T. Rowe Price, in particular, with its focus on mutual funds rather than securities, is in an entirely different business than Alex. Brown, one not as reliant on capital, Riepe said.

But forces beyond the control of the three companies could intervene. They apparently did with Alex. Brown.

For instance, when Alex. Brown Chairman and Chief Executive A. B. Krongard was asked two years ago what advantages he would see in a possible business combination between Alex. Brown and a larger company, he paused.

"None that I can think of," Krongard said. "If it ain't broke, don't fix it."

However, he qualified his comments by saying: "If someone dropped a ridiculous price on the table, you'd have to look at it."

For Alex. Brown, that "ridiculous" price turned out to be an attractive 2.6 times its book value. Typically, profitable investment firms sell for about two times their book value, defined as assets minus liabilities.

Alex. Brown also certainly was impacted by changes in federal regulations that for six decades have prohibited commercial banks from owning securities firms. Late last year, for instance, the Federal Reserve further eroded the tenets of the Glass-Steagall Act of 1933, when it raised the ceiling on the amount of revenue banks' securities divisions could generate from underwriting stock offerings to 25 percent, from 10 percent.

Bankers Trust Chairman Frank Newman said earlier this week that the virtual elimination of Glass-Steagall played a large role in its decision to target Alex. Brown.

Conversely, Alex. Brown is expected with Bankers Trust to be able to offer institutional and corporate clients a broad range of debt and equity financing services.

By comparison, Legg Mason would fetch $780 million at 2.6 times its book value. Ferris, Baker Watts would garner more than $148 million, based on its capital current level. T. Rowe Price could get $900 million in a sale at that level, although the nation's third largest no-load mutual fund company's stock already trades at more than six times its current book value.

Of course, all three locally based investment firms say they would entertain lucrative offers, if they also made sense from a business vantage point.

"We'd certainly have to give some thought to it, but I'd still say it's unlikely," said Ferris, whose firm dates to 1900. "No deal would look attractive to us unless it significantly improved our return on equity for our shareholders."

"Between Alex. Brown and Bankers Trust, there are tremendous gaps that each other fill," said David B. Hilder, a Morgan Stanley Group Inc. analyst. "The same logic can't be applied to T. Rowe Price, however. But I can see how theirs would be an attractive business for a commercial bank to own.

"Whether or not a buyer could make a compelling argument to T. Rowe Price is another matter. That I wouldn't be able to predict."

The inability to predict the future -- or even draw reasonable conclusions about it -- is rising exponentially, causing many analysts to speculate that even those firms adamantly opposed to merging may be forced to do so in the months and years to come.

"Any firm could be acquired now," said Michael Flanagan, head of Financial Service Analytics, of Philadelphia. "Many firms are resolute in their desire to remain independent -- Alex. Brown was one of them."

Pub Date: 4/09/97

Copyright © 2019, The Baltimore Sun, a Baltimore Sun Media Group publication | Place an Ad