In the ‘be careful what you wish for because you just might get it’ category, first prize goes to Alex Brown & Sons’ chief executive AB ‘Buzzy’ Krongard. Slightly over two years ago, Krongard said the chances of his beloved brokerage company being acquired were about the same as his dating Bo Derek.
Well, it’s time for Krongard to spring for a corsage and a box of Godivas because Bo’s in town and she’s shopping for a wedding dress. On April 7, Bankers Trust dug deep and shelled out $1.7 bn for the 200-year-old Baltimore-based brokerage. Brown’s stock spiraled $10 to $63 1Ú8 on word of the deal on the same day (from a low of $27 in January 1996) while Bankers Trust’s stock closed at $79.50, down $2.50 from the previous day’s trading.
While the merger scored a perfect ten with Brown’s shareholders, who profited handsomely, it didn’t sit well with some financial regulators. The Philadelphia Stock Exchange, where both the company’s stock and equity options are traded, says it is conducting a ‘routine’ inquiry into the unusual trading activity on the days immediately preceding the merger. Investigators say that heavy purchases of call options on the company – meaning buyers thought the stock would skyrocket and soon – were at abnormally high levels in early April.
Both parties dismiss talk of foul play, with Bankers Trust chairman Frank Newman insisting there were ‘no allegations of market improprieties’ associated with the deal. Instead, both Newman and Krongard gave great heft to the synergy between the two firms. Like Ms Derek and Krongard, in fact, the merger may truly turn out to be a case of opposites attracting.
‘It’s a great deal for both sides,’ offers Perrin Long, a Darien, Connecticut-based securities analyst. ‘Alex Brown shareholders will benefit from a sharply higher dividend and Bankers Trust gains a wider distribution channel for its mutual funds and other investment products.’
Murky World
Bankers Trust made its $4.2 bn in revenue last year by operating in the murky world of leveraged finance and derivatives. In fact it’s a bank in name only; it has not one ATM machine, nor does it provide a single checking account. Alex Brown doesn’t court Uncle Irv and Aunt Tillie either – it has no local brokerage offices that cater to small investors. Most of the $1 bn it racked up in 1996 came through underwriting healthcare and high technology IPOs.
Synergy aside, the deal rocked the toney boardrooms of Wall Street, with some traders calling it the first big marriage between a Main street brokerage firm and a Wall Street Bank. Much of the talk centered on the domino effect the merger had on brokerage stocks. Hambrecht & Quist (16.8 percent), Piper Jaffrey (12.8 percent), Morgan Keegan (12.6 percent) and Lehman Brothers (11 percent) led a host of brokerages whose stocks posted double digit gains on the day of the announcement. Traders who bought early in the day and sold later that afternoon were able to pocket a quick profit before brokerage stocks lost steam later in the week.
Other industry observers were busy readying funeral pyres for Glass-Steagall, the Depression-era statute that has long placed a barrier between investment banking and commercial banking. Half of the US banking world, it seems (with the exception of the big insurance companies), have spent a good chunk of time chipping away at the law, especially since the Federal Reserve loosened restrictions on bank underwriting practices in 1989.
And there are few doubts among Wall Street cognoscenti that regional brokers will continue to attract the attention of big banks, especially under a new allowance by the Fed last December that enables banks to elevate corporate underwriting from 10 percent to 25 percent of revenues within a bank’s securities unit. Bankers Trust estimates that the combined underwriting clout of the two companies could generate 20 percent of its revenues from such practices. An interesting side note: Newman served as deputy treasury secretary from 1993 to 1995 and was reportedly instrumental in blazing a trail for banks and brokers to merge.
Empty Hourglass
If Glass-Steagall falls by the wayside, most industry observers will wave good-bye with both hands. The hourglass has long been empty for the law and few will be surprised if Congress gets serious about negotiating its way out of Glass-Steagall – this time once and for all.
But the real questions to be answered may be what the deal means to the long-term prospects of the regional brokerage as an institution; and what Bankers Trust plan to do with its prized acquisition.
Regarding the former, Alex Brown may look upon previous graduating classes of bought-out brokers with some sense of trepidation. Kidder-Peabody (bought by General Electric in 1986 and sold in 1994) and Prescott Ball & Turben (bought by Kemper Corp in 1982 and sold in 1984) are at the top of a laundry list of regional wirehouses that were wooed, seduced and discarded all in the time it takes Al Gore to do the Macarena.
The results of these and other similarly ill-fated mergers were thousands of jobs lost, hundreds of millions of dollars squandered, and umpteen share prices shredded. The lesson for would-be buyers was that brokerages were unique institutions, operating in unique markets and under unique regulations. Few who were there can forget the Kidder Peabody trader who, on news of the GE buy-out and the subsequent promotion of a manufacturing VP to the top post at Kidder, commented, ‘Great, just what we need, a good tool and die man.’
That wry comment summed up the feeling of many who believe that only brokers should manage brokers and bankers, while toaster makers and earthquake underwriters should stick to their knitting. The exceptions are few: Philadelphia-based Janney Montgomery Scott, acquired by Penn Mutual Life, has thrived under the autonomous management style of the Philadelphia insurance giant; and Smith-Barney has left well enough alone with Atlanta-based Robinson-Humphrey. But the track record is a checkered one at best for banks running brokerage houses.
Immersion Therapy
And what of this merger? Whether or not Bankers Trust has dark designs on merging Alex Brown into its New York offices remains to be seen. Signs of upheaval in Baltimore, though, are already apparent. Krongard will remain there, but his 200-year-old brokerage firm won’t – as it ‘has ceased to exist’ in his own words. Speculation is that Krongard will fill some board post or set up shop as a vice-chairman in Bankers Trust’s ‘Southern bureau.’
Other repercussions include the immediate elimination of the brokerage’s municipal trading group and the significant reduction of other fixed-income trading operations as the company prepares for immersion into the Bankers Trust corporate culture.
Those moves, according to the Wall Street Journal, will result in the layoff of 80 employees. Brown has about 150 traders and brokers in its bond department. That may not do much for the confidence of Brown staffers, who surely exist even if their current company doesn’t. To plug in the equity traders from Alex Brown, Bankers Trust also lopped 20 stock traders off its own payrolls in early May.
Some say the cuts don’t amount to much. ‘There may be some changes, but a lot of that stuff is overrated,’ says Robert Markman, a principal at Edina, Minnesota-based financial advisory firm Markman Capital Management. ‘Because of the way mutual funds and other investment products today are structured, these mergers tend to have little effect on the day-to-day operations of investment firms.’
But whatever the travails, imagined or otherwise, Bankers Trust just can’t stop smiling over the deal. Alex Brown is a jewel among even top-tier regional brokers and is a highly-regarded underwriter in the lucrative healthcare and high-tech IPO markets (it handled America Online’s IPO, for example). It has 150 investment bankers on staff, employs 95 analysts who track 830 companies, and has about 450 brokers averaging commissions of $800,000 annually, who handle mostly affluent customers with the requisite deep pockets that Bankers Trust is eager to add to its fold.
And, as Alex Brown’s shareholders can attest, they’re now sitting pretty. On Wall Street, as in most endeavors, timing is everything. And make no mistake about it, Krongard timed this deal brilliantly. 1996 was a banner year for Alex Brown, its best ever in fact. It underwrote more stock offerings than any other investment banking firm in the country, according to The Washington Post, raising $6.4 bn through 96 IPOs and another $8.2 bn through secondary stock offerings that already had gone public. Furthermore, Alex Brown held the hand of corporate investors who cabled together $13.3 bn worth of merger activity.
Looking Good
Despite that pedigree, some say Bankers Trust paid too much for Alex Brown. But time may reveal that the price tag would have been cheap at twice the price. For its money, Bankers Trust gets a brand name investment bank with a penchant for stock revenues and a formidable player in the lucrative IPO field. For these reasons, industry observers say, both Alex Brown and Bankers Trust shareholders should rest easy.
‘Alex Brown shareholders are going to get 0.83 shares of Bankers Trust for every share of Alex Brown stock that they own,’ reasons Perrin Long. ‘And Alex Brown pays a dollar a year in dividends, compared to Bankers Trust which pays about $4 a year. I think Alex Brown shareholders gain in that respect and also from the fact that they will be shareholders in one of the largest commecial banks in the industry. Anybody who bought Alex Brown stock when it first came out is looking pretty good right now.’
And Alex Brown? Well, it gets a lot of money and memories. Many industry traditionalists will no doubt be saddened by the demise of the venerable Brown, America’s oldest brokerage, underwriter of the nation’s first railroad, and financier of Baltimore’s first public utility projects. Many of these same observers also feel that Bankers Trust has, in a sense, a unique public trust in seeing that Brown’s customers receive the same personal touch that they grew accustomed to from Wilmington to Washington. But it’s in the bank’s interest as well. If history is any guide, how Banker’s handles its new acquisition may spell the difference between a long and fruitful marriage or just another May to December romance.
