Wall St. giants plan to merge Morgan Stanley, Dean Witter forming largest securities firm

They'll eclipse Merrill Lynch

Similar deals rumored

shares in Alex. Brown, Legg Mason rise

February 06, 1997|By Sean Somerville | Sean Somerville,SUN STAFF

Dean Witter, Discover & Co. and Morgan Stanley Group Inc. yesterday announced a $10 billion merger that will create the world's largest securities firm and likely spark consolidation elsewhere on Wall Street.

The stock swap will combine Dean Witter's vast retail brokerage and Morgan Stanley's blue-chip investment bank.

The combination will create a $23 billion company that manages $270 billion -- the largest amount managed by a securities firm, the two companies said.

"The combination of Morgan Stanley and Dean Witter, Discover may be as close to an ideal merger as there is," said Philip J. Purcell, Dean Witter's chairman and chief executive officer. "It is based on powerful franchises, high profitability and opportunities for accelerated growth."

Investors apparently agreed. Morgan Stanley shares went up $7.875 to close at $65.25. Dean Witter went up $2, to close at $40.625.

With analysts predicting a wave of similar mergers, shares of competitors jumped, even as the Dow Jones industrial average fell more than 86 points. Shares of two high-profile Baltimore-based brokerages had big gains.

Alex. Brown Inc.'s shares jumped $2.125 to $54.625 and Legg Mason Inc.'s shares increased $1.75 to close at $47.375.

A. B. "Buzzy" Krongard, Alex. Brown's chairman and chief executive, wouldn't comment on the effect of the merger on the brokerage. He also said he didn't know whether the merger of Morgan Stanley and Dean Witter would be the first of many.

"They've been predicting that for a long time," he said.

Under the terms of an agreement approved Tuesday by their boards, each Morgan Stanley common share will be exchanged for 1.65 Dean Witter common shares.

The new company will be named Morgan Stanley, Dean Witter, Discover & Co. The merger will combine "Morgan Stanley's strengths in investment banking and institutional sales and trading with Dean Witter's in retail distribution and asset gathering," Purcell said.

The companies did not say if jobs would be cut, but noted that there was little overlap between the two businesses.

Dean Witter offers brokerage, asset management and credit services. The company has 361 branches nationwide with about 9,000 brokers, the third largest sales force.

Dean Witter employs about 80 brokers in Timonium and Baltimore offices. With its flagship Discover Card, Dean Witter is the country's largest credit card issuer with 39 million accounts.

Morgan Stanley, formed in 1935, has offices in 19 countries and is a leading investment bank, underwriting securities for corporations and governments and providing advice on mergers, acquisitions and other transactions. The company does not have operations in Baltimore.

After the transaction, which is expected to be completed in the middle of the year, Dean Witter's Purcell will serve as chairman and CEO of the new company.

John J. Mack, president of Morgan Stanley, will be president and chief operating officer. Richard B. Fisher, chairman of Morgan Stanley, will be chairman of the executive committee of the new company's board.

"I think this is a textbook example of synergy," said Michael A. Flanagan, a brokerage analyst with Philadelphia-based Financial Service Analytics Inc. "In this case, one plus one will truly equal three.

"Morgan Stanley is a top-ranked equity underwriter, and Dean Witter's retail sales force can only enhance that No. 1 position. And Dean Witter's 9,000 brokers can now provide their retail clients with underwritings managed by Morgan Stanley."

Put more simply, Morgan Stanley gets a bigger distribution network, and Dean Witter gets more products to sell, according to Dan Theriault, a T. Rowe Price analyst.

The new company would eclipse Merrill Lynch & Co. in size. Merrill led all securities firms last year with $1.6 billion in net income.

Morgan Stanley had $1 billion and Dean Witter had $951 million. The new firm would have a market capitalization of $23 billion compared to Merrill's $14.1 billion.

Until now, Morgan could not compete with Merrill Lynch's retail network. "Merrill doesn't have anything over them anymore," Theriault said.

Analysts said the deal would merge blue-collar Dean Witter with the blue-blood Morgan Stanley. Morgan Stanley was formed in the 1935 breakup of the J. P. Morgan empire, while Dean Witter was once a subsidiary of Sears.

"Morgan Stanley is first class, institutional and global," Flanagan said. "Dean Witter is retail, coach class and primarily domestic. There's clear potential for a cultural clash between the two firms given their disparate corporate cultures."

Such combinations may become more common, analysts said.

"Before today, there were a lot of people out there who said we can go it alone and compete with Merrill," Theriault said. "After today, they are going to rethink that strategy."

Yesterday's deal could spark two types of mergers -- the first between institutional brokerage houses and retail partners, and the second between large banks and partners with retail and institutional networks, he said.

"It certainly puts the quality firms like Alex. Brown, Legg Mason and T. Rowe Price on the radar screen," Flanagan said.

"They are very attractive firms, but I doubt any of the three would sell or merge unless there were compelling synergies involved."

Pub Date: 2/06/97

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