A titan grows in Gotham Acquisition: In acquiring Alex. Brown, Bankers Trust is gaining a quality subsidiary and positioning itself to offer a wider array of financial products.

April 13, 1997|By Kevin L. McQuaid | Kevin L. McQuaid,SUN STAFF

For Bankers Trust New York Corp., acquiring venerable Alex. Brown Inc. for $1.7 billion will fill a void that has stanched the 94-year-old company's quest to become a full-service global banking conglomerate.

But buying the nation's oldest investment banking firm also will produce intangible -- and for Bankers Trust, perhaps much more important -- benefits, according to industry analysts and company executives.

With Alex. Brown, Bankers Trust takes another key stride in a long march toward regaining trust in the eyes of clients -- potential and existing -- and Wall Street, credibility erased by a scandal that tarnished its reputation four years ago.

In Alex. Brown, the New York bank gains a firm with a sterling history. That Alex. Brown has expertise in stock offerings, allowing Bankers Trust to offer clients a wider array of financial products, makes the deal watertight, analysts contend.

The notion that folding Alex. Brown into Bankers Trust will generate more than equity underwriting capabilities hasn't been lost on Frank N. Newman, Bankers Trust's chairman and chief executive, either.

"From our perspective, the strategic fit of the two companies was critical, and the quality of Alex. Brown was just as critical," Newman, a former Bank of America chief financial officer who came to Bankers Trust in September 1995, said in an interview last week.

Newman has reasons to be concerned about Bankers Trust's image. In fact, in the 19 months since Newman joined Bankers Trust, the nation's seventh largest banking company with more than $120 billion in assets, raising the company's image has consumed him.

It's little wonder. Beginning in 1993, Bankers Trust became embroiled in a scandal over "derivatives," financial contracts whose value depends on underlying assets such as stock or bonds and whose gains or losses are usually tied to interest rate activity.

Before the crisis subsided last year, Bankers Trust would settle high-profile lawsuits with Procter & Gamble Co. and others over charges that it misled corporate clients, absorb more than $150 million in derivative losses, pay $10 million in fines to the federal government and dismiss several executives.

In addition, Bankers Trust agreed to provide clients with more information about their investments, curb the more exotic, highly leveraged aspects of its derivatives business and adopt

changes presented by an independent counsel set up by the Securities and Exchange Commission and co-chaired by Venable, Baetjer & Howard Chairman Benjamin R. Civiletti, a former U.S. attorney general. The report had criticized Bankers Trust for "deficiencies of a systematic nature," including weak internal controls and poor management that exacerbated the crisis.

Newman represents a significant part of the damage control, having joined Bankers Trust from his post as deputy secretary and chief operating officer of the U.S. Treasury.

As part of the plan to repair the bank's reputation, Newman has embarked on a full-scale campaign to transform Bankers Trust from a company perceived as a daredevil risk-taker driven by transactions and fees to one that emphasizes business relationships.

Dovetailing with that plan, Newman is working to broaden Bankers Trust's capabilities in order to offer clients -- especially emerging and growth-oriented companies not in the Fortune 100 -- investment banking, which he sees as a key vehicle for growth in the bank's future.

The multifaceted approach to solving Bankers Trust's problems appears to have succeeded thus far.

"It's still a work in progress, but they've made a lot of strides since Newman took over," said Raphael Soifer, a banking analyst with Brown Brothers Harriman & Co. in New York.

"The damage has been done. But I think the derivatives problems are entirely behind them, and they've settled the lawsuits, addressed the regulatory issues and reputational issues."

"They are devoted to the highest principles of business conduct," said A. B. "Buzzy" Krongard, Alex. Brown's chairman and chief executive. "We did considerable due diligence. We weren't going to marry up with someone unless we got good vibes."

The proof of Bankers Trust's turnaround can also be seen in its financial performance. In 1996, the company posted net income of $612 million, nearly tripling its results from a year ago. At the same time, revenues totaled $4.2 billion, the second-highest mark in its history, according to its most recent annual report.

And Bankers Trust's 13 percent return on equity represented a substantial increase from 1995, when its return on equity was just 4 percent.

"In the late 1980s, what drove their earnings were highly leveraged deals," said Stephen Biggar, an analyst with the S&P Equity Group, in New York. "For the past couple of years, though, their emphasis has been on more stable earnings drivers."

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