With the Federal Reserve poised to boost limits on the amount of revenue banking companies can reap from securities underwriting, banks are once again emerging as potential acquirers of investment banks.
Oppenheimer & Co. last week raised its ratings on two brokerage firms, Lehman Brothers and Bear, Stearns & Co., claiming that both companies represent "compelling buyout candidates" for commercial banks.
And Goldman, Sachs & Co. investment banker Milton Berlinski predicted commercial banks would begin buying brokerage firms six to 24 months after any official policy change by the Federal Reserve.
"Raising the limit gives banks greater flexibility," said Mr. Berlinski, a senior vice president in Goldman's financial institutions mergers and acquisitions group. "It would be prudent for banks to relook at their brokerage-investment banking strategies to determine whether it makes more sense to buy than to build."
The Fed is seeking comment with September deadlines on various proposals to lift restrictions on section 20 subsidiaries, as the securities underwriting units of banking companies are known. The most profound change would be to allow section 20s to generate as much as 25% of their revenue from underwriting stocks and bonds, versus 10% now.
Many of the largest U.S. banks have been building up their investment banking abilities over the past decade, including Chase Manhattan Corp., Citicorp, and Bankers Trust New York Corp. Lighter restraints on investment banking revenues would give these banks the ability to accelerate the growth of that business - possibly through acquisitions.
"With this barrier removed, those banks will be reevaluating the build versus buy decision," said Robert Smith, the co-head of the financial institutions investment banking group at Salomon Brothers Inc.
Mr. Berlinski cited several commercial banks as possible acquirers of investment banks, including NationsBank Corp., First Union Corp., and BankAmerica Corp.
Experts said that raising the revenue limit makes all investment banks potential targets. But Oppenheimer analyst Steve Eisman singled out Lehman and Bear Stearns because of their relatively low price-to-book ratios.
Still, few commercial banks have the capital needed to acquire a firm the size of Lehman or Bear Stearns, which would fetch at least two times their book value, or approximately more than $4 billion each. And many commercial banks have made serious commitments to building securities operations rather than buying them.
"The number of banks who are actually interested in the investment banking business in a global sense is limited," said Gerard Smith, a managing director in the financial institutions group at Union Bank of Switzerland.
Some said well-capitalized European banks, such as Deutsche Bank, may prove to be the most likely buyers. These institutions have already dealt with some of the cultural issues that afflict commercial banks that try to compete on Wall Street.
"Most of the demand will be from European banks that are already in the institutional business from Europe," said Goldman partner Christopher J. Flowers.
Others pointed out that investment banking is an inherently volatile business from which commercial banks, both foreign and domestic, will stay away.
"The fundamental investment banking business isn't real good," UBS' Mr. Smith said, citing the intense competition and declining margins. "Is this the kind of business that should attract new entrants?"
