Lifted by a bull market, earnings growth, and a series of takeovers, brokerage firms have become a hot sector.
In particular, a rash of buyouts by commercial banks, inevitably sparking rumors of more deals, has put brokerages on the radar screen for investors looking to capitalize on consolidation.
Both public and private companies have been targets of takeovers. Recently, Dillon, Read & Co. agreed to be bought by Swiss Bank Corp., Robertson Stephens & Co. struck a takeover deal with BankAmerica Corp., Montgomery Securities said it would sell to NationsBank Corp., Alex. Brown & Sons was purchased by Bankers Trust Co., and Oppenheimer & Co. went to CIBC Wood Gundy.
At the same time, the interindustry marriage of Morgan Stanley and Dean Witter, Discover & Co. added fuel to the fire of takeover speculation.
Lehman Brothers, Salomon Brothers Inc., and Donaldson Lufkin & Jenrette Securities Corp. have been beneficiaries of takeover rumors, with their stock prices surging as investors rushed to jump on the bandwagons. Smaller firms have not been ignored. Shares of San Francisco's Hambrecht & Quist jumped earlier this summer.
Even discount brokerages are getting into the action, with Quick & Reilly rumored to be for sale and in talks with big banks. Its stock shot up 8% on Wednesday.
"The main reason the sector is doing well is the continuing bull market," said Raphael Soifer, the veteran analyst at Brown Brothers Harriman & Co. "Almost every firm we follow has reported better-than- expected earnings."
He noted that strong stock and bond markets have been fueling equity and bond underwriting volume, gains on trading and the sale of equity investments, and increasing merger and acquisition activity. "The fundamental background is quite positive," he said.
Mr. Soifer said analysts have generally underestimated earnings on the firms that are so dependent on stock market success, but "the longer the bull continues, the more they surprise to the upside."
But Mr. Soifer said many of the takeover rumors are just that. He noted that only the smaller firms have actually found buyers, if the merger between Morgan Stanley and Dean Witter is excluded.
"That's not an accident," he said. "A large bank can afford to do a small deal without diluting shareholder value, but the price required to buy a large firm in this market is all but prohibitive."
Still, banks want a quick way into the lucrative securities underwriting business, and buying brokerages seems like a trend with no end in sight.
