Escalating competition from commercial banks is one of the major factors driving Dean Witter, Discover & Co. and Morgan Stanley & Co. into each other's arms.
So wrote Dean Witter's chairman and chief executive officer Philip J. Purcell in the company's recent annual report. With officials at both firms honoring a Securities and Exchange Commission-enforced quiet period on their pending merger, Mr. Purcell's letter to shareholders offered a rare glimpse into the transaction, which is expected to be approved May 28.
Changes in section 20 rules governing the percentage of capital commercial banks can use for securities underwriting "will encourage commercial banks to expand their securities business and perhaps undertake new acquisitions," Mr. Purcell wrote.
"This is a trend that will continue, and the implications are plain: more intense competition and further consolidation in financial services."
He then goes on to mention reports of merger talks between Citicorp and American Express as another sign of "dramatic changes in the competitive landscape."
The Morgan Stanley-Dean Witter merger is expected to marry the former's expertise in mergers and acquisitions, global underwriting, and asset management with the latter's strong retail brokerage and credit card businesses.
Some have termed the merger "white shoe meets white sock," from Morgan's top-end approach and Dean Witter's mainstream appeal. Dean Witter has likened the deal to "merging with the Chicago Bulls."
If that's the case, they could get even stronger.
In his letter to shareholders, Mr. Purcell said regulatory changes would also bolster his company's Discover and NOVUS credit card units. These units, under the Competitive Banking Equality Banking Act of 1987, had growth and asset transfer restricted by their brokerage ownership. A change in that law means the companies can operate "without the distraction of so many frivolous federal lawsuits," he wrote.
The combined firm-Morgan Stanley, Dean Witter, & Discover, or "Morgan Witter," as many are already calling it-may stand apart from other major corporate mergers of recent years: Without major overlap between the two firms, the combined company is not expected to be significantly streamlined.
"It's not a cost-cutting merger," said Raphael Soifer, analyst at Brown Brothers, Harriman & Co., New York. "Estimates of savings are about 2%. There are not that many overlaps."
Some have suggested that the two companies would remain as separate as possible-thus avoiding a culture clash. But "that might be overstatement," Mr. Soifer said. Of cultural differences, he added: "There are none at the outset. They tend to show up over time. A bear market might make them worse. But if the market is kind, they'll have a chance" to meld.
Some have cited declines in the companies' stock prices as signs of investor unease about big financial services mergers. Dean Witter's stock is trading in the mid-30s, down from a 52-week high of $44 a share on Feb. 19, two weeks after the merger was announced. The decline has wiped out the premium Morgan Stanley shareholders would have received for the deal.
Meanwhile, Morgan's stock is trading near $58 per share, down from its 52-week high of $72.125, also set Feb. 19.
Not everyone is convinced that the declining stock prices mean Wall Street has soured on financial services mergers.
"Most stocks in the industry are down. Market corrections are not kind to brokerage stocks, nor should they be," said Mr. Soifer.
And analyst Sallie L. Krawcheck at Sanford C. Bernstein & Co., touts only two brokerage stocks: Dean Witter and Morgan Stanley.
Indeed, Dean Witter reported record earnings in the first quarter, when its net income was $276.3 million, a 12% gain on the previous year.
