Moving to build its capital markets prowess, KeyCorp on Monday announced plans to buy McDonald & Co., a Cleveland-based securities firm, for $653 million in stock.

The deal, which is expected to close in the fourth quarter, would bring KeyCorp the ability to underwrite equities, as well as a substantial retail brokerage and private-client operation.

Executives at the Cleveland-based banking company said they are looking for these businesses to account for one-fifth of KeyCorp's revenues in the near future.

"We will begin with 10% to 12% of our earnings coming from capital markets from day one of our merger," said Robert W. Gillespie, KeyCorp's chairman and chief executive.

"We are planning to grow that to 20% of our revenues by the end of the year 2000."

KeyCorp becomes the latest in a string of banking companies to snap up securities firms in recent months. After the Federal Reserve Board loosened restrictions on underwriting activities last year, banks ranging from Bankers Trust Co. in New York to Fifth Third Bancorp in Cincinnati announced plans to buy brokerage firms in a bid to build fee income.

But Mr. Gillespie said KeyCorp's transaction is different because of the close relationship his company has enjoyed with the neighboring McDonald. Some acquisitions, such as BankBoston Corp.'s recent deal for San Francisco's Robertson Stephens, pair banks with brokerage firms clear across the country.

"I would not be as excited as I am today if we were trying to pull off a merger with a company that was 2,000 miles away, where the individuals didn't already know each other and respect each other," he said.

R. Jay Tejera, a managing director of research at Dain Rauscher, agreed that McDonald's Cleveland location does help to distinguish the KeyCorp transaction.

"There are more back-office synergies than we typically see in these deals," he said.

KeyCorp estimated that on a pro forma basis, annual revenues from capital markets for a combined Key-McDonald would be just shy of $1 billion. But some analysts questioned whether the bank could hit its target of reaping 20% of revenues from capital markets in just two years.

"They could make it if they are able to successfully cross-sell to the corporate customer base and access the Rocky Mountain region that McDonald doesn't really have access to without KeyCorp," said Diana Yates of A.G. Edwards & Sons.

But, she added, "It won't be an overnight success."

KeyCorp, which has $73 billion of assets, will pay $653 million in new stock to McDonald shareholders. It will also establish a $68 million employee retention pool, to be paid out over the next three years, to roughly 200 of McDonald's top employees.

KeyCorp shares closed Monday at $34.75, down $1.125.

The merged entity would have about 750 securities professionals, bank executives said. Mr. Gillespie said he hoped to increase the professional staff to about 1,000 over the next couple of years.

"I see particular opportunities for us in capital markets in the Rockies and Pacific Northwest," Mr. Gillespie said.

Mr. Tejera said to compete in those markets, Key may choose to do another brokerage deal.

"They could recruit people out there, but increasingly in this business buy is more cost-effective than build," he said.

"There are a number of smaller houses out there and Key has not been in those markets forever, " Mr. Tejera added.

Upon completion of the merger, Key Capital Markets would be split into two separate units. The section 20 subsidiary would be called McDonald-Key Investments, and include equity and debt underwriting, sales and trading, public finance, mezzanine finance, and the bank's private equity fund.

The subsidiary would be led by McDonald's chief executive, William B. Summers Jr., who would become the section 20's chairman and CEO. McDonald's president and chief operating officer, Robert T. Clutterbuck, would continue to fill those roles at the merged entity.

The second major business group in Key Capital Markets would include asset management, mutual funds, institutional asset services, wealth management, and insurance. R.B. (Yank) Heisler Jr., a KeyCorp group executive vice president, would lead this unit.

Mr. Summers would join Mr. Heisler as a member of Key's executive management committee and report to Henry L. Meyer 3d, KeyCorp's president and chief operating officer.

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