Kidder's muni group awaits fallout from sale; ax may swing as early as today.

Kidden Peabody & Co.'s public finance employees are bracing for pink slips following PaineWebber Group Inc.'s agreement to buy the struggling firm.

Aside from Kidder's 1,150 highly regarded retail brokers, the outlook appears grim for many of the firm's other 3,850 employees. With the volume of tax-exempt debt issuance down 40% this year from last, the prospects seem particularly gloomy for Kidder's public finance department.

"I don't think the company itself has fully decided, but with volume down so much, [public finance] is not likely to be an area [PaineWebber] will add significantly to," said Joan Solotar, an equity analyst at Donaldson, Lufkin, & Jenrette Securities Corp. "They'll have some hiring on a selective basis, but I think it's unlikely the whole group will be absorbed."

A source in Kidder's municipal bond department said that some indication from PaineWebber regarding the extent of the layoffs is expected shortly, even as early as today.

With job cuts expected throughout the tax-exempt industry, the prospects are uncertain for Kidder's public finance employees who lose their jobs.

"We're talking about people who have conceptual skills so they'll probably find something, but the majority of those people are not going to be employed in pubic finance," said the managing director of a top Wall Street firm. "We're downsizing, too. Where are they going to go for public finance [jobs]?"

Meanwhile, issuers who have picked Kidder to manage negotiated bond deals are looking for replacements as a result of the acquisition agreement.

The New York State Environmental Facilities Corp. selected Kidder as senior manager on a $100 million revolving fund transaction for New York City's water authority. The deal is scheduled to proceed by the end of the year, but officials with the environmental corporation now say that they will have to select a new senior manager.

David Liebschutz, the corporation's director of marketing and special projects, said it will not appoint PaineWebber. Instead, the corporation will turn to one of several firms already selected for its revolving fund syndicate. PaineWebber does not belong to the corporation's underwriting group.

The New York State Urban Development Corp. also recently choose Kidder as one of three senior managers for a possible refunding of $700 million in corporation general purpose bonds.

Development corporation officials say they are examining the matter, but have yet to determine what action to take.

In anticipation of layoffs, sources close to the negotiations say General Electric, Kidder's parent company, has agreed to pay severance to any Kidder or PaineWebber employees released as a result of the acquisition. Although Wall Street sources expect some cuts at PaineWebber, they say Kidder employees will take the biggest hit.

AGE spokesman confirmed that a severance package will be made available, but declined to elaborate.

Terry Atkinson, manager of PaineWebber's municipal securities group, did not return repeated phone calls. PaineWebber spokespersons declined to comment on the matter.

PaineWebber public finance executives have already met with several Kidder public finance officials, Wall Street sources say. The sources say several of Kidder's best investment banking operations, such as its Philadelphia offic, could be retained by PaineWebber.

It is unclear, however, if other top bankers at Kidder will join PaineWebber's public finance team.

One notable question mark is Kidder banker and senior vice president David I. Weprin, the son of former New York State Assembly Speaker Saul Weprin, who died this year. David Weptin, who has worked on New York State deals for Kidder, could not be reached for comment.

At the moment, PaineWebber executives are attempting to determine where the two firms overlap.

"I think unfortunately there,s a lot of duplication," said one municipal market player. "PaineWebber will need some extra people to augment the staff they had, but not very many. My sense is that it's not a good fit. It's not like Salomon Brothers buying a little retail firm.

One executive in Kidder's public finance department said that PaineWebbet will make across-the-board cuts wherever overlap between the two firms exist, and that Kidder employees will take virtually all the hits.

But other market sources were skeptical that such a draconian scenario would emerge, saying thore are some areas-where Kidders' expertise is on par with, if not superior to PaineWebber's.

"I would be most surprised if PaineWebber did that," one veteran municipal market executive said, referring to across-tie-board cuts at Kidder. "I think that would be imprudent on Paine Webber's part."

The executive, who asked not to be identified, said that Kidder's zero coupon and syndication desks were among the "specialty" areas where Painebber might consider keeping Kidder personnel.

Another source noted that Kidder's institutional fixed-income trading presence is "stronger than PaineWebber's" and that "PaineWebber could improve itself by absorbing a lot of [Kidder's] institutional fixed-income people."

Kidder's commercial and residential business, equity research, high yield, and corporate bond sales and trading departments were also mentioned by industry observers as likely candidates for a reprieve.

"We're going to be anxious to see what business PaineWebber selects from Kidder Peabody," said Haig Nargesian, a senior analyst at Moody's Investors Service. "Clearly the most important business they're picking up are retail brokers, [but] they have mentioned a number of other businesses that appear to complement" areas PaineWebber already has a presence in.

In part because of the uncertainty surrounding how PaineWebber will incorporate Kidder's personnel and assets into its existing businesses, Moody's on Monday placed PaineWebber's A3 senior debt and Baal subordinated debt ratings under review for possible downgrade.

Standard & Poor's Corp. affirmed the firm's BBB+ senior unsecured, BBB subordinated debt, and A-2 commercial paper ratings.

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