About once a week, shares of a securities firm such as Donaldson, Lufkin & Jenrette Inc. or Lehman Brothers jump as investors speculate on the next bank-brokerage merger.
But such anticipation could well be misplaced. Yes, banks are buying securities firms, but so far they have shown a clear preference for privately held companies.
Last week's announcement of BankAmerica Corp.'s planned $540 million purchase of privately owned Robertson, Stephens & Co. came only a few weeks after Swiss Bank Corp.'s $600 million deal for the Dillon, Read & Co. partnership.
Meanwhile, privately held Oppenheimer & Co. is rumored to be near a deal with Canadian Imperial Bank of Commerce, and Montgomery Securities is said to be talking with a European bank.
The deals and speculation surrounding banks and private securities firms is no accident. Although they may not be as well-known as Lehman Brothers or Alex. Brown & Sons Inc., private brokerages offer numerous advantages for banks, investment bankers say.
They say private deals have fewer regulatory hurdles. And even more important, they add, these purchases can be designed to ensure that a firm's top talent sticks around.
Also, word of impending deals with private firms is less likely to leak out prematurely, as news of the deal between Bankers Trust and Alex. Brown evidently did when options volume for Alex. Brown soared in the days leading up to the merger announcement.
For all these reasons, private firms like Brown Brothers, Harriman & Co. or Cowen & Co. in New York, Roney & Co. in Detroit, and the Ohio Co. in Columbus may find themselves among the most sought-after companies in today's hot market for securities firms.
But Craig Wasserman, partner in the Wachtell, Lipton, Rosen & Katz law firm, says thus far size has been more important to banks than whether the firm is public or private. "To date banks have primarily been interested in smaller, regional firms rather than the larger ones on Wall Street," he said.
Robert A. Baer, head of the financial institutions group at Bear, Stearns & Co., says private deals are easier to get approved by the Securities and Exchange Commission. "There's a certain hassle factor you avoid," he said, in filing only one proxy statement and calling upon only one group of shareholders to approve the deal.
Deals for private firms can also be structured more flexibly than purchases of publicly traded brokerages, said William M. Parent, director of mergers and acquisitions at BankBoston Corp.
The cost of a private deal can be deferred over time if the target's partners permit, he said. And payment can be delayed or accelerated depending on how the brokerage's traders and underwriters perform once they are part of the bank. In a public deal, Mr. Parent observed, "you've got to pay the price all at once."
The fact that private brokerages don't have publicly quoted stock prices or disclose revenues or losses serves another important purpose for banks making acquisitions: After the deal is done, it is harder for shareholders to determine whether their bank overpaid.
And banks have been paying some rich prices. Swiss Bank is paying three times book for Dillon Read, while BankAmerica will pay five times Robertson Stephens' book value.
To be sure, book values are an imperfect gauge of worth, particularly if a company earns a lot of money from asset management, but they do indicate the lofty prices banks will pay for a desired partner.
"The prices banks are willing to pay are driving guys who are otherwise impervious to selling to sell," said Richard J. Barrett, managing director at UBS Securities.
"These firms are under no pressure from shareholders, but they're run by people who in their hearts are traders who realize, 'Hey, I'll sell,' at the prices being offered."
The fact that private securities firms are often owned by the traders and financiers who founded them is appealing to banks, too. Every bank executive worries that star traders at a brokerage will flee if their firm is sold.
An investment banker close to the deal said it was "clearly a benefit" for BankAmerica to pursue Robertson Stephens, where the people who run the business own the business.
By contrast, he said, "If you look at the Bankers Trust-Alex. Brown deal, 90% of the money Bankers paid went to outside shareholders who had nothing to do with producing Alex. Brown revenues."