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.

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