When it comes to commercial banks buying securities firms, 1999 will be a year of fewer-and cheaper-deals, according to analysts.

Capital market gyrations and concerns over year-2000 compliance are expected to reduce the clamoring demand. And the many deals consummated this year have narrowed field of acquisition candidates considerably.

Still, 1999 could produce further convergence between commercial and investment banking, analysts say, because the strategic case for these deals remain strong.

"I would expect to see more efforts in that direction, because there is a perceived need for these types of transactions," said Samuel Hayes 3d, professor of finance and investment banking at Harvard Business School.

"I am not as optimistic about the outcome," Mr. Hayes said. "I think that many of these acquirers are downplaying the culture clash as a barrier."

At least six big banking companies bought securities firms in 1998, and most paid dearly to do so. Mr. Hayes and other industry watchers predict that it will take years for the banks to recoup their investments.

"Most of these deals are going to be dilutive to earnings, because they were done by extrapolating volume for 1997 and 1998," said R. Jay Tejera, managing director of research at Dain Rauscher. "That's not likely to be the case in 1999."

But there is pent-up demand for investment bank acquisitions, Mr. Tejera added. He expects the merger wave to continue next year-though at a slower pace.

"The fact that the Johnson Lane deal was done post-Russia indicates there are still strategic reasons to do these," Mr. Tejera said, referring to Wachovia Corp.'s recent agreement to buy Interstate/Johnson Lane, a regional underwriter. The deal is expected to close early next year.

Some larger New York investment banks could hit the auction block in the next go-around, including Bear, Stearns & Co., Lehman Brothers Inc., PaineWebber Group Inc., and Prudential Securities Inc., analysts say.

Regional firms that may be attractive to bank buyers include A.G. Edwards & Sons, St. Louis; Dain Rauscher, Minneapolis; Hambrecht & Quist LLC, San Francisco; and Legg Mason Inc., Baltimore.

However, some of these firms may not be willing sellers, said Harold Schroeder, a bank equity analyst with Keefe, Bruyette & Woods Inc. Or they may not want to adjust their price expectations after the rich deals cemented this year, market observers say.

Meanwhile, a handful of large commercial banks still need to buy or build a securities capability, bank analysts say.

Chase Manhattan Corp. is the perennial favorite on this list, though many say the banking company may choose to build an equities capability- something it has done successfully with high-yield bonds.

"It is perhaps a case of fortuitous timing that they didn't buy a brokerage firm before the recent market turmoil," Mr. Mayo said.

Aside from Bank of New York Corp., the other large banks that analysts foresee as potential buyers are all superregionals, including Bank One Corp., Chicago; Fleet Financial Group, Boston; and Wells Fargo Corp., San Francisco.

But buyers need to beware. Many of the most desirable matches have already been made, analysts say.

"Some firms in a weakened condition might choose to merge with a bank for more defensive rather than offensive reasons," said Michael Mayo, a bank equity analyst with Credit Suisse First Boston.

"These mergers might not be a home run for investors, especially since year-2000 problems will limit their ability to merge systems in the near term," he added.

Concerns over preparing for the year-2000 problem-the glitch that will effect computers that are not brought into compliance by Jan. 1, 2000-will likely force potential merger partners to strike their deals early in 1999.

Meanwhile, it may be five to 10 years or more before banks that bought securities firms in 1998 see a return on their investment.

But Mr. Tejera pointed out that many of the firms acquired were small compared with the banks that bought them, reducing the buyer's risk.

Analysts looked favorably on a couple of 1998 regional mergers that they thought had better-than-average geographic and cultural compatibility.

These were KeyCorp's acquisition of McDonald & Co., both based in Cleveland, and First Union Corp.'s acquisition of Wheat First Butcher Singer & Co. In the latter, the Charlotte, N.C-based bank bought a firm in nearby Richmond, Va.

"Some people viewed First Union's deal for Wheat First as boring. But boring may actually be good in this day and age," Mr. Schroeder said. "They don't have the cultural conflicts that some others may have had."

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