Bank and brokerage stocks galloped along with the rest of the market to new heights Monday after Citicorp and Travelers Group made their blockbuster merger announcement.
The disclosure spurred a broad rally that thrust the Dow Jones industrial average well past 9,000.
Analysts said the teaming of Citicorp and Travelers would usher in other big deals that combine commercial, investment banking, and brokerage services on a global basis. They also said the transaction would prompt smaller banks to make strategic purchases of insurance companies and other financial organizations.
"This deal has made the first major step toward redefining the nature of financial services for the future," said analyst Michael A. Flanagan of Financial Service Analytics Inc., Fort Washington, Pa.
"Banks will be able to acquire nonbanks with less resistance" once the legal complications of Citicorp and Travelers are addressed, said Anthony R. Davis of SBC Warburg Dillon Read & Co.
Shares of Citicorp surged $39.125, to $182, and Travelers was up $11.375, to $76.0625. The Dow rose 49.82, or 0.55%, to 9094.76, while the Standard & Poor's bank index climbed 3.56%, and the Nasdaq bank index added 0.08%.
The biggest gains were posted by banks that are seen as most likely to strike similar deals. For example, Bankers Trust New York Corp. was up $4.50, to $127.50; Chase Manhattan Corp., $6.75, to $146.975; and J.P. Morgan & Co., $10.8125, to $144.75.
Bankers Trust and J.P. Morgan "may now rethink their strategies of trying to compete globally on a stand-alone basis," said Diane B. Glossman, analyst at Lehman Brothers Inc.
"The main targets are going through the roof," said one brokerage trader. The transaction has set "a fire under Chase to get going as far as brokerage firms, with Merrill Lynch obviously being their number one" option.
Indeed, share prices of investment and brokerage companies rose sharply. Merrill Lynch, which has been rumored many times to be in talks with Chase Manhattan, rose $10.125 to $96.625.
Donaldson, Lufkin & Jenrette rose $4.1875, to $91.875, and Lehman Brothers gained $6.1875, to $80.8125.
One trader said he expects merger speculation to keep large brokerage shares flying high for a while.
"This is something that is going to hang around a bit," said the trader. "Where there is smoke there is fire, and Citicorp has lit a pretty decent fire."
Among superregional banks, Fleet Financial Group jumped $1.5625 to $86.3125; Mellon Bank Corp. gained $2.375 to $67.25; NationsBank Corp. added $1.375 to $75.25; and SunTrust Banks Inc. rose 31.25 cents to $49.25.
The deal "changes the landscape of what is possible," said Milton Walters, a managing director and market strategist at Prudential Securities. "There is a feeling this is a beginning and we concur."
Some regional banks fell back a bit as the prospect of increased competition from the new breed of megabanks sank in. "Scale is now more important than it was on Friday," Mr. Davis said.
Commerce Bancshares dipped 6.25 cents to $49.75; First Union Corp. dropped 12.5 cents to $56.75; and Norwest Corp. slipped 6.25 cents to $42.375.
The general gains among larger banking companies are likely to be sustained, observers said. Lawrence Cohn, banking analyst at Ryan Beck & Co., said first-quarter earnings results should have a positive effect.
But smaller or more focused banks are seen as vulnerable to Citigroup and others with the full spectrum of products for business and consumer clients.
"Goldman Sachs has affirmed (its intention) each year to remain private, but in light of this announcement, they will have to rethink their strategy, too," Mr. Flanagan said.
"Financial stocks were already too high," said Mr. Flanagan "Now they are in the stratosphere. At this stage of the game a lot of promises are being made and the risk is that the results anticipated will not be delivered."
Bank stock trader Adam J. Lewis, senior vice president at Keefe Bruyette & Woods, said, "The gut reaction this morning was to buy everything and worry about price later. But in a week, if no deals emerge," the brokerage stocks will go down again, he predicted.
