Bankers Trust New York Corp.'s move to acquire Alex. Brown & Sons Inc. sent the stock prices of other regional brokerages soaring Monday.
With investors guessing which firm might be next to be bought out by a bank, demand was so heavy that trading in A.G. Edwards Inc., Legg Mason Inc., Raymond James & Associates, Hambrecht & Quist Group, and Morgan Keegan Inc. had to be delayed while market makers matched buy and sell orders.
Legg Mason soared $4.125 a share, to $49.125; Raymond James was up $2.625, to $23.375; and Hambrecht & Quist rose $2.75, to $20.625.
Analysts said these companies are desirable because they offer what many banks want: entry into the hot stock underwriting and initial-public- offering business.
"It's the equity underwriting that banks covet," said David Berry at Keefe, Bruyette & Woods Inc. "More and more banks see that as the ticket."
Bank-broker mergers, forbidden since the 1930s under the Glass-Steagall Act, have become largely feasible with the easing of regulatory barriers. Last month, rules took effect allowing bank affiliates to derive up to 25% of their securities-related revenues from underwriting, up from 10%.
Forty banks have securities units, but most specialize in corporate and municipal bond underwriting.
Observers view First Union Corp., NationsBank Corp., BankAmerica Corp., and Chase Manhattan Corp. as keen on expanding their equity underwriting businesses. European banks are also getting in on the action. Commerzbank of Germany, which is buying an asset management unit from Montgomery Securities of San Francisco, has long been interested in buying the privately held firm, sources say.
"Strong underwriting firms will be in demand more than strong retail firms," said Deutsche Morgan Grenfell analyst Joel Silverstein. "If you buy a retailer, it's not too different from just adding bank branches."
Investor interest in bank-broker mergers has reportedly caused scrambling within the brokerage community. Piper Jaffray Inc. of Minneapolis is said to be discussing a merger with Raymond James of St. Petersburg, Fla. The firms declined to comment.
News of the Bankers Trust-Alex. Brown deal had members of Congress repeating their calls to revise the banking laws.
"If these mergers take place on a piecemeal, case-by-case basis before proper regulation is in place, safety and soundness could be threatened," said Rep. Marge Roukema, R-N.J. "We must make sure proper firewalls between the banking and securities sides of new entities are in place and that conflicts of interest are guarded against."
Industry sources said few banks other than Chase Manhattan are likely to pursue big Wall Street brokers. High prices are one reason, trading operations incompatible with most commercial banks' businesses are another.
Because of the cultural divide, "I really don't think we'll see a chain reaction of deals," Mr. Silverstein said.
Observers noted that few buyers of brokerages have had good experiences recent years.
"One major disturbing factor is that when companies bought brokerages, like GE-Kidder and Prudential-Bache, the deals didn't work," said H. Rodgin Cohen, attorney at Sullivan & Cromwell.
Indeed, GE Capital lost money and finally unloaded Kidder, Peabody & Co. to PaineWebber Group Inc. (PaineWebber also has been rumored to be in takeover talks and was upgraded Monday to "buy" from "hold" by Credit Suisse First Boston.)
But the pressure to buy and achieve the size necessary to compete will be strong, said Mr. Berry at Keefe. J.P. Morgan & Co., he pointed out, has been building its equity underwriting department for many years and still is not as big as Alex. Brown.
Despite the recent regulatory relaxation, banks may still be prohibited from buying some of the more desirable brokerages.
Donaldson, Lufkin & Jenrette and Hambrecht & Quist Group, for example, both have substantial investment ties to nonbank companies that would make it difficult for bank holding companies to buy them, said Brown Brothers Harriman analyst Raphael Soifer.
