The banking industry gained a powerful new competitor Wednesday when Dean Witter, Discover & Co. and Morgan Stanley Group announced their intent to merge.

The resulting entity is expected to be a giant in everything from credit cards to asset management to equity underwriting-the very businesses that most banks are relying on to boost their future revenues. It would boast relationships with some 3.2 million consumers in 21 countries and sport 361 branches in the United States alone.

"If I was a banker, I would think of this as the creation of a brand new financial services company for the next century," said Edward Furash, chairman of Furash & Co., Washington. "The mistake is to see the new company as a securities company. It is not."

Executives of both companies were adamant that the huge Discover credit card program would remain a centerpiece of their new firm. However, card experts were speculating otherwise. (See story on page 13.)

Mr. Furash and other observers said the new firm, dubbed Morgan Stanley, Dean Witter, Discover & Co., is likely to emerge as one of a handful of global financial services companies fully equipped to serve both giant corporations and consumers worldwide. In the United States, only a few commercial banks, securities firms, and insurance companies are poised to become such powerful players.

By agreeing to merge, Morgan Stanley and Dean Witter are trying to ensure that they will be one of them, these observers said.

"This is not just a securities industry transaction," said Charles B. Wendel, president of Financial Institutions Consulting, New York. "To see it as one would be naive."

Indeed, the new firm is set to rank as the world's fifth largest asset manager, with $271 billion under management. A whopping $146.5 billion of that will be in mutual funds, including Morgan Stanley's international equity portfolios; its recently acquired Van Kampen American funds; and Dean Witter's home-grown fund family.

Such numbers are "overwhelming," said Charles T. Bauer, chairman of Aim Management Group, a Houston fund company with $60.9 billion of assets under management.

"One is going to have to be enormous to be in the business," Mr. Bauer said. "The whole industry is going to be made up of behemoths."

The combined company will have 9,300 retail salespeople, ranking it No. 3 among brokerages. John Mack, the president and chief operating officer of Morgan Stanley, said Wednesday the plan is to hire even more salespeople.

"That is going to place more pressure on regional and midsize banks to sell mutual funds," Mr. Furash said.

"The local consumer will see investment management products from Morgan Stanley that they didn't see before," added Anthony Santomero, professor of finance and director of the Financial Institutions Center at the University of Pennsylvania's Wharton School. "That's going to be big competition to money-center banks."

In credit cards, the new firm will rank No. 3 in loans outstanding. Dean Witter's success in marketing its Discover Card-once viewed as a weak sister to the banking industry's powerful MasterCard and Visa brands-has some banking experts predicting that other innovations will come out of Morgan Stanley and Dean Witter soon.

"Many of the banking industry's products have substitute products in the securities industry." Mr. Santomero said. "If the securities industry has a major merger and a formidable competitor is formed, the market will see even more substitutes for banking products."

On the corporate side, investment banks already offer a dizzying array of alternatives to commercial bank finance-as well as bank loans. While pairing with Dean Witter will do little to strengthen Morgan Stanley's already strong ties to blue-chip corporations, it gives the firm the scale its needs to make a run at the middle market.

"They will go downstream and make small business loans to get the volume they need to be a major participants in the capital markets," Mr. Furash said. "They will be able to take more risk than regional banks and offer better pricing and comprehensive wrap around financing."

The new company, which will be formed via a stock swap, will be headed by Philip J. Purcell. Dean Witter's chairman and chief executive, Mr. Purcell will keep that title at the merged firm.

Mr. Mack, president and chief operating officer of Morgan Stanley, will retain that post, while Richard B. Fisher, Morgan's current chairman and chief executive, will become chairman of the executive committee of the board of directors.

The partners have been quietly exploring the idea of a merger for some time, Mr. Purcell said at a news conference Wednesday.

"We talked about this for more than two years. We looked at venture arrangements, we looked at contract arrangements," he said. "Last summer, we both agreed it would have to be a merger. It took us some time and thoughts."

Indeed, Dean Witter has experimented with several ways of expanding its reach. One notable example: its 1992 joint venture with NationsBank Corp., which came apart two years later. More recently, it teamed with Banc One Corp. to provide investment services in bank branches.

While most observers said the new Morgan-Dean Witter will be a consumer and corporate global financial behemoth, Roy C. Smith, a professor of finance at New York University's Stern School of Business, said there are currently only two firms that can make such a claim today-Merrill Lynch & Co., and to a lesser extent, Citicorp. He said he is skeptical that this transaction will put Morgan Stanley in the same league.

"It's a move in that direction, but Morgan Stanley will not be that powerful internationally in retail," Mr. Smith said. "It's diversifying its source of business in a way that might look attractive to a shareholders."

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