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E. F. Hutton in Merger Talks With Shearson : Troubled Securities Giant Says Other Suitors Have Also Expressed Interest

November 24, 1987|PAUL RICHTER | Times Staff Writer

NEW YORK — Securities giants E. F. Hutton Group and Shearson Lehman Bros. began merger talks Monday, just hours after Hutton disclosed that it had received unsolicited "indications of interest" from an unspecified number of suitors about buying all or a portion of the company.

Hutton, dogged by weak earnings and legal problems in recent years, disclosed early Monday morning that it had been approached about the possible acquisition. Shortly after noon, Shearson announced that Hutton had approached Shearson executives about a takeover, and company officials said later that talks had already begun.

In a prepared statement, Hutton said it had directed its financial advisers to "pursue discussions with prospective investors and acquirers as part of the board's review of strategic alternatives." Shearson, a unit of American Express Co., said it believes that Hutton "could represent an attractive and complementary addition to our organization."

Hutton and Shearson began merger talks in October, 1986, but Hutton broke them off a month later because it considered Shearson's $50-a-share, $1.6-billion offer too low.

A merger between the two would continue the consolidation of major Wall Street investment houses and would create a firm with huge capital resources. Together, the two firms have $4.8 billion in capital, which would put them ahead of Salomon Inc., now No. 1 in capital resources with about $3.5 billion.

The combined firm would also have nearly 11,700 brokers, according to a company spokesman. Merrill Lynch, owner of the largest retail securities network, has more than 12,000, a spokesman said.

Price More Attractive

The swift pace of Monday's events suggested to some analysts that Hutton turned to Shearson out of fear that it might be forced into a less attractive deal by another bidder.

"They may prefer to pick a partner than to be picked off themselves," said Paul Kelly, president of Peers & Co., a New York investment banking firm.

With its valuable network of retail securities offices, Hutton has been a rumored takeover target for months. Suitors are thought to have included Ford Motor Co., cash-rich after several good years; Commercial Credit Corp., and Sumitomo Life Insurance Co., a unit of the big Japanese bank. Sumitomo already has a member on Hutton's board of directors.

Hutton's stock price has traded above $44 a share this year but slumped in the aftermath of October's market crash, making the company a better buy for any would-be purchaser, analysts noted.

The disclosures forced a brief halt in trading of Hutton stock early in the day. Hutton shares were bid up sharply when trading resumed and closed the day at $27.375 a share, up $7.125. About 2.2 million shares traded hands, making it the second most heavily traded stock on the New York Stock Exchange.

A spokesman for Hutton declined to discuss the identity of bidders other than Shearson and said that Hutton executives were unavailable to discuss the day's developments.

Shearson President Jeffrey Lane predicted that if a deal can be reached, it will come soon. "Traditionally, these things go pretty quickly or not at all," he told the Associated Press.

Shearson said it had already studied the possibility of a merger and concluded that the two companies would work well in four common areas: retail securities, investment banking, capital markets and investment management.

Shearson earned $316 million for American Express last year and provided 31%, or $4.5 billion, of the company's total revenue of $14.7 billion.

Analysts said a merger would give Shearson a valuable addition to its retail network, while giving Hutton financial stability and better ties to the business of underwriting, securities trading, and mergers and acquisitions, where it is now weak.

Some analysts speculated that Hutton may feel more inclined to agree to a deal because a weaker market has dampened its earnings prospects. "Maybe they rethought things, and the best deal for them is to hook up with a firm like Shearson," said Larry Eckenfelder, analyst with Prudential-Bache Securities.

Some analysts suggested that Hutton might be acquired for $30 to $40 a share, which would mean a total price tag of $960 million to $1.28 billion.

Hutton's image problems began in 1985 when the company pleaded guilty to 2,000 federal fraud counts stemming from a massive check-kiting scheme. The bad publicity continued last year when Hutton had to establish a special $130-million reserve to cover customer losses on certain municipal bonds that the firm had improperly marketed and traded.

Charges related to those incidents have helped hold down earnings for two years.

"These incidents didn't have a severe impact, but when you do a big retail business like Hutton does, they hurt," Kelly said. "You need a good public image."

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