NEW YORK — Paine Webber Group said Monday that it has agreed to sell an equity stake of up to 25% to Japan's Yasuda Mutual Life Insurance Co. to raise capital that it needs to compete more effectively in world securities markets.
Paine Webber, a middle-sized investment firm that has lagged behind competitors in the growth of its capital resources, said Yasuda will pay $300 million for common stock warrants and convertible preferred stock that will give it an 18% voting interest. Yasuda's stake would rise to 25% if it chooses to convert the 6.74 million shares of preferred stock to common stock, the companies said.
With the announcement, Paine Webber became the third major U.S. firm to turn to the cash-laden Japanese for an infusion of capital within a little more than a year. Sumitomo Bank bought a 12.5% stake in the Goldman, Sachs & Co. investment bank for about $500 million in November, 1986; last March, Nippon Life Insurance Co. paid $538 million for a 13% stake in Shearson Lehman Bros., the securities firm that is 60% owned by American Express Co.
Plan to Expand Merchant Banking
The U.S. firms have been forced to augment their capital resources as world markets have grown ever more tightly knit, and the American companies have found themselves pitted against well-funded foreign competitors in securities underwriting, trading, and mergers and acquisitions activities.
Sale of the stake would increase Paine Webber's total capital to $1.45 billion from its current $1.15 billion, the company said. Paine Webber is parent of the Paine Webber Inc. brokerage and is ranked 10th by capital among U.S. investment firms.
Chief Executive Donald Marron said in an interview that the deal offers Paine Webber capital with which to expand its merchant banking activities, as well as better access to Japanese companies that may become investment banking clients. "We're trying to expand in promising foreign markets, and this will help us do exactly that," he said.
Asked about the pattern of Japanese investments in U.S. firms, Marron said the American securities firms "can't overlook the reality of the Japanese. Their financial service companies have a major stake in global business, and we're going to have to conduct things more on a joint basis."
Deal Not Forced by Weakness
Paine Webber lost $16 million in October because of the stock market crash, according to analysts, and has recently announced a hiring freeze, cutbacks in capital spending and a withdrawal from the commercial paper business. But analysts said the deal was not forced by weakness resulting from the stock market's decline or other difficulties. (The company said the deal had been in negotiation since August.)
Unlike E. F. Hutton, which last week began entertaining takeover offers, Paine Webber "wasn't forced into this," said Frank DeSantis, analyst with the Smith Barney, Harris Upham & Co. brokerage in New York. "It's a totally different situation--they'll get capital they need, but they'll keep control of their assets."
Paine Webber's earnings have grown steadily in recent years, although the firm has not achieved chief executive Marron's goal of putting the company in the so-called bulge bracket--the top rank of U.S. investment banking firms.
Analysts said sale of the stake will tend to discourage unwelcome takeover offers for Paine Webber. The firm has been mentioned occasionally as a takeover target, and its stock has been drifting upward since Hutton's announcement last week suggested that takeover bids for other brokerages might be forthcoming as well.
Paine Webber has been considered attractive in part because of its large network of retail brokerage offices, which includes about 4,500 stockbrokers in 295 locations. At the beginning of the year, Paine Webber ranked fifth among investment firms in the number of brokers.
Unlike Hutton, the company also has built a substantial investment banking business, which provides about 25% of the firm's revenue, according to DeSantis.
Yasuda is the fifth-largest issuer of life insurance in Japan. For the fiscal year that ended in March, it reported life insurance sales of $42 billion and $21 billion in assets.
Yasuda will nominate two members to Paine Webber's board. Norikazu Okamoto, Yasuda's president, will also serve as non-voting senior adviser to the Paine Webber board.
Yasuda belongs to the Fuyo Group, an association of 29 Japanese companies that includes such large corporations as Nissan and Hitachi. Marron said Yasuda's membership in the organization may bring access to the other companies as investment banking clients.
The agreement between the companies includes a standstill agreement that bars Yasuda from increasing its stake beyond 25% within the next 20 years without Paine Webber's permission. The companies also plan to establish a joint venture in which they will offer asset-management and financial advisory services from an office in London.