In a stunning defection that could threaten First Boston Corp.'s profits and standing as a top merger and acquisition concern, the firm's two highly regarded investment banking co-heads and at least two other top officials resigned Tuesday and formed a rival company.
The resignations of Bruce Wasserstein and Joseph R. Perella, among the nation's best known and respected mergers and acquisitions specialists, immediately raised questions about at least one major pending takeover deal and about the future strength and morale of First Boston's bread-and-butter M&A business, which accounts for as much as half of its profits.
Rival investment banking firms were said to be courting First Boston clients, while the two departing executives were believed to be working to lure those clients to their own new firm. First Boston, meanwhile, moved quickly to replace the pair by promoting two officials who had been under Wasserstein and Perella.
"It's a major, major loss for First Boston," said one rival investment banker. "I can't believe they can replace them. There's nobody with the reputation or visibility of those two."
"Clearly Wasserstein and Perella are extremely well regarded individuals," said Paul Baastad, financial services analyst for S. G. Warburg. "Their departure will have a meaningful, detrimental impact on the firm's M&A activities."
The departures stemmed from a disagreement over the firm's emphasis on merchant banking, a highly lucrative but risky activity in which investment banking firms facilitate mergers by acquiring stock in target firms or providing temporary financing.
New York-based First Boston, apparently concerned about the potential risks of merchant banking, concluded in a recent strategic study that it did not want to expand the activity as fast or as far as Wasserstein and Perella wanted. The two executives, along with two other high-ranking officials in First Boston's investment banking group, said they formed a new merchant banking company, Wasserstein, Perella & Co.
"We have a different vision of the future of the business than is reflected in the conclusions drawn from the recent strategic study," Wasserstein said in a statement.
"After 10 years of working together on over 1,000 transactions at First Boston, we felt it timely to set up our own firm," Perella added.
The shake-up is yet another striking example of the upheavals on Wall Street as firms reassess their priorities following the devastating October stock market crash. A number of firms have curtailed or slowed expansion of merchant banking, which critics have described as the riskiest investment trend on Wall Street.
The risk comes from the firms' putting up their own capital to support merger deals that may be overpriced and could collapse if the stock market or economy weakens, thus putting that capital--and the companies providing it--in potential jeopardy.
The shake-up also highlights the recent conflicts between superstar investment bankers, who had achieved immense power and multimillion-dollar incomes in the 1980s bull market, and the top managements at their firms, who now must cut costs and restrain the superstars' risk-taking.
Tuesday's departures come as First Boston, like some of its competitors, already is reeling from major losses stemming from the October debacle. The firm on Tuesday reported that its fourth-quarter profit fell 91.7% to $5.1 million, staying in the black only because of a one-time $80-million pretax gain from the sale of its interest in its New York headquarters building.
About 500 employees, or 10% of First Boston's work force, may lose their jobs due to rising overhead costs and trading losses.
Made Some of Top Deals
The news also depressed First Boston's stock as investors clearly saw the departures as worrisome. The firm is regarded as a leading bond trader, but its biggest profits have come from investment banking--and, specifically, M&A work. Under Wasserstein and Perella, the firm has been involved in some of the biggest deals in American corporate history, including its role as adviser to Texaco in its $10.1-billion acquisition of Getty Oil Co. in 1984.
First Boston derives as much as half of its profits and a third of its revenue from M&A, sources familiar with the company estimate. Overall, the firm ranked second last year in M&A activity, with $55.1 billion in deals, compared to $63.5 billion at top-ranked Goldman, Sachs & Co.
In New York Stock Exchange composite trading Tuesday, First Boston shares fell $1.875 per share to close at $24.375.
Also leaving First Boston to join the new firm are Bill Lambert, a managing director who specialized in helping clients identify potential acquisition targets, and Charles G. Ward, a managing director and co-head of mergers and acquisitions who helped administer that department's day-to-day activities.