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It's Official: GE Selling Kidder to PaineWebber : Securities: The deal for $670 million in stock would free the conglomerate from what has been a financial quagmire.

October 18, 1994|JAMES F. PELTZ | TIMES STAFF WRITER

General Electric Co., ridding itself of a troublesome and embarrassing division, formally agreed Monday to sell Kidder, Peabody & Co. to rival brokerage house PaineWebber Group for stock valued at $670 million.

Under the agreement, which had been rumored for days, GE would receive PaineWebber common and preferred stock that would would give the company a 25% stake in PaineWebber. GE would also get one seat on PaineWebber's board of directors.

While the deal would free GE of a financial quagmire, it would lift PaineWebber a notch in the ranks of Wall Street's giants, both in the retail and investment banking areas. It could also mean massive layoffs at Kidder.

By acquiring Kidder's 1,150 brokers in 50 offices, PaineWebber would have a total of 6,700 brokers, making it the nation's fourth-largest investment firm by that yardstick. It's currently fifth.

Kidder's brokers are known for tending mainly to wealthy investors, and the amount of customer assets under PaineWebber's management would rise by a third, to more than $180 billion.

Kidder should also give PaineWebber a boost in investment banking, particularly in underwriting securities. For instance, Kidder was sixth among the Top 10 underwriters of U.S. debt through the first nine months of this year, and PaineWebber was absent from the list, according to the research firm Securities Data Co.

But in terms of capital, PaineWebber would stay in eighth place despite the Kidder deal and so remain a second-tier player behind the likes of Merrill Lynch & Co. and Salomon Bros. Capital is a key measure of the financial wherewithal a Wall Street firm has for growth and expansion, particularly in the area of investment banking.

As for 129-year-old Kidder Peabody itself, the deal is likely to mean pink slips for hundreds of the firm's 5,000 employees.

PaineWebber declined to comment on potential cutbacks and office closures, saying those issues--along with the future of the Kidder name--are under review. But as part of its deal, GE agreed to pay severance costs for Kidder employees who are dismissed.

Major layoffs are "likely because there's fairly large numbers of duplication in terms of the back-office" jobs that support the firms' brokers and traders, said Geoff Bobroff, a financial services consultant in East Greenwich, R.I.

As for GE, shedding Kidder would cut loose a business that has been extremely costly and a public relations fiasco.

Fairfield, Conn.-based GE bought Kidder for $600 million in 1986, but it has pumped an additional $800 million into the firm since then. Kidder has suffered major losses in such areas as mortgage bond trading, and last spring it was shaken by allegations that its star government bond trader, Joseph Jett, had concocted $350 million in phony profits in a scheme to hide trading losses. Jett denies the allegations.

GE's decision to shed Kidder illustrates once again how even well-managed companies often stumble in managing a Wall Street brokerage whose fortunes are tied to the capricious financial markets. GE is otherwise an enormously profitable conglomerate, with interests in everything from appliances to jet engines.

The Kidder mess also reinforces the failure of the "financial supermarket" experiment of the 1980s, when big, diversified companies gobbled up brokerage houses in hope of giving consumers "one-stop shopping" for their financial needs.

Sears, Roebuck & Co.'s purchase of Dean Witter Reynolds Inc. and American Express Co.'s ownership of Shearson Lehman Bros. are two other examples. In both cases, the brokerage firms were later divested.

GE's struggle with Kidder was even more pointed, though, because a third of GE's revenue and operating earnings--which totaled $60.6 billion and $7.8 billion, respectively, last year--come from its GE Capital Services unit, an oft-praised financial powerhouse that is heavily involved in corporate lending and leasing services.

In selling Kidder, however, GE said it expects to record a pretax charge totaling about $500 million, probably in this quarter, GE spokeswoman Joyce Hergenhan said. About $300 million of that sum reflects a non-cash accounting entry, called good will, that stems from GE's purchase of Kidder and now must be charged against earnings because of the sale.

The remaining $200 million reflects GE's agreement to pay for actually shutting down Kidder, including severance costs related to the expected layoffs, and any future legal costs stemming from Kidder's bond trading scandal, Hergenhan said.

In light of GE's overall size, however, the charge is expected to have a negligible impact on the company's financial health, the credit-rating firm Standard & Poor's Corp. said Monday in affirming its AAA rating on GE's debt.

* Q&A: What to do when your broker is sold. D3

What the Deal Means

* For PaineWebber: Acquires 1,150 Kidder brokers, including many that serve wealthy investors, and $50.5 billion in Kidder customer accounts. Incurs no liability in the Kidder bond-trading scandal.

* For General Electric: Rids itself of a troublesome operation. Faces an approximate $500-million charge related to divestiture. Retains a 25% stake in PaineWebber.

* For Kidder: Possible layoff of hundreds of employees. The 129-year-old Kidder name could vanish from Wall Street.

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