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Putting Brokerages in Banks' Sights

Investment: Some analysts say rule change could make them takeover targets.


Some top corporate-takeover advisors might be on the verge of needing buyout advice of their own.

A rule change proposed by the Federal Reserve Board could mean that certain investment bankers and brokerage firms, whose efforts include helping other companies deal with mergers, would become potential takeover targets by banks seeking to expand in the securities business, some analysts said.

The change, proposed July 31, would allow commercial bank holding companies to garner as much as 25% of their total revenue from their securities operations, up from the current 10%.

Those operations largely involve underwriting new issues of corporate stocks and bonds, activities that generated more than $6.5 billion in fees industrywide last year.

If the increase is adopted--it's open to public comment until Sept. 30--some familiar names on Wall Street could be gobbled up, analysts predicted.

"We strongly believe there will be several buyouts of brokerage firms," Steven Eisman, an analyst with the investment firm Oppenheimer & Co. in New York, said in a report.

Two likely candidates, he said, are Lehman Bros. Holdings Inc. and Bear Stearns Cos., which are both publicly held. A Lehman Bros. spokesman did not return a call seeking comment and Bear Stearns declined to comment.

Ironically, Oppenheimer itself was recently on the verge of being bought by a foreign bank, Germany's Bayerische Vereinsbank. But the bank backed off when it appeared the deal would put it above the current 10% cap.

Regardless, others argued that giant U.S. bank holding companies such as Citicorp, BankAmerica Corp. and Chase Manhattan Corp. would be reluctant to buy investment firms even if allowed to.

One reason: The banks see problems trying to mesh the often free-wheeling, well-compensated investment bankers into the banks' hierarchal, bureaucratic structures, said David Berry, director of research at Keefe Bruyette & Woods, a New York investment firm that focuses on banks.

The banks also remember the troubles other companies had when they bought Wall Street houses, including General Electric Co. (Kidder Peabody) and American Express Co. (Shearson), he said.

Banks are more likely to use the rule change to expand their securities operations from within, he said.

"I would be aghast if a big bank went out and bought a big brokerage firm," Berry said.

BankAmerica, for one, is "happy with the [Fed's] proposal" because revenue from its securities unit is already bumping against the 10% limit, said spokesman Peter Magnani in San Francisco. But he declined to comment on whether BankAmerica is considering buying a brokerage house.

Passage of the Fed's proposal would further erode the Glass-Steagall Act of 1933, which separated commercial banking from the securities firms that underwrote stocks and bonds.

Since 1987, that separation has gradually weakened as banks have been given limited authority to underwrite securities. The limitations included capping their securities revenue at no more than 10% of total.

For that reason, less than 30 of the nation's 10,000-plus banks, along with a dozen or so foreign banks, have bothered getting permission to engage in underwriting, and even fewer have tried to buy Wall Street firms.

Oppenheimer's Eisman argued that banks will pounce more aggressively on Wall Street if the 25% cap is adopted because the "banks are on a hunt for new sources of revenue."

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