TIME: Almanac 1993/TIME Almanac 1993.iso/time/091691/0916200.000

Text File | 1992-08-28 | 7.9 KB | 159 lines

                                                                                BUSINESS, Page 46

WALL STREET

The Dealers Return


Those blockbuster buyouts of the giddy '80s may be history, but
investment bankers are rebuilding business on safer ground

By JOHN GREENWALD -- Reported by Thomas McCarroll/New York


    Who said Wall Street's dealmakers have gone the way of
the extravagant 1980s takeover wars? Wall Street giants First
Boston and Morgan Stanley stand to rake in $10 million apiece
for helping put together BankAmerica's $4.4 billion merger with
Security Pacific. Rothschild Inc. earned $2.5 million in cash
and bonds for representing creditors in the bankruptcy of Donald
Trump's Taj Mahal casino in Atlantic City. And Donaldson, Lufkin
& Jenrette received $2.5 million last month for co-managing a
$200 million junk-bond issue for Dr Pepper. Little by little,
deal by deal, Wall Street's investment bankers are rebuilding
a business that all but collapsed with the waning of the '80s.
A recent surge of deals ranging from bank megamergers to huge
new stock and bond issues is putting some chastened
wheeler-dealers back on their feet. But without the limitless
pots of cash that the now shrunken junk-bond market once
provided, the investment bankers can no longer arrange the sort
of blockbuster buyouts that produced breathtaking profits for
Wall Street in the past decade. Instead, the erstwhile Masters
of the Universe now rescue debt-laden companies and humbly take
orders from corporate clients intent on acquisitions that will
give them a competitive edge and help them survive the
constrained 1990s.

    The new era could halt a dizzying skid on Wall Street that
began with the 1987 stock-market crash. Buoyed in part by
mergers and new issues, investment bankers earned $900 million
in the first half of 1991, compared with $540 million in the
same period a year earlier. And after dismissing nearly 70,000
employees since 1987, or more than 20% of Wall Street's total
work force, some firms have gingerly begun to hire again.
Goldman, Sachs has added 44 new associates to work on mergers
and other deals. The firm also opened a Frankfurt office for
international deals. Declares Alain Lebec, a managing partner
and co-director of mergers and acquisitions for Merrill Lynch:
"Things are better across the board. Our clients are more
interested in exploring acquisitions, and the quality of the
work is more real and less speculative."

    Unlike the overleveraged '80s buyouts, the sobersided new
deals are largely free of debt. That is particularly true of
mergers in the beleaguered banking industry, where companies are
combining to eliminate overlapping branches and services and
thereby cut costs. San Francisco's Bank America is using a stock
swap to acquire Los Angeles rival Security Pacific in a deal
that will create the second largest U.S. banking company after
Manhattan's Citicorp. In a similar transaction, Chemical Banking
is exchanging $2.3 billion of its shares for the stock of New
York City neighbor Manufacturers Hanover. "Debt has become a bad
four-letter word," says Benjamin Griswold, chairman of Alex.
Brown & Sons, the oldest U.S. investment banking firm.

    Such mergers are red meat to Wall Street, even if the fees
they generate cannot match the profits from takeover wars.
Investment bankers, lawyers and accountants raked in a
staggering $1 billion for plotting strategy and raising the cash
that enabled the buyout firm Kohlberg Kravitz Roberts to acquire
RJR Nabisco for $25 billion in 1989. But the new deals are
smaller and generally arranged by executives of the merger
partners, so advisers play a smaller role and receive a
correspondingly thinner slice of the overall purchase price.

    Still, the transactions can be highly lucrative for Wall
Street firms. Morgan Stanley and Goldman, Sachs will each get
$4 million for their work in fine-tuning the financial details
of the Chemical-Manufacturers Hanover deal. The two investment
houses also expect to split most of the $45 million in fees that
Chemical will pay underwriters to market a $1.5 billion stock
issue next year.

    Vanished along with vast takeover profits are the
freewheeling raiders who once made corporate officers squirm.
Such buccaneers "accounted for half of all merger and
acquisition activity" just three years ago, says Frederick Lane,
a managing director of Donaldson, Lufkin & Jenrette. But most
raiders have long since run out of cash or come to grief in the
manner of Robert Campeau, whose debt-financed buyouts of Allied
and Federated stores for a total of $10.2 billion in the '80s
landed in bankruptcy court.

    Today's takeovers are more likely to be launched by
corporations with deep pockets that are searching for companies
to enhance the strength of their basic businesses. AT&T mounted
a now rare hostile offer for computer-maker NCR that grew
increasingly bitter until the phone company agreed last May to
raise its bid from an opening offer of $90 a share to $110 a
share, for a total of $7.4 billion. AT&T is paying that amount
in the hope that NCR will finally make it a force in computers.
Goldman, Sachs and Dillon, Read will each receive $18.5 million
for advising NCR to hold out for top dollar.

    Consolidations in the rapidly shrinking airline industry
have been another boon to Wall Street. Goldman, Sachs earned an
estimated $8 million last month helping Delta outbid American,
United and other carriers for the coveted East Coast shuttle and
transatlantic service of bankrupt Pan Am. Delta won the routes
by agreeing to pay about $620 million in cash and to assume
nearly $670 million of Pan Am's debt.

    Investment bankers are also reaping handsome fees by
underwriting an avalanche of new stock and bond issues for
companies intent on raising fresh capital and reducing their
debt. Attracted by the post-gulf war stock rally and falling
interest rates, U.S. corporations issued some $250 billion of
new securities in the first half of 1991, a whopping increase
over the $164 billion that companies raised in the same period
last year. The latest under writings brought Wall Street firms
$1.95 billion in fees, or 60% more than they earned a year ago.

    Many companies have used the new issues to trim the
interest costs that firms assumed when they merged in the 1980s.
In one offering, Time Warner, the corporate parent of TIME, paid
some $117 million to Salomon Brothers, Merrill Lynch and other
Wall Street firms in August for serving as underwriters for a
$2.8 billion stock issue that was the largest in U.S. history.
Time Warner used the proceeds to reduce the $11 billion debt it
incurred in the 1989 merger of Time Inc. and Warner
Communications.

    Perhaps the fastest-growing field for investment bankers
is bailing out foundering companies. "We're the cleanup crew
who are picking up the pieces left over from the decade-long
party of debt," says Wilbur Ross, a senior managing director at
Wall Street's Rothschild Inc. "What you're seeing now is a
mirror image of the 1980s." Memories of the '80s have left some
skeptics doubting whether once high-flying dealmakers really
have reformed. "Just when we thought it was safe, they're back
again," says Perrin Long, director of research at First of
Michigan Corp. "We have to be on guard against the excesses of
the 1980s, because a lot of investment bankers haven't learned
their lesson. They're still gung-ho, they're still knocking on
doors, even though the business isn't there, and they're still
blowing smoke. The danger is that they may find some chief
executives with big egos who will listen." But while Wall
Street's wheeler-dealers may lust for their old profits, power
and glory, a return to '80s-style overborrowing is something
that companies -- and the rest of the country -- know they can
no longer afford.