Wall Street The Dealers Return

By John Greenwald

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 BankAmerica 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-Manufacture rs 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 underwritings 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.

With reporting by Thomas McCarroll/New York