VIEW FROM NEW YORK: Wall Street cashes in on merger mania

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The Independent Online
Bear Stearns's chairman, Allen Greenberg, last week gave a little reminder of the misery that was Wall Street just a few months ago. In the financial year that ended 30 June, the firm suffered a 38 per cent fall in its net income, and whereas Mr Greenberg's bonus a year before was a handsome $10.9m (pounds 6.8m), this time it slumped to $5.6m. Still a lot of money, but a big cut none the less.

So the shadow of 1994, when virtually everyone was laying off workers by the thousands and bond trading suffered its worst spell in 70 years, still lingers a little. But almost every other item of news coming from the Street these days tells us that the sunlight has started to return. Even Salomon, beset both by losses and an exodus of its top performers, might just have managed a profit in the quarter just ended. (They will tell us in the third week of the month.) Then we will know for sure that the wheel has turned.

And why shouldn't things be better? While rising interest rates spoiled the party in 1994, this year the rates scenario - basically stable but on a downward trend - has been near perfect. Over- the-counter securities trading is booming, while investors continue to pour their money into US mutual funds at a record pace. And that's before considering the avalanche of merger and acquisition activity, led by the takeover bids for Capital Cities-ABC by Walt Disney, for CBS by Westinghouse and, most recently, for Turner Broadcasting by Time Warner. Merger mania in the media industry is almost being matched by the banking sector, with fusions by the handful, including that between Chase Manhattan and Chemical Bank.

Indeed, according to a study published on Friday by Mergestat Review, a publication of the Los Angeles investment bank Houlihan Lokey Howard & Zukin, 1995 is set to become America's biggest takeover year in history. The third quarter alone produced deals worth a record $125.2bn, up 55 per cent over the same quarter in 1994. So far this year the number of deals valued at $1bn or more is up 65 per cent, while the number of smaller combinations has also risen sharply.

Wall Street is enjoying the ride. Notable beneficiaries include CS First Boston, Goldman Sachs and, above all, Morgan Stanley, which acted as adviser both in the Chemical-Chase deal and in Time Warner's $7.5bn embrace of Turner. Last Wednesday, Morgan Stanley revealed that its second-quarter earnings leaped 73 per cent over the same period last year. Investment banking revenue was up 68 per cent and trading revenue up 17 per cent. Not surprisingly, the stock value has soared 58 per cent since the beginning of this year.

Lehman Brothers too has been attracting attention. Its revenues have been rising gradually while its stock value, like Morgan Stanley's, has taken off. Some of the market interest reflects speculation that Lehman may be ripe for takeover, perhaps by a foreign institution anxious to get a decent foothold in America. Thought to be near the front of the queue of potential buyers are Union Bank of Switzerland, Deutsche Bank and Dresdner Bank.

In addition to the improved conditions, many firms are benefiting from their efforts last-year to cut costs, including the multiple redundancies. "The lay-offs have worked and are beginning to show through in the financials," says Michael Lipper, of Lipper Analytical in New York. He confirms that Wall Street is thriving again but voices caution. "I would say it is a good time, but not yet a boom time. There is still some pricing pressure and some excess capacity". So far there has been no sign of significant rehiring of any of the thousands who got their pink slips last winter.

And while little change seems likely on rates in the near future, the months ahead may hold some other uncertainties. Mr Lipper is concerned, for example, that the onset of the presidential campaign may bring some of the trading volumes down as investors and corporations consider what kind of policy changes various candidates might bring. "It is possible that as we begin to see the candidates we may become like deer in the headlights. It is a wonderful excuse to do nothing", he says.

Finally, there are others, aside from the investment bankers, who are making money in the merger binge. As the gossip from the Time Warner courtship of Turner surfaces, we learn, for example, that none other than Michael Milken, the ex-convict who, in theory, is banned from any securities-related businesses, is reportedly being paid a $50m fee by his friend Ted Turner for advice rendered. Then there is the package that has been promised to Mr Turner himself, who, if the deal goes through, will become a vice president of Time Warner. His pay packet, according to the New York Times, has been set at over $110m for the first five years - or somewhere around $42 a minute. Eat your heart out, Mr Greenberg.