Market run-up has more still more brokerages going public

It first happened in the early 1970s. Merrill Lynch & Co., PaineWebber Inc., and E. F. Hutton & Co. went public, leaping smartly into a rising stock market and vastly enriching their corporate coffers. Then in 1983, more investment houses saw a chance to boost their assets by hitching a ride on the rally that had begun in the fall of 1982.

More than half a dozen brokerage firms -- including Legg Mason Wood Walker and Rooney, Pace (recently acquired by the privately held Sherwood Capital Group) -- seized the opportunity to sell stock in themselves.

Now it's happening again.

The old-line, upscale Morgan Stanley Group, a vestige of J. P. Morgan's financial empire, recently jumped on the initial-public-offering (IPO) bandwagon. Prices opened at $56 a share and zoomed to $75 in the first week of trading.

The Baltimore-based mutual fund family T. Rowe Price is slated to go on the auction block in the next week or two.

Kidder, Peabody & Co.'s president says his firm may also issue its own stock.

Since last October, when Bear, Stearns & Co. got the ball rolling, at least six other private brokerages or mutual funds have gone public or have said they soon will do so.

But all this activity worries some stock market analysts. If the past holds clues to the future, then this spate of new issues may portend a slump in the stock market.

As brokerage houses rushed to market in the early '70s, the Dow Jones industrial average was climbing. It hit 1,051 in early 1973.

But shortly after the brokerage stock was floated, the market began to slide. It tumbled more than 400 points by late 1974.

Similarly, during the early '80s, the Dow was on the move. But just after a flurry of brokerage-house IPOs, the market topped, hitting 1,287 in 1983.

It skidded 200 points by the middle of 1984.

Now, maintains Norman G. Fosback, editor of New Issues, a Fort Lauderdale, Fla., investment newsletter, ``the largest part of the bull market is over.''

The current brokerage-house rush to market, he says, ``could lead to a termination of the bull market.'' Although he adds that he doesn't see much evidence of a market top quite yet. Mr. Fosback thinks the Dow will reach ``1,900 to 2,100 in the next three to six months.''

Susan Gallant, editor of the New York-based newsletter Going Public: The IPO Reporter, points out that the volume of new issues has been steadily growing.

But IPOs, she says, still largely consist of high-quality companies -- such as Morgan Stanley -- and not the speculative start-up enterprises that tend to flood the market near a top.

For March, the tally of new issues coming to market will probably reach about 45, says Fosback. That's up from the recent average of 30 to 40 IPOs a month. But it's still far shy of the speculative boom of 95 a month reached in the last half of 1983 before the market sank.

What's the logic behind brokerage firms going public now?

The business generated by a bull market helps brokerages ``to show good earnings-performance comparisons and get a good price for their stock,'' Fosback says.

A rocketing bull market generally means the issuing firm will get the most money out of its new stock. But brokerages have more specific reasons for going public.

Most are in the midst of a head-on competition that has been intensifying in recent years.

Raising capital helps full-service securities firms compete against the powerful banks, and the increasingly popular discount brokers, because of financial deregulation, are encroaching on territory that was once the sole domain of brokerages.

The securities industry also faces a challenge from well-heeled institutions such as mutual funds, pension funds, and insurance companies. Financial clout helps brokerages offer more services to these institutional investors.

Moreover, dozens of innovative financial products have been introduced in recent years, creating new markets to support.

And finally, securities firms need huge pools of capital to participate in the multibillion-dollar merger-and-acquisition game.

A quick way for a brokerage to leap into the big leagues (or at least to ensure it won't be swallowed up or left behind) is to broaden its capital base.

Morgan Stanley, for instance, netted nearly $300 million by selling 21 percent of its stock to the public.

The remaining 79 percent of its shares enrich principals of the company. Morgan's 245 managing directors and principal partners paid some $300 million (according to the Securities and Exchange Commission filing) for that 79 percent stake.

It was quite a deal. At current prices, those shares are worth a total of about $1.4 billion.

The remaining major private brokerages on Wall Street with no announced plans to go public are Goldman, Sachs & Co. and Drexel Burnham Lambert Inc.

Both already have large capital bases. But with the stock market seemingly headed into the stratosphere, creating instant wealth may be a difficult urge to resist.

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