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URGENT Hutton Board Adjourns Meeting; No Announcement On Reported Merger

December 3, 1987

NEW YORK (AP) _ The board of directors of E.F. Hutton Group Inc. adjourned from a day-long meeting Wednesday with no announcement regarding a purported proposal for the firm to be acquired by Shearson Lehman Brothers Holdings Inc.

Sources close to the talks said the board broke up without making a decision, but the two investment firms were close to agreement on the broad issues of a proposed $1 billion acquisition by Shearson.

A Hutton spokeswoman Laurel Fry said the board would have no further announcement Wednesday and was expected to meet again Thursday.

Shearson declined comment.

Sources said earlier Shearson had reached a tentative agreement to acquire Hutton in a deal that would create the nation’s biggest investment firm. But others close to the talks said late in the day that the two sides, which held and broke off informal merger talks late last year, had reached only an informal understanding on the final issues to be hammered out.

″The two sides are not that far apart,″ said one source, who asked not to be identified. ″It’s not like the show is over. They’re still very optimistic.″

Other than a brief Wednesday morning statement from Hutton that an announcement would be forthcoming later, neither company would comment throughout the day on the reported merger proposal.

But sources close to the talks indicated senior Shearson employees had been notified verbally about the deal.

Sources inside Hutton said the firm’s employees had not been notified officially, but nevertheless viewed a merger with Shearson as a foregone conclusion.

One executive said the lingering uncertainty over whether the deal was official, and the possibility that a merger would mean extensive layoffs at Hutton, slowed work to a virtual crawl as employees there awaited word from the top.

″People are extremely bitter. It’s difficult to contain yourself with what’s at stake, namely people’s livelihoods,″ said the source, who agreed to discuss the matter only if not quoted by name.

The 84-year-old Hutton began seeking a buyer or major cash infusion last month amid concerns over its ability to continue raising capital following the stock market collapse in October.

Hutton’s board had met Tuesday to mull a buyout proposal from Shearson, which it had contacted regarding a possible acquisition.

Hutton stock dipped 25 cents a share to $27.37 1/2 on the New York Stock Exchange. Shearson shares, 61 percent of which are owned by American Express Co., rose 50 cents to $15.

For Shearson, an acquisition of Hutton would be a coup that would vault it past Salomon Inc. as the nation’s biggest investment firm, dramatically expand the size of its retail sales force and create new uses for its recently expanded computer processing facilities.

The deal also could help Hutton shake the taint of recent scandals and erratic financial performances, but also might mean the sale of some major operations or widespread layoffs of Hutton workers that Shearson does not need, analysts said.

According to a report by Dow Jones News Service, Shearson offered to pay $25 per share in cash and $8 in preferred Shearson stock, which carries a market value of about $5 per share. Hutton has 34.2 million common shares outstanding, giving the proposal a value of about $1.03 billion.

Several other companies had eyed Hutton since the firm put itself up for sale on Nov. 23, little more than a year after informal merger talks with Shearson had broken down.

Dean Witter Financial Services Group Inc., Merrill Lynch & Co. and Equitable Life Assurance Society of the United States all had expressed some interest in buying Hutton.

A key target for Shearson is Hutton’s worldwide retail network, which would add about 6,500 seasoned account executives to Shearson’s own 5,700 brokers, rivaling Merrill Lynch for dominance in that area.

Shearson, which has about $75 billion in funds under asset management, also would gain billions of dollars in that relatively stable business.

The additional workload generated by Hutton’s business also would enable Shearson to get more efficient use from its computerized securities processing operation, the object of a $200 million expansion last year.

But at the same time, duplication among back office functions and other areas ake it likely Shearson could cut as many as 5,000 of Hutton’s 18,000 employees, while attempting to retain top performers, analysts have speculated.

There have been unsubstantiated market rumors that Shearson might attempt to sell Hutton’s capital markets operations, considered some of the firm’s weaker areas, which would reduce the scope of any layoffs.

While Hutton’s decision to seek a buyer was emblematic of the consolidation that has swept Wall Street, the move comes in the wake of a series of problems that forced the firm to seek a fresh infusion of capital or a new parent.

The biggest cloud was Hutton’s 1985 guilty plea to 2,000 counts of federal mail and wire fraud stemming from a check-overdraft operation. To many Wall Streeters, the scandal was an indictment of Hutton management that pointed out sloppy practices which were tarnishing the company’s earnings as well as its reputation.

In 1986, a boom year for the stock market and investment business, Hutton lost $90.3 million. The loss stemmed from a special $130 million reserve that was set aside largely to compensate customers losses from certain municipal bonds the firm had marketed and traded improperly.

In addition to the existing worries, Hutton officials said the stock market’s October crash raised new concerns about the firm’s ability to raise capital needed to remain competitive in the volatile global financial markets.

Hutton had about $1 billion in capital at year-end 1986, making it the nation’s 10th largest investment firm. Shearson was No. 2 with about $3.1 billion in capital, behind Salomon Brothers Inc.’s $3.2 billion.

A number of major Wall Street firms in recent years have sought outside investors or new parents in order to gain access to the huge amounts of fresh capital needed to meet competition in the expanding global financial markets.

Shearson itself earlier this year sold a 13 percent stake in itself to Nippon Life Insurance Co. of Japan for $538 million. That transaction occurred shortly before American Express sold 18 percent of Shearson stock to the public, raising more than $600 million.

Unlike Hutton, Shearson had enjoyed growing profits during the bull stock and bond markets and access to the huge capital of its parent American Express. Shearson posted a $316 million profit in 1986, up from $201 million the previous year.

Much of Shearson’s growth stems from acquisitions. American Express acquired the former Shearson Loeb Rhoades Inc. in 1981, and the new firm, Shearson-American Express acquired the venerable investment house Lehman Brothers Kuhn Loeb in May 1984.

In between, Shearson acquired a number of smaller, regional brokerage firms.

Its linkage with Nippon Life was seen as bringing not only fresh capital, but additional access to the growing Japanese and Asian financial markets.

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