BUSINESSWEEK ONLINE : APRIL 28, 1997 ISSUE
INSIDE WALL STREET

What Brokers Are The Banks After?

George Salem is an analyst who predicted a number of the big bank mergers. Salem is still watching the banks, but this time he sees them not as targets but as suitors. Now at New York investment bank Gerard Klauer Mattison, Salem says many commercial banks have investment banks and brokerages ''high on their acquisition lists.'' Banks must move quickly or risk being shut out of this line of business, especially the booming market for initial public offerings.

With the recent deals between Morgan Stanley and Dean Witter Discover and between Bankers Trust and Alex. Brown, securities firms are now ''heavily in play,'' notes Salem. At the top of Salem's picks of brokers he thinks are compelling takeovers: Lehman Brothers Holdings (LEH) and Donaldson, Lufkin & Jenrette (DLJ).

Rumors have swirled that Lehman will be the next prey. When Lehman was first mentioned in this column as a target (BW--Sept. 30), the stock was at 21. It has since reached 321/2, after hitting a high of 37 in mid-February. In a takeover, Lehman is worth 45, analysts figure. Who's stalking Lehman?

Salem thinks the most likely buyer is Chase Manhattan. Lehman is a nice fit for Chase, says Salem, because of Lehman's prowess in raising capital through securities underwriting, merchant banking, asset management, and trading. These are fields where Chase needs help, he adds. Also rumored to be interested in Lehman is J.P. Morgan. Salem, however, puts a low probability on that happening.

He thinks that J.P. Morgan's target could well be Donaldson, an integrated investment and merchant bank whose skill and competence in equity underwriting and junk-bond operations are its most attractive assets. Donaldson shares spiked up from 37 a share in early February to 47 by mid-February and then slumped back down to 37 when the disappointment set in--as the prospect of being taken over seemed to fade from the picture. In recent days, the stock has moved up again, to nearly 39. In a buyout, analysts figure Donaldson is worth about 50.

BY GENE G. MARCIAL

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