E.F. Hutton's fall began long before market plunge

When Shearson Lehman Brothers talks, E.F. Hutton listens. That was not always so. In Last November 1986, Shearson, the nation's largest retail brokerage firm, tried to buy Hutton for $50 a share, or a total of $1.6 billion. Hutton, which wanted $55 a share, turned it down.

A year later, Shearson is expected to pick up Hutton at about half that price, about $29 to $30 a share, or about $1 billion. While the impending deal - expected to be achieved through a tender offer approved by stockholders - and the drop in price are dramatic, they aren't surprising, Wall Street-watchers and analysts say.

``We knew it had to happen eventually,'' says Robert Michelotti, regional sales manager in Hutton's Great Lakes region. Papers formalizing the deal were expected to be signed yesterday.

The fall of one of the most visible firms on Wall Street began long before the 508-point plunge in the stock market. ``Oct. 19 made it more pressing and changed the price,'' says A.Michael Lipper, president of Lipper Analytical Securities Inc. ``But this isn't a new problem.''

Hutton's decline, he and others say, predates even the company's highly publicized guilty plea in 1985 to a massive check-kiting scheme. The initial and cataclysmic error, says veteran Wall Street analyst Perrin Long, was made in the 1970s, when Hutton stopped ``focusing on what Hutton did best, which was servicing retail customers.''

Since the company opened its doors in 1904, it had concentrated on building a top-notch sales force. And with success: On a per-broker basis, Hutton's brokers sold more stocks and bonds to the general public than any other brokerage house.

Then in the 1970s, and especially in the '80s, Hutton changed course. Robert Fomon, who had headed Hutton's investment banking operations on the West Coast, took over.

``The new management wanted to be in more exotic businesses like investment banking and the capital markets, not in the mundane retail markets,'' Mr. Long says.

``We began doing things we haven't done well in 83 years,'' says one employee who asked not to be identified. ``Morale in the field was terrible.''

Nancy Young, a financial services analyst at Tucker, Anthony & R.L. Day Inc., says Hutton didn't have much choice. ``The retail brokerage business is now mature,'' she says. ``To achieve growth you have to be willing to participate in new markets'' such as capital markets, securitization, trading, and mutual funds. ``Hutton hadn't kept up.''

The problems were compounded on May 2, 1985, when Hutton pleaded guilty to 2,000 counts of wire and mail fraud. In an industry where reputation is a major asset, if not the major asset, the admission was devastating.

``When you're handling other people's money, you have to be extremely careful,'' says Elizabeth Curley, who was at Hutton during the check-kiting scandal and is now at Bear, Stearns & Co. ``There's no doubt'' that the smear on the company's reputation accelerated the decline, she adds.

Over the next couple of years, Hutton bumped along. But problems were just below the surface, and often above.

When Hutton's board chose not to merge with Shearson a year ago, it reportedly did so by only one vote. The reason, Long says, is that the board didn't have much confidence in the new management. Mr. Fomon had left Hutton, but president and chief executive officer Robert Rittereiser was not given the chairman position.

``That suggested there were major differences between Rittereiser and the board,'' observes Long. ``All was not well.''

And it got worse. When the market plunged Oct. 19, rumors abounded that Hutton was insolvent.

For its part, Shearson may be getting more problems than it bargained for: lawsuits from disgruntled Hutton shareholders.

Notes Ms. Young at Tucker Anthony. ``The question for E.F. Hutton shareholders is, `Why didn't management take the Shearson offer a year ago?'''