Primerica-AMEX Deal May Presage Restructuring Wave

THE sale of the Shearson Lehman Brothers retail brokerage division - a unit of American Express Company - to Primerica Corporation for more than $1 billion is expected to have broad repercussions for the US financial services industry. Competition between brokerage firms will be sharply intensified; American Express will be able to focus once again on its troubled but primary credit card business; and Primerica will be able to directly challenge industry leader Merrill Lynch & Co. for dominance within th e retail brokerage sector.

The sale, which has been rated well by Standard & Poor's Corporation and Moody's Investors Service Inc., may serve as a model for other selloffs or mergers of brokerage houses, experts say.

The push for mergers and structural reorganization that has marked much of corporate America lately has increasingly been felt within the financial services area. A number of major banks, including such insitutions as Chemical Bank and Manufacturers Hanover, have merged. Many analysts say the retail brokerage industry could join the march toward consolidation given stepped up competition for investor dollars from banks and savings and loan associations, mutual fund companies, and other financial-service firms.

Brokerage houses that have been the subject of speculation as potential takeover candidates include Kidder Peabody & Co., owned by General Electric Company, and Prudential Securities Inc., a division of Prudential Insurance.

Primerica's acquisition of Shearson is the largest purchase of a brokerage house undertaken in the United States. "I would anticipate a period of digestion [by Primerica], with clearer controls of costs, the elimination of some overlapping staff and a big push on Merrill Lynch & Co.," says Lewis Altfest, president of L. J. Altfest & Co., an investment advisory firm. Merrill Lynch is the country's largest retail brokerage firm. "In a way this is going to be like the battle between Coca Cola and Pepsi," sa ys Mr. Altfest. Primerica and Merrill Lynch "will do just fine. But the problem is going to be for the smaller brokerage houses, or the [large] firms that can't control costs."

So far, investors have given a thumbs up. Both companies saw a boost in the price of their stock, especially for Primerica. Primerica's stock has jumped 20 percent since the initial report of the sale surfaced early last week; American Express rose about 2 percent. Primerica is a full-service financial firm with units in insurance, finance, and securities. Its securities entity, Smith Barney, Harris Upham & Co., although relatively small in terms of the number of brokers (with around 2,500), is considere d one of the more imaginative investment houses on Wall Street, concentrating on high income investors.

Sanford Weill, the chief executive officer of Primerica, is the original founder of Shearson. He sold the brokerage house to American Express in 1981. Mr. Weill may have been able to wrap up the Shearson acquisition because of his close friendship with Harvey Golub, the CEO of American Express. An attempt by Weill to put together a joint venture with American Express was rebuffed three years ago by James Robinson, who was then CEO of American Express.

American Express will retain the profitable Lehman Brothers investment banking unit, which deals with corporate underwriting and finance. But American Express is expected to sell off the unit later this year.

Merrill Lynch has long been the dominant player among retail brokerages, with 11,500 brokers and 458 offices. The Shearson-Smith Barney merger will create a retail broker that can directly challenge Merrill Lynch, experts say, with 11,400 brokers and 500 offices.

"Weill wanted better national distribution" for his Smith Barney brokerage unit, says Wall Street analyst Perrin Long Jr., of First of Michigan Corporation. "Weill gets that by buying back Shearson."

Many industry experts caution that earnings for the brokerage industry in general could come in slightly lower than for 1992, which turned out to be a record year for industry sales volume and profits. Larry Eckenfelder, at Prudential Securities, has recommended that investors hold onto existing shares of brokerage house stocks without adding to their portfolios. But Mr. Eckenfelder notes that the eight brokerage stocks that he follows have outperformed the market so far this year, with an average gain o f 9.7 percent through February, compared to only 2.4 percent for the Standard & Poor's 500.