Dean Witter, Morgan Stanley Combine Forces

The merger-makers are merging.

Morgan Stanley & Co., a blue-chip investment bank, is tying the knot with Dean Witter, Discover & Co., a large retail brokerage firm. Yesterday's $10 billion link-up will create the nation's largest investment house, surpassing Merrill Lynch & Co. in market value. The deal will likely lead to a new round of Wall Street combinations.

The new firm will dominate Wall Street in some areas. It will become the largest mergers-and-acquisition investment banker, and the leading issuer of initial public offerings and other US equities. It will trail Merrill Lynch in research, but will be No. 5 in both mutual-fund networks and asset management.

Analysts say the link-up makes sense - it combines Morgan Stanley's institutional business with Dean Witter's retail business and asset management. The value of this type of deal became clear in mid-January, when Solomon Brothers announced a "strategic alliance" with Fidelity Investments, the largest mutual-fund company. Solomon Brothers agreed to sell Fidelity at least 10 percent of any stock offering it is involved with. "It's a strategic answer to Merrill," says one brokerage industry analyst who asked not to be named.

Pulling off the merger will pose challenges for the new firm, to be called Morgan Stanley, Dean Witter, Discover, & Co. The companies have different corporate cultures. Morgan Stanley is an aggressive investment banker with a talent for making money on its investments. Many of its managers have advanced degrees from such institutions as the Harvard Business School. Dean Witter is more like Middle America. It tried to sell securities from Sears, Roebuck stores. It offers a large stable of mutual funds. Morgan Stanley, which is also in the mutual-fund business, has also concentrated on the investment-management business.

The combined firm will have enormous financial resources. It will have a market capitalization of $21 billion, pre-tax income of $3.1 billion, and $12 billion in combined revenues. It will have 3.2 million customers and 409 offices in 38 countries.

The deal may spur other mergers on Wall Street. For several weeks there were rumors that Paine Webber would be purchased by Morgan Stanley or another large institutional firm. The company has tried to maintain its independence. But one securities analyst says, "Paine Webber may have to throw in the towel."

The merger comes after an extraordinarily profitable year on Wall Street. But analysts say earnings could drop this year - perhaps almost in half.