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GE's Investment in Kidder Finally Pays Off

Updated from 12:02 p.m. EDT

A Wall Street story that began in the 1980s concluded Wednesday.

Tucked in the shadows of the buyout of PaineWebber (PWJ) by the Swiss investment bank UBS (UBS) is both the tangled wreckage of Kidder, Peabody -- the once-esteemed Wall Street brokerage firm that collapsed in 1994 under the weight of a bond trading scandal -- and the ambitions of General Electric (GE - Get Report) to become a Wall Street powerhouse.

GE bought Kidder, Peabody, then a 121-year-old stately investment house, for $600 million in 1986. What ensued was a nearly decade-long stint on Wall Street by GE, punctuated by financial scandals and waning profits at Kidder, that culminated in the 1994 sale of its stake to PaineWebber for $670 million in stock, giving GE a nearly 25% stake in that firm.

With the sale of PaineWebber to UBS, GE stands to gain about $1.5 billion. In 1998, it reaped about $400 million when it lowered its stake in the brokerage to 22%.

Not bad for an investment that once raised the ire of shareholders and dragged the perennial blue-chip company's stock to an approximate 40% discount to the market.

"It was like GE lost its mind," said Nicolas Heyman, an analyst at Prudential Securities who has long followed GE, describing the sentiment of the time of the Kidder buyout. "This redeems GE in terms of saying that they stuck with Kidder, Peabody, and generated almost $2 billion out of a disaster. I would say this is a very favorable way to close out the chapter of the Kidder, Peabody book." Prudential has not acted as an underwriter for GE. Heyman rates GE a buy

With a bit of self-deprecation, Jack Welch, chief executive of GE, praised the PaineWebber-UBS deal. "Anyone who knows GE's history in the brokerage business, knows we weren't so good at the game," he said Wednesday in a statement. "However, PaineWebber had the experience and leadership to leverage our Kidder Peabody franchise.

"We're pleased with the merger of PaineWebber and UBS, which adds to the strong global franchise UBS enjoys today, and dramatically increases its U.S. presence," Welch said. "We're confident of the strategic fit of these two businesses and will vote our shares in support of this transaction."

Shortly after GE bought Kidder in 1986, a skein of insider trading scandals, which came to define the Street of the 1980s and were depicted in the James Stewart bestseller Den of Thieves, swept Wall Street. The firm was implicated when former Kidder executive Martin Seigel -- who had since left for Michael Milken's junk-bond investment firm, Drexel Burnham Lambert -- admitted to selling inside information.

"We never would have touched Kidder Peabody with a 10-foot pole if we knew there was a skunk in the place," Welch said to Kidder employees in a speech in early 1988, as reported in Fortune magazine, shortly after the scandal broke. "Unfortunately we did, and now we've got to live with it. But we're as committed to winning as we were on day one. We'd love you to win -- more than any mother in the world."

It wasn't the insider trading scandals of the 1980s, however, that brought Kidder down. Although weakened by lawsuits and Securities and Exchange Commission fines, the company managed to survive until 1994 when another scandal, this one involving a bond trader who manufactured $350 million in paper profits to mask trading losses, forced the firm's collapse.

Out of patience, GE ripped Kidder apart and sold its assets to PaineWebber, in an all-stock deal. In the process it took a hit of 45 cents a share against its 1994 fourth-quarter earnings.

Wednesday's sale of PaineWebber is at least a partial redemption for GE's frustrating foray into the Wall Street brokerage business, analysts said.

"This is a victory for GE shareholders at the time, GE shareholders who were punished," said Lawrence Horan, an analyst at Parker/Hunter who covers General Electric. Horan's firm has not performed investment banking services for GE and Horan has a buy rating on the stock.

GE finished up 1 1/2, or 2.9%, at 53 3/4.

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