Finance: SECURITIES FIRMS
SMITH BARNEY'S WHIZ KID
Can Jamie Dimon turn Smith Barney into a Wall Street dynamo?
On a Sunday night in early August, Daniel P. Tully, the chief executive of Merrill Lynch & Co., phoned three other Wall Street CEOs. Tully, who was also serving as chairman of the NASDAQ stock market, asked Smith Barney's James Dimon, Dean Witter's Philip J. Purcell, and Goldman Sachs' Jon S. Corzine to come to Washington the next morning. The task at hand: the highly contentious negotiations over the terms of a landmark $100 million settlement for charges of pervasive price-fixing on NASDAQ. For three days straight, the four commuted to Washington and met with top regulators and their staffs.
It was the first time Merrill Lynch's Tully had worked closely with Dimon, who at 40 is the youngest CEO of a major securities firm. And it was one of the first times for Dimon to step out of the very long shadow of his boss, Sanford I. Weill, the CEO of Travelers Group, Smith Barney's parent. Says Tully: "Jamie never acted as if, `well, let me check with Sandy before I speak."'
THREE PRINCIPLES. Since January, when Dimon got the top job at Smith Barney, he has been coming into his own as a major Wall Street mover and shaker. A straightforward, unpretentious workaholic, Dimon has a lot going for him. One asset is his youth. In the stodgy financial-services business, he's on the same wavelength as younger consumers. A technology advocate, he got the firm on the Internet and made it the only brokerage to tie into the popular personal-finance software Quicken. He also pushed Smith Barney to become the first brokerage to sell no-load mutual funds, breaking industry tradition.
But what really sets Dimon apart is his superb Wall Street education. Dimon has been the right-hand man of Weill, 63, who has been masterfully buying, consolidating, and running brokerage firms and creating shareholder value since 1960. "Weill built his empire by sticking to three basic principles: controlling expenses, building revenues through acquisitions, and never taking risks that are unnecessary," says Smith Barney veteran Stephen Treadway, now an executive vice-president at PIMCO Advisors. "The essence of Jamie is that you have a bright, driven guy trained on the principles Sandy built."
Dimon's and Weill's biggest accomplishment has been re-creating Smith Barney--which, like Dimon, is just now emerging as a major force on Wall Street. In 1992, Smith Barney was a sleepy company of just 2,000 brokers and a small investment bank that earned $157 million. With the 1993 acquisition of Shearson Lehman Brothers, the Smith Barney name was pasted on 8,000 Shearson brokers. To support them, traders and investment bankers were hired up and down the Street. The result: a retail juggernaut boasting 10,500 brokers, second only to Merrill Lynch's 13,000, that will earn $852 million in 1996, estimates Sanford C. Bernstein & Co. "We're becoming a powerhouse," says Dimon.
Yet despite Smith Barney's considerable progress, Dimon faces daunting competitive obstacles. On the retail side, full-service brokers are under pressure from discounters as well as banks, mutual-fund companies, and financial planners. On the institutional side, he needs to find a thrifty way to transform Smith Barney into a global operation. Says Michael Flanagan, an analyst with Financial Service Analytics Inc.: "Globally, they have to build or buy." Dimon also wants to build a major investment bank. In 1995, Smith Barney earned $599 million, while Merrill Lynch earned $1.1 billion, largely because it boasts a large investment bank to complement its brokers. If Dimon can muster the leadership skills and strategic moves, he could change Smith Barney into another Merrill Lynch.
Dimon's and Weill's initial foray into investment banking proved a chaotic and costly embarrassment. In 1993, Weill hired Robert F. Greenhill, a superstar Morgan Stanley & Co. banker, as CEO of Smith Barney. But the move backfired, and Greenhill resigned earlier this year. Dimon ended up running the firm even before he became CEO in January. Many bankers, wooed by hefty contracts and ambitious plans, left embittered and blame Dimon for broken promises, mismanagement, and treating them with disdain. "Jamie is a charming and smart person, but he doesn't understand the crux of investment banking," says an ex-Smith Barney banker. "We tried to do too much too fast," admits Dimon. "Blame it on me, not Bob." Greenhill declined comment.
In mustering a second push, Dimon faces stiff odds. The market for investment banking has never been more crowded. Further, many believe Smith Barney no longer has the stomach to spend what it takes over time to build an investment bank. Historically, Weill and Dimon have succeeded by consolidating retail brokerages while shunning investment banking. "Every time they come up against that [problem], they recoil," says a former Smith Barney banker.
Internally, Dimon must deal with equally precarious terrain. He enjoys an unusually close and trusting relationship with Weill. But Weill, whom one insider calls "a professional busybody," is still very much in charge, and as Dimon becomes a power in his own right, tension will inevitably arise between the two. Already, since Dimon became CEO, "there have been a few confrontations," says one insider. "Jamie's riding high on Smith Barney's success. He can hold stronger views than ever before."
BOSS'S DAUGHTER. Dimon also has the delicate task of containing tensions between himself and Jessica M. Bibliowicz, 36, Weill's ambitious daughter, who is very close to her father. Bibliowicz runs Smith Barney's mutual-fund business. In recent months, Dimon has been in the uncomfortable position of disagreeing with the boss's daughter on new ventures.
At least Bibliowicz isn't competing with Dimon for her father's job, which no one expects to open up soon. Will Dimon be the next CEO of Travelers? "Yes," says Linda J. Wachner, the chief executive of Warnaco Group Inc. and a Travelers board member. Dimon is already the No.2 executive at Travelers: He has been chief operating officer of the $16.5 billion insurance company since 1993. "Everybody on the board of Travelers is proud of Jamie because he has grown a long way," says Wachner. "He has converted Smith Barney from a small brokerage house to a meaningful player on Wall Street."
There's no question Dimon is on a roll these days. The brokerage has had four record-breaking quarters in a row. Largely due to Smith Barney--it contributes 30% to 40% of its parent's earnings--Travelers' stock has soared from 21 in late 1994 to its current 53. Of course, so have other financial stocks, but what distinguishes Smith Barney is Dimon's and Weill's sharp emphasis on costs: Smith Barney's return on equity is among the highest in the business. In 1996's second quarter, it was a record 36.7%, up from 22.5%, largely because Dimon kept the firm focused on retail brokerage and so far has not expanded overseas. And Smith Barney's balance sheet is far less leveraged than those of its rivals--thanks to Weill's and Dimon's aversion to riskier tangents such as proprietary trading and bridge loans.
CRITICAL OVERKILL. The main credit for such stellar returns goes to the bull market. But Dimon has brought a disciplined, hands-on management style. He has installed key lieutenants who are intensely loyal to him. He also instills confidence by dint of sheer brainpower. Whether it's Wall Street analysts or Smith Barney brokers, he can dazzle a crowd with his ability to field queries on a range of issues. If Dimon has a managerial flaw, it is his people skills. He has yet to master Weill's deft touch. An example: when someone floated an idea at a recent meeting with 20 employees, Dimon retorted, "That is the stupidest thing I ever heard." Says an attendee: "It wasn't personal or mean-spirited, but he would be more effective if he would lighten up."
That may take time. But Dimon's deep experience in the brokerage business more than compensates. His roots in the industry go back to Dimon's grandfather, a Greek immigrant from Smyrna. He was a broker and taught Jamie's father, Theodore Dimon, the business. Dad and granddad, who modified his name from Papademetriou, were partners for 19 years. As a teen, Dimon worked summers in his father's New York office. While he was in junior high school, the family moved to a Park Avenue apartment, a big change from Queens, where Dimon grew up. Jamie, his brother Peter, and his fraternal twin, Ted, went to Browning, an East Side boys school. Next was Tufts University in Boston, a two-year stint at a consulting firm, and then Harvard business school in 1980. After a summer at Goldman, Sachs & Co., Dimon got job offers from Morgan Stanley, Goldman Sachs, and Lehman Brothers. "He was generally perceived as one of the very brightest guys in finance in that class," says Harvard professor Jay O. Light.
Seeking career advice in 1982, Dimon visited Weill, an old family friend. The Dimon and the Weill clans had been close for years. Ted Dimon was a broker at Shearson when Weill's firm, Hayden Stone Inc., bought Shearson, Hammill & Co. The two families, including Weill's children, Jessica and Marc, would get together at the Weills' Passover dinners, and Ted Sr. would play the violin. At Tufts, Dimon wrote a paper on the Hayden Stone merger, which Dimon's mother, Themis, showed to Weill. Dimon's meeting with Weill proved fateful. Weill, then chairman of the executive committee at American Express Co., offered Dimon a job as his assistant.
So began a working relationship that evolved to where the two have the understanding of an old married couple. Dimon is always respectful of Weill, but the two argue often. With adjoining offices, Dimon consults constantly with Weill. He is a perfect foil for his boss. Weill is instinctive, and Dimon's strength is financial analysis. Weill grabs headlines with a new deal, and Dimon does the behind-the-scenes grunt work to make it succeed. "It's a good thing for Sandy to have Jamie," says Ted Dimon, now a Smith Barney broker. Weill seems to give Dimon room to breathe. For example, Weill doesn't attend Smith Barney executive committee meetings.
SCOUTING MISSION. Weill left AmEx in 1985, and, after much soul-searching, Dimon joined Weill on his solo trek to find a company to buy. In a borrowed office in Manhattan, Dimon sat outside Weill's office, sifting through deal proposals. In 1986, Weill bought Commercial Credit Co., which became the foundation of his financial services empire. In 1988, he acquired Primerica Financial Services Group, which included Smith Barney. In 1993, Weill bought Shearson Lehman Brothers from American Express for $1.2 billion and, shortly thereafter, picked up Travelers for $4 billion.
Dimon had to earn his stripes with Weill every step of the way. For example, in 1988, Weill was impressed with Dimon's keen analysis of Primerica's dicey balance sheet, which resulted in a strategy of divestitures and write-offs that won over rating agencies. Dimon also managed the enormously complex 1993 combination of Shearson and Smith Barney. Weill declined to buy Lehman Brothers, then part of Shearson. "It was like cutting your body in half," recalls Dimon. Next, he had to integrate Shearson and Smith Barney brokers to form what was renamed Smith Barney.
Scrambling to replace Lehman, Dimon built on the small Smith Barney investment banking staff. He hired traders so that brokers could buy or sell stocks for clients and recruited bankers to generate initial public offerings for brokers to sell. All in all, he hired 1,000 people, moved 4,200 employees to a larger headquarters building in New York's Tribeca, and built five trading floors costing $250 million. "It was 24 hours a day, seven days a week," says Steven D. Black, Smith Barney's chief operating officer.
Weill wanted to go head-to-head with Morgan Stanley and Merrill Lynch for high-profile and international deals. His star catch was Greenhill, a highly regarded investment banker who was Weill's trusted friend and advisor. Initially, Greenhill seemed like the right man for the job. He brought over 22 Morgan bankers and instantly reeled in a marquee deal: Smith Barney represented Viacom in a $10.2 billion merger with Paramount Communications.
But Weill and Dimon soon realized that Greenhill, while a superb banker, had neither the interest nor the administrative skills to manage Smith Barney. He was constantly out of the office meeting with clients. And there were enormous tensions between the highly paid ex-Morgan Stanley bankers and their new colleagues.
The strategy soon began going sour. Not all of the Morgan Stanley hires turned out to be rainmakers. An expansion in Hong Kong proved a costly failure. But most damaging to the bottom line and morale were the mind-boggling contracts and guarantees to the three most senior bankers from Morgan Stanley: Greenhill, Robert H. Lessin, and Michael Leavitt. The multiyear guarantees consumed the lion's share of the investment-banking bonus pool because the trio got a percentage of the total earnings of the entire department. This meant the rest of the bankers, no matter how productive, had to scrap over a shrunken pie.
In late 1994, Weill severely cut back Greenhill's responsibilities. Dimon moved into the vacuum. Officially, Greenhill retained the CEO title, but Dimon ran the show. Yet by stepping into the CEO position without the title, his supporters say, Dimon got in a no-win situation where he did a lot of the work and got none of the credit. "He was following behind a big elephant to make sure nothing hit the ground," says a senior Travelers executive. "If it wasn't for Jamie, it would have been much worse."
Initially, Dimon and Greenhill were civil to each other, but later they worked at cross-purposes, avoiding and complaining about each other. They had wildly dissimilar personalities and goals. Greenhill was hell-bent on making Smith Barney into a global investment bank and tried to buy the European houses Barings PLC and ING Group. Dimon was more interested in cutting costs.
PAY SHOCKER. Finally, after a year of trying, Dimon convinced Weill that Greenhill had to go. In January, 1996, Greenhill resigned. "It was a mistake. It didn't work out," admits Weill. "I learned great things are built over a long period of time."
Wall Street gasped when word of Greenhill's three-year pay package of $86 million leaked out, including restricted stock worth $20 million at yearend 1995. And he will receive bonuses for three more years, which could total an additional $30 million. The episode did a lot of damage. "Jamie was really hurt by the whole thing. He got really, really burned and made to look foolish," says one employee.
Dimon certainly bears some of the blame for the problems. It was Dimon and Weill who put together Greenhill's rich contract, and Dimon and Greenhill who negotiated those of Leavitt and Lessin. And there's still a talent drain. Dozens of bankers have bailed out this year, including 30 promising younger ones as well as the experienced teams that worked the energy industry and Latin America. Ex-Smith Barney bankers say that the investment bank is too dependent on two or three niche areas, such as health care. Last January, Dimon conceded to the bank's staff that "I know I made mistakes, and I'm sorry. Let's move forward."
Dimon and others minimize the damage. The investment bank represents just 5% to 10% of Smith Barney's earnings, says Dimon. But that is exactly the problem. The firm has a ways to go before it reaches its goal of being in the top five in mergers & acquisitions. Its M&A market share has declined from No.8 in 1995 to No.12 through Oct. 4, 1996.
Still, Smith Barney is going gangbusters in other areas that it says are key for the firm's retail brokers. While only No.10 as an underwriter of all domestic debt and equity issues, it is No.4 in U.S. stock underwriting, No.2 in IPOs, and No.1 in muni bonds, through Sept. 30. The markets where it is weaker--government debt, corporate debt, and M&A--are not as relevant for retail customers, it says. "We are building on our strengths," says Dimon.
FOREIGN VACUUM. Sobered by his costly education, Dimon is rebuilding with more realistic goals. He says he has no plans to make Smith Barney another Merrill Lynch. Instead, now that Merrill Lynch has broken into the top three, alongside Morgan Stanley and Goldman Sachs, Smith Barney seems to be aiming for the No.4 or Merrill Lynch "wannabe" slot. That means settling for the co-manager position on some underwritings instead of the lead manager slot. Rather than "elephant hunting," as Dimon calls pursuing the biggest M&A deals, he plans to do a high volume of equity and high-yield underwritings and M&A for midsize to large companies. "Maybe that's what Merrill Lynch did in the past. They used their size and brand name to bootstrap their investment bank," says Dimon.
Dimon is also working on a better compensation system, since the old one prompted so many departures. The big test will be at yearend, when bankers get their bonuses and decide whether to stay. Further defections would make it tough to attract the 30 to 40 bankers whom the firm plans to hire in 1997.
Internationally, Dimon faces a vacuum. With just 150 people in London, 140 in Tokyo, and 50 in Hong Kong--far fewer than rivals--Dimon is considering buying or building a bank or finding joint-venture partners. He could tap Travelers $750 million in excess capital. "Maybe we'll buy a global investment bank," says Dimon.
Dimon could partner with an institutional firm, such as Morgan Stanley, as a way for Smith Barney to get a broader variety of financial products to sell through its brokerage network. And there are recurring rumors that Smith Barney will buy another retail broker.
Whatever card Dimon plays, it would be a mistake to underestimate him. He is enormously ambitious, and, despite his disclaimers, many believe he is driven to make Smith Barney another Merrill Lynch. That could take a decade -- if ever. But with Weill's blessing, and the maturing experience of a few fumbles behind him, Dimon certainly has a decent shot.By Leah Nathans Spiro in New YorkReturn to top