Sandy Weill Strikes AgainLeah Nathans Spiro
At American Express Co. headquarters in lower Manhattan, there was a sense of dej a vu. Almost three years to the day earlier, Primerica CEO Sanford I. Weill had tried to put together a joint venture with AmEx, Weill's former employer. The venture would have owned AmEx's Shearson Lehman Brothers Inc. unit. But the deal collapsed when James D. Robinson III, AmEx' CEO at the time, refused to commit himself to covering unexpected liabilities at Shearson, leaving both Weill and Robinson sorely disappointed and embarrassed.
Now, Weill is trying again, with a $1 billion bid for Shearson's retail-brokerage unit, disclosed on Mar. 9 in The Wall Street Journal and confirmed the same day. There's a chance the new offer won't fly, either. Weill has a history of making deals that fall through, from his failed bid for BankAmerica Corp. in 1985 to his unsuccessful attempt to buy Kidder, Peabody & Co. in May, 1992. And the disposition of Shearson's considerable liabilities, stemming largely from legal claims by Shearson customers, could again prove a sticking point. Plus, the buy is subject to approval by the boards of both companies and the rating agencies.
Still, if the deal isn't quite a fait accompli, it's very close. The reason: It's one of those rather rare cases where everyone involved--AmEx, Shearson, Shearson's Lehman Brothers division, and Primerica, as well as Weill and his old Brooklyn friend Harvey Golub, AmEx' CEO--should come out winners. AmEx gets to unload an albatross whose laggard earnings have hurt its bottom line and eaten more than a billion dollars of its capital. By adding Shearson to its Smith Barney, Harris Upham & Co. brokerage, Primerica Corp. will be able to create a colossus, to be called Smith Barney Shearson, that could challenge industry giant Merrill Lynch & Co. The arrangement should also allow Lehman Brothers, the third-largest U.S. investment bank, to get its independence from Shearson and AmEx, something its management has long coveted. Plus, the deal would be a personal victory for Weill and Golub. Weill would reclaim the brokerage he virtually built from scratch and then lost when he sold it to AmEx in 1981. (He became AmEx' president in '83 and resigned in '85.) Golub would be able to expunge the major obstacle to his plan to rebuild AmEx.
Once Golub replaced Robinson on Feb. 22, Weill moved fast. He approached Golub, AmEx officials say. Weill found a receptive audience in Golub, whose most pressing problem was to quickly stem Shearson's losses.
Weill offered Golub a way out. Instead of a joint venture, the two began talking about a straight asset sale of Shearson's retail-brokerage business alone. "It leaves AmEx more manageable, easier to understand, and stronger, having rid itself of its major problems," says analyst E. Wilson Davis of Gerard Klauer Mattison & Co.
STRIKING DISTANCE. It also leaves the door open for AmEx to sell Lehman Brothers as early as this year. Because of the asset-sale structure, the $1 billion that AmEx would get from selling Shearson would remain in Lehman, say sources close to the transaction. This would considerably shrink the equity Lehman would require to be spun off, putting it within striking distance of a stand-alone, single-A rating, say sources at the investment bank. Further, Lehman could write down the large amount of goodwill left from the 1988 acquisition of E.F. Hutton & Co. and get Shearson's fixed assets off of its books. "Harvey gets a two-step exit strategy with the value accruing to Lehman Brothers," says one Shearson executive.
Finally, Lehman Brothers could be judged on its own achievements, without the poor earnings of the Shearson retail division obscuring its own lucrative results--$250 million in earnings in 1992, say Lehman sources. Under the deal, Lehman would keep its own retail division, with 750 brokers spread among seven offices domestically and more than a dozen offices internationally. Lehman Brothers' co-presidents, J. Tomilson Hill and Richard S. Fuld Jr., will lose their chance to turn around all of Shearson Lehman Brothers. But running Lehman Brothers, as they're expected to do, isn't a bad consolation prize. "They were prepared to turn Shearson around the long way, but Harvey was not," says an AmEx official. A Shearson Lehman Brothers spokesman declined to comment beyond confirming that discussions between Primerica and AmEx were under way.
The biggest winner of all may be Primerica, which saw its stock run up more than $4 on the Shearson acquisition news. Smith Barney, with only 2,400 brokers, had been runing the risk of being too small to be an effective player. The addition of Shearson's 8,500 brokers means that the new Smith Barney Shearson will have 10,900 brokers--almost as many as Merrill Lynch's 11,500. Primerica will also get Shearson's lucrative money-management business, with $50 billion under management.
For Weill, owning Shearson has great personal significance. Known as a bottom-fisher and a ruthlessly cost-conscious manager, Weill hopes to be able to do to Shearson what AmEx couldn't: turn it into a big moneymaker. He is expected to improve profits by getting Shearson's bloated costs under control.
SOUR LEGACY. But while the positives of the Shearson sale should outweigh the negatives, problems lurk underneath the euphoria of the biggest brokerage deal of the 1990s. AmEx has agreed to assume legal liabilities that have been incurred to date by Shearson, say people close to the deal, with Primerica assuming any liabilities going forward and the two companies using a formula to calculate liabilities in the interim period before the deal closes. "We must continue to pay for what is in the pipeline," says one AmEx executive.
That amount could be considerable. After Prudential Securities Inc., Shearson is believed to have been the biggest seller of failed limited partnerships in the 1980s, a product that has cost the brokerage industry millions in settlements. Shearson is also potentially on the hook for damages resulting from First Capital Corp., a failed California thrift that is part-owned by Shearson, and Computervision, a Shearson stock offering that went sour. While Shearson reserved some $90 million in 1992's fourth quarter for liabilities, the tab could run higher.
AmEx may also have to contend with liabilities created by Lehman's retail division. Its highly aggressive sales force generates almost twice as much commission income per household as Shearson brokers. But Lehman brokers have also been a frequent target of regulators. In April, 1991, for instance, Shearson, without admitting or denying guilt, agreed to pay the New York Stock Exchange a $750,000 fine for violations at Lehman. A Shearson spokesman says the Lehman division's compliance problems have been cleaned up.
Another potential problem for Lehman is that its investment bankers may have a harder time recruiting clients. Under the deal, Lehman Brothers will lose its ability to distribute securities through the giant Shearson retail-brokerage arm, which has been its main selling point with corporate issuers.
Weill may have a few troubles of his own: Melding Smith Barney and Shearson won't be a breeze. Smith Barney brokers, who cater to high-net-worth individuals and preach the virtues of being small, may be unhappy being part of a megabroker. "It's probably a positive for us," says one big retail competitor. "There will be turmoil at both firms and definitely a period of digestion where we can pick up some people."
Still, Weill and Golub think the Shearson deal is well worth any morning-after problems that may arise. Indeed, the chances seem high that down the road, the two friends from Brooklyn will have plenty of anniversaries to celebrate.