King of Capital, Part 2

Sandy Weill's years with AmEx: While anything but smooth, he did learn a number of lessons that helped ease the way when he formed Citigroup

Merging Shearson with AmEx in 1981 (see BW Online, "King of Capital, Part 1"), was a professional triumph and a financial windfall for Sandy Weill, but the years at AmEx were some of the most frustrating of his career. He not only struggled within the AmEx bureaucracy, but, by handing over the reigns of Shearson to his young lieutenant, Peter Cohen, he lost his power base. Cohen took the brokerage in a direction that would lead to massive losses.

In 1983, Weill went through a torturous process to get AmEx to agree to his idea of purchasing financial-planning firm IDS. In the end, IDS turned out to be one of the most successful acquisitions in AmEx history. Weill's last major role there was straightening out its ailing insurance subsidiary, Fireman's Fund. When AmEx decided to sell it, Weill tried to purchase it in a leveraged buyout, with help from Warren Buffett. Thwarted once again by the AmEx board, Weill in 1985 resigned from the company, to start over on his own.

The AmEx years weren't a loss for Weill, however. After his relationship with Cohen frayed, he discovered a new protégé in the young Jamie Dimon -- who left AmEx with his mentor and now heads Bank One (ONE ). Also, Weill learned key lessons about the importance of gaining favor with the board, keeping a hand in operations, and never agreeing to a No. 2 role in management. The lessons would prove vital in 1998, when he merged Travelers with Citicorp, to form Citigroup (C ).

Chapter 5: Deputy Dog (Part 2)

An Auspicious Beginning

Unlike other deals Sandy Weill had been a part of, the sale of Shearson to American Express in 1981 was not about cutting costs and consolidating operations. In fact, little effort was put into integrating Shearson with American Express, and the brokerage largely operated as it had before the deal, albeit with a far larger capital base.

And what of cross-selling? It never got off the ground. As Howard Clark Jr., who worked with Weill at American Express, recalls:

There were attempts at cross-selling. But at the end of the day the credit-card people were not going to open their business to thousands of salespeople. They just weren't about to do it. The credit-card list was called the "crown jewel of American Express" and the thought of having a couple of thousand salespeople calling credit-card holders to try and sell them common stocks, unit trusts, annuities, and partnership interests just never worked.

Given the changing environment for financial services in the 1980s and CEO James Robinson III's hunger for more acquisitions, Weill was ideally suited for his role of dipping into AmEx's deep coffers and making some timely acquisitions for the greater glory of the company. Yet Weill struggled to make significant deals for AmEx. In his new bureaucratic environment, he couldn't move as fast. And, as number three behind Robinson and AmEx President Al Way, he couldn't call the shots.

Weill did his best to cut through layers of bureaucracy at AmEx. For example, when a major customer reached Weill with a problem with his margin account, instead of handing the problem off to the next rung down on the corporate ladder, Weill went directly to the margin clerk to fix the problem. "He didn't need an organizational chart," says Clark. "He went to where the source of the problem was."

Maybe so, but Weill was clearly hamstrung in his new environment. In his first two years, he managed to acquire only The Boston Company, a small money-management concern, and two regional brokerages. His attempt to take over Foster & Marshall, a brokerage based in Seattle, failed. In fact, many of Weill's ideas for acquisition languished in dead-end meetings, like unpopular legislation stuck in committee.

He was, however, reaping the benefits of his increasing wealth. In 1982, the Weills, who maintained an apartment in the city after they bought their Greenwich home, purchased a seven-room penthouse on the Upper East Side, with views of Central Park.

Weill Loses His Power Base

Weill had less and less to do with Shearson. While Robinson was off giving speeches about how great Shearson was, Weill removed himself from Shearson's daily operations and looked for major initiatives to lead within the parent company, leaving day-to-day management to his lieutenant Peter Cohen. With many of his deals going nowhere and with little input in Shearson, Weill felt as if he had very little to do.

Nonetheless, in January 1983, at 49, Weill was named president of American Express, replacing Alva Way in a management reshuffle. Louis Gerstner became chairman of the executive committee, succeeding Weill. The day of his promotion to president turned out to be the high point of Weill's time at American Express. For one day, at least, Weill received a little bit of attention after being virtually invisible for over a year.

Weill's promotion to the coveted role of president proved to be the worst thing that could have happened to him. With it, Weill chose to give up his power base to the 36-year-old Cohen, who became the youngest head of a major Wall Street brokerage.

Explains Shearson exec George Murray, "Sandy had great confidence in Peter Cohen and Peter had done some very remarkable work in making order out of the chaos of merger time after time.... Therefore, he was rewarded." Cohen was officially named CEO of Shearson, with Weill staying on as chairman.

Cohen moved into Weill's former office on the 106th floor of the World Trade Center, complete with working fireplace. As awkward as Weill felt in his new situation, Cohen quickly made himself at home and added an oversized pair of shoes behind his desk. "This was a present to myself," Cohen told The Wall Street Journal, "a reminder that I had big shoes to fill."

After years of supporting Weill -- crunching the numbers, dotting the i's and crossing the t's -- Cohen, understandably, felt ready to make his own mark. Yet Cohen had a distinctly different management style than Weill. Observed Murray: "Sandy would walk onto the elevator and start asking people, 'What do you do?' He wanted to know everyone on the elevator. Now, Peter would get on the same elevator and he just stared straight ahead, hoping no one would talk to him."

Cohen's slightly aloof demeanor was more similar to that of a traditional Wall Street manager. Cohen was even-tempered and visibly noncommittal during meetings and conference calls. Cohen was also considered to be less focused on Shearson's 3,800-strong retail salesforce and more interested in investment banking and real estate deals.

Seeing Cohen run the company he built in a completely different style was painful enough for Weill. Even worse, at that point Cohen was faring better than his old boss, even at the acquisition game. Cohen conceived of and orchestrated AmEx's purchase of Edmond Safra's Trade Development Bank, which Cohen had become familiar with during his year spent at Safra's First Republic Bank.

As Weill's relationship with Cohen frayed, he found a new protégé. In 1983, Weill hired Jamie Dimon, a Harvard Business School graduate and son of a Shearson broker. It was the beginning of an even more intense relationship than the one Weill and Cohen had shared. Dimon was soon indispensable to Weill, taking care of many of the same details that Cohen had handled. Cohen's journey with Weill -- he had started at CBWL-Hayden Stone in 1971 as a 24-year-old analyst -- would soon culminate with estrangement.

Weill's IDS Purchase Goes Unappreciated

While Cohen was basking in praise for the Trade Development Bank (TDB) deal, Weill scouted out a deal of his own that seemed pedestrian by comparison. He proposed that American Express buy Investors Diversified Services (IDS), a Minneapolis-based firm that sold mutual funds and insurance products door-to-door. Not surprisingly, the deal did little to improve Weill's status at AmEx, striking most as a hum-drum initiative, particularly in light of Cohen's prestigious TDB deal.

Getting the IDS deal through AmEx's bureaucracy would prove torturous to Weill, who saw great potential in the company's grass-roots approach. He negotiated with management and proposed a $1 billion stock trade, which seemed, to him, a fair price given the company's growth potential. But other Shearson and AmEx executives, including Cohen, balked at the price. Cohen's unenthusiastic response to the deal enraged Weill. Finally, in December 1983, Robinson agreed to the deal, at a price of $773 million.

IDS would eventually prove to be AmEx's best acquisition, more profitable by far than either Shearson or TDB, both of which would eventually be shed at a loss for the parent company. But at the time, AmEx's top brass believed that Weill had miscalculated the price. That perceived stumble would pave the way for Gerstner's ascendancy as Robinson's most trusted and influential lieutenant.

Saving Fireman's Fund

Weill, still smarting from the IDS pricing debacle, would soon have his hands full with a key role in resuscitating American Express' ailing insurance subsidiary, Fireman's Fund. But it was far from a plum assignment. For the next year, Weill could no longer complain of not having enough to do. Fireman's Fund was a mess.

To his credit, Weill attacked the job with his customary gusto. He rented a small apartment three miles from the Fireman's Fund offices in Novato, California, north of San Francisco, where instead of overlooking the Manhattan skyline his office had a view of a cow pasture. He worked full-time there, flying back to New York and his family on the red-eye Friday mornings and returning on Monday. Adopting his old Shearson ways, he set about turning around the insurance subsidiary.

Weill moved fast. He cut the staff by one-fifth, reduced costs by $65 million, and attempted to thin an entrenched bureaucracy. Many of his cuts came from within the executive ranks. Weill expected immediate changes to produce immediate results, as they typically did at the brokerage firms he had turned around. But it took about a year for Fireman's Fund to get back on firm footing -- far longer than Weill had expected.

Weill and Cohen Clash Again

At the same time Weill was shaking things up at Fireman's Fund, Cohen came up with an even more high-powered acquisition idea. In the spring of 1984, news broke that the partners of Lehman Brothers, the venerable Wall Street investment bank, were warring and looking for a buyer. Lehman had merged with another ailing Our Crowd firm, Kuhn Loeb, six months earlier and attempts to integrate the two firms were failing miserably.

As CEO of Shearson American Express, Cohen was eager to purchase an investment banking firm. Shearson was still known for its fleet of retail brokers. As Cohen saw it, Lehman could bolster Shearson in the key areas of banking, fixed-income trading, and government securities.

Not surprisingly, Weill was against it at the start, arguing it was bad timing. The market was booming and he preferred to buy firms when the market was suffering and he could get a good price. But, his clout at the firm badly damaged by the IDS pricing debacle, Weill had no power with which to restrain Cohen.

Weill Looks for an Exit from American Express

Weill's stint running Fireman's Fund had rekindled his longing to be on top again, and it was abundantly clear to him that Robinson wasn't going anywhere soon. In August 1984, Weill started selling AmEx shares by the hundreds of thousands. As the months went by, he kept selling. For anyone who cared to look, Weill was clearly signaling his impending departure, as he had always viewed the willingness of employees to stockpile company shares a litmus test for their loyalty.

Weill alighted on a potential exit strategy when Robinson and the board decided that, even with a turnaround under way, Fireman's Fund wouldn't be able to achieve benchmarks for growth and should be sold. Weill, who liked the insurance business, decided to buy Fireman's Fund himself.

The strategy he came up with for buying Fireman's Fund was a leveraged buyout, with assistance from Warren Buffett of Berkshire Hathaway. It called for Buffett to get 40 percent, AmEx to retain 40 percent, and Weill to take the remaining 20 percent.

Robinson weighed Weill's proposal for nearly a month. But the board balked, so Robinson rejected Weill's offer. Instead, the AmEx board decided on a strategy of selling Fireman's Fund to the public over the next few years while the turnaround continued. As it turned out, one of Weill's big mistakes during his tenure at AmEx was not doing more to cultivate the board.

But Weill was not completely rebuffed. Robinson offered him the chance both to become the CEO of Fireman's Fund and to buy a significant stake of the public company. Though skeptical, Weill negotiated with Robinson. But when Robinson wouldn't grant him as big a stake as he wanted, Weill turned down the deal, which included a five-year, $80 million offer from Robinson to run Fireman's Fund full-time -- a compensation package that would have been the richest in corporate history.

In June 1985, Weill resigned from American Express, effective August 1. His stated reason, as he would frequently tell the press, was that he was exhausted with the corporate grind. He said he was determined to take it easy for a while.

AmEx after Weill

Cohen, whose first few years at American Express were a stunning success, floundered in the years after Weill's departure. Apparently caught up in the excesses of the day on Wall Street, Shearson was hurt by bad real estate deals, junk bonds, and bridge loans. "There was a lot of bad stuff going on and it affected a lot of companies, not just Shearson," says Clark. "It was clear that Peter was very smart, a terrific back-office person, and a great integrator of the acquisition strategy that Sandy Weill had. But he always had Sandy." Cohen resigned on January 30, 1990.

As for Robinson, he, too, would see his once sparkling reputation lose luster in the late 1980s and early 1990s. "Jim did a lot of very good things for American Express over a long period of time," says Clark, pointing to the firm's tremendous growth. But Robinson inevitably suffered at the hands of the press when many of the acquisitions, including Shearson, ran into problems. BusinessWeek ran a punishing story "American Express: The Failed Vision," on March 19, 1990. Robinson eventually resigned from AmEx in January 1993.

Despite never quite hitting his stride at American Express, Weill has said many times in the business press that he would do the Shearson/American Express deal all over again. His AmEx years were a time of tremendous growth, if not great achievement. The lessons he learned -- about cultivating the board of directors, keeping a power base in operations, and never accepting a number two spot -- would all serve him well 17 years later when Travelers merged with Citicorp.

From King of Capital: Sandy Weill and the Making of Citigroup (Wiley), by Amey Stone and Mike Brewster. Now available at bookstores everywhere.

Before it's here, it's on the Bloomberg Terminal.