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Travelers joins Wall Street's elite with the marriage of Solly and Smith Barney
Sanford I. Weill is a compulsive tape-watcher, and on Sept. 24, the day of his greatest triumph, the numbers veritably leapt off the stock-quote machines. Before the opening bell, Weill's Travelers Group Inc. announced a deal to purchase Salomon Inc. for $9 billion. Soon, the nation's premier bond-trading firm will be joined with Smith Barney Inc., a large retail brokerage firm, under the Travelers umbrella. For Weill, the reaction on Wall Street--the object of his dreams, ambitions, and envy for four decades--could hardly have been sweeter. By day's end, Salomon stock was up 6.6% on massive volume. Shares of Travelers, up 96% in the past year, fell just 3.6%, to 69 1/2.
For the 64-year-old Brooklyn native, Wall Street was his--"Weill Street," if you will--for a moment, at least. The Salomon acquisition is the climax of a genuine rags-to-riches saga, a tale that parallels the recent history of Wall Street. From hard-charging leader of Shearson in the 1970s to resurgent boss of Primerica in the 1980s to acquisition-minded head of Travelers in the 1990s--it is as nimble a record as you can find on Wall Street (table).
Weill even got a good price. His all-stock transaction is about two times Salomon's book value--compared with around three for other recent investment bank deals. But he should savor this moment, for it likely will not last long. In melding the diverse corporate cultures of Salomon, Smith Barney, and Travelers, Weill has his work cut out for him. What he wants from the merger is a Wall Street giant and an investment arm that will make Travelers a player in the global financial-services market. That will take immense management skills.
On paper, the deal that will link Salomon with Smith Barney, and the two with the Travelers insurance goliath, seems to be a marriage made in heaven: the joining of a major equities distributor with a mighty bond trader. At $55 billion, the market capitalization of the combined Travelers-Salomon-Smith Barney will be more than twice that of Merrill Lynch & Co. and even bigger than Chase Manhattan Corp. The resulting behemoth will have more star equities analysts than anyone else, giving it the most highly ranked research team on Wall Street.
MODUS OPERANDI. Above all, the deal thrusts the new firm into a position to compete with Merrill Lynch, Goldman Sachs, and Morgan Stanley Dean Witter, the product of another stunning merger earlier this year. Says Weill: "This is a growth story. By putting Salomon and Smith Barney together, merging the two, it will make us one of the three or four major players in global investment banking over the next 25 years."
But not too far beneath the surface, the doubts lurk. For starters, part of Weill's modus operandi has been to buy cheap and then cut deep. The question is whether this strategy can be used successfully on Salomon. There are major areas of overlap between the firms and sources say serious cuts may be in the offing at Salomon--perhaps $1 billion to $2 billion worth. In the words of one source, it will be a "blood bath."
At a meeting at Salomon the morning of the announcement, the first question from employees showed what was on everyone's mind--it had to do with severance pay for laid-off employees. Even if Weill avoids massive layoffs and simply adjusts Salomon's generous compensation system, he risks an exodus of the firm's highly compensated investment bankers.
"There will be cuts," Weill concedes. But, he adds, "We're not doing this deal just to cut costs." As for compensation, Weill speaks vaguely of changes to come. "We have to ultimately tie compensation to performance," he says.
To be sure, Weill has handled difficult deals before. He has spent a career buying up often-troubled financial firms, revamping them, and merging them into ever-growing empires. But he has made grave missteps, too. In 1993, for example, he hired Robert F. Greenhill, former president of Morgan Stanley, to build Smith Barney's investment bank. Greenhill hired legions of expensive bankers from Morgan, but it was a disaster. The business that Weill sought never materialized.
One potential problem for the combined company is figuring out who's really in charge. For the present at least, the leadership of the combined firm is a compromise--the joint CEOs will be Weill's righthand man, Smith Barney CEO James Dimon, and Deryck C. Maughan, Salomon Brothers' chairman and CEO (page 39). The two say they're friends--clearly an asset, as they will have to work to combine the two firms. But, the critical question is whether Dimon will quickly dominate, perhaps driving Maughan out and raising fears among the Salomon folk.
From the standpoint of Travelers, the addition of Salomon has a number of virtues. Smith Barney is a largely retail-driven, domestic firm, while Salomon's forte is bond trading. In addition, Solly has a solid overseas presence, which Smith Barney lacks. Rick Haller, head of Emerging Markets Proprietary Trading, thinks the deal is a smart move for Travelers for that reason: "This gives them the scope to build an international equity origination and distribution capacity. This rounds out the product line of Smith Barney," he says. Further, he adds, Salomon is strong in issuing and placing debt and trading all types of fixed-income instruments. In these areas, "they are as good as you get," Haller says.
While some of their differences may make blending Salomon and Smith Barney a difficult management challenge, their differences also make the companies a good strategic fit. For instance, since Salomon is largely a "wholesale" operation and Smith Barney retail, the two are hardly competing for the same customers. "Their businesses are complementary," says Samuel L. Hayes III, a professor of investment banking at Harvard business school.
But how will the combination work in practice? "I don't see Travelers making Salomon more competitive," says Roy C. Smith, professor of finance at New York University's Stern School of Business and a former Goldman Sachs partner. "You've created a holding company with a $55 billion market cap, but will that create more transactions, more synergy? It creates a company that's better distributed, but I'm not sure any single piece of it is more competitive." For example, the deal makes Salomon Smith Barney Holdings, as the company will be known, the new No. 4 in mergers and acquisitions. But, says Smith, that "doesn't make them more likely to become third." Indeed, he's skeptical that the merger will lead to positive synergies, at least in the short term. "Whatever positive synergy is achieved is offset by the negative synergy of trying to run a big organization," says Smith.
The deal has undeniable appeal for institutional investor . For each share of Salomon, shareholders in the company will receive 1.13 shares of Travelers stock. That gives the deal a value of about $9 billion, or just under two times Salomon's book value at midyear of $4.6 billion.
The institutional investor who may welcome this deal most is Warren Buffett. Buffett bought into Salomon in 1987.
Four years later, the legendary Nebraska investor found himself enmeshed in the company's management when a government-bond trading scandal rocked the firm. Indeed, Buffett handpicked the British-born Maughan, who had run Salomon's Tokyo office, to head the firm after the departure of Salomon's longtime CEO, John Gutfreund.
Despite the bond-trading scandal, Salomon has been generally profitable for Buffett, although for a number of years the stock languished. Under the terms of the original deal, Buffett bought $700 million of convertible preferred. And beginning in 1995, Buffett had the right to sell back 20% annually. Today, he is still left with 60% of the issue from 1987, which is convertible into a little over 11 million shares. In the meantime he has bought stock in the open market so that at the end of 1996--according to Berkshire Hathaway's annual reports--he had an 18% voting interest in Salomon.
MUTUAL DISSATISFACTION. That's a huge chunk of Salomon stock, which Buffett could convert, tax-free into Travelers stock if he chooses. Based on his original investment, his gross return amounted to about 16% annually, a modest improvement over the Standard & Poors-500 stock index.
One longtime Buffett-watcher, who requests anonymity, believes that Buffett will take the Travelers stock and run. "It's nirvana [at this price]," he says. Why? Although Buffett is a big player in insurance--GEICO is a major holding of Berkshire Hathaway--he has never shown much interest in the kinds of business Travelers is in.
And as for Salomon: "As much as Buffett knew about Wall Street and human greed, he was sickened by what he learned when he got into it," he says. If he were to cash out now, the Street estimates that he would make about $500 million.
The dissatisfaction, however, was mutual. The legacy of Buffett's stewardship of Salomon, in the troubled days following the bond-trading scandal, is decidedly mixed. Buffett's dismay with huge bonuses led to a cutback in 1994--which caused significant staff defections. To staunch the losses, Buffett had to reinstate the bonuses. Maughan calls it "a tactical retreat"--clearly implying that the knives may well become unsheathed in the weeks and months ahead.
Where would the cuts come? The easy part will be identifying corporate functions that can be consolidated, redundant back-office operations that can be shut and real estate that can be vacated or sold. Which of the two merged companies will feel more pain? The betting on Wall Street is that Salomon will absorb more of the cutbacks. The reasoning: Dimon, the longtime Weill protege who apparently designed the deal, will emerge as the first among equals in sharing the executive suite with Maughan. That bodes better for Smith Barney than it does for Salomon.
There's a great potential for culture clash, say sources close to Salomon. How, for example, will Dimon handle the ego-driven, intensely competitive investment bankers at the new Salomon Smith Barney. Dimon is said to be no great fan of investment bankers and put off by their gargantuan pay demands and their tendency to shrug off managerial edicts.
UNQUESTIONED SUCCESS. In that regard, he is similar to his longtime boss and confidant. Indeed, to some degree Weill has never strayed too far from the close-to-bone thrift that marked his early career on Wall Street. Although he was raised in a middle-class family in the Flatbush section of Brooklyn, where his father was a successful dress manufacturer, Weill began on a wing and a prayer--borrowing $200,000 to form, with three friends, the firm of Carter, Berlind, Potoma, & Weill.
Weill never strayed from his entrepreneurial, cost-cutting roots, even as he leveraged his little firm, via mergers, into Shearson Loeb Rhodes. That made him an unquestioned success on Wall Street. Still, Weill was always the outsider in the still-clubby world of brokerage partnerships and investment banks.
In 1981, he made the biggest miscalculation of his life--selling Shearson to American Express. He became president of American Express, but almost from the start, he chafed under the leadership of its then-CEO, James Robinson. In 1985, Weill left AmEx, a seeming failure.
He wasted no time starting the comeback that, with this latest deal, has put him at the top of the Wall Street heap. Beginning with his takeover of Commercial Credit in 1986, the succeeding years held one success after another. In 1993, he even managed to buy back Shearson, making it a part of Travelers.
The Weill formula was simple--acquire companies, troubled ones particularly, and cut costs ruthlessly. Weill's tactics may have won few friends among the employees of acquired companies. But for the most part, his buy-downsize-build formula has worked. And he has thrived at it. "You have to understand his psyche," says one veteran Wall Streeter who knows him well. "The guy lives to do deals. That's what he does. It means no endgame."
But, if Weill's moment of triumph is to last, this time he had better pay attention to the endgame. That means going beyond the deal and doing whatever it takes to make this, his most daring move yet, work. One note of irony--and, possibly, foreboding--came up at a luncheon for Smith Barney clients in Hong Kong on Sept. 23, a day before the deal was announced. The topic: "Investment Banking Consolidation in the U.S.: The Implications for Global Markets." The speaker was Steven D. Black, chief operating officer at Smith Barney and Dimon's righthand man.
It was a sobering session. Drawing on his personal experience, Black talked about how acquisitions are a very difficult and painful process, incredibly risky, with the odds favoring failure. He talked about a number of acquisitions that Smith Barney had made, such as the Shearson deal in 1990, saying how difficult and painful it had been. He went on to talk about lots of Street deals that hadn't worked well, such as Shearson and Hutton, and said that he was skeptical of current deals such as Bankers Trust and Alex. Brown.
Black is right. Wall Street acquisitions are incredibly tough. The Salomon-Smith Barney-Travelers merger is going to be a far tougher deal than it appears to be at first blush. But Sandy Weill is ready for it--and he may be just the man to make it work.By Gary Weiss, in New York, with Phillip Zweig, Debra Sparks, and Kerry Capell in New York; Leah Nathans Spiro in Hong Kong; and bureau reportsReturn to top