King of Capital, Part 1


Sandy Weill has become a legend on Wall Street because he has a rare ability to do deals that not only build huge companies but create value for shareholders. His signature deal (so far in his career) was the 1998 merger of Travelers and Citibank to form Citigroup (C). Weill is also a remarkable survivor who has been able to bounce back from setbacks that might have stalled less driven executives.

Part 1 of this chapter excerpt from a new biography of Weill written by Amey Stone and Mike Brewster, King of Capital (Wiley, June 2002), explores Weill's long fascination with the idea of cross-selling financial services and follows him as he mulls the merger of his beloved brokerage Shearson Loeb Rhoades to American Express (AXP) in 1981. It's the prelude to one of the most frustrating points in his career: Weill hoped he would one day run American Express, but he was continually thwarted at the firm until he finally stepped down in 1985, tired of playing "Deputy Dog" to AmEx CEO Jim Robinson.

Many analysts believe Weill still hopes to one day acquire American Express as a capstone to his long career. This chapter shows how sweet that victory could be for him. It also shows how cross-selling was a big part of his rationale for doing both the deal with AmEx in 1981 and with Citibank in 1998. Yet the goal remains elusive for Weill, even today.

Chapter 5: Deputy Dog

For much of his career, Weill has been driven by one idea -- one that very few in the business world believe works: cross-selling financial services products. From CBWL to Hayden Stone to Shearson to American Express to Travelers and Citigroup, Weill has followed the cross-seller's siren song: if only the stock brokers could sell insurance; if only the insurance agents could sign up customers for brokerage accounts. If only...

The fuel behind cross-selling is reciprocity. Various divisions within a big company sell each other's products, generating more sales without incurring additional costs. "Sandy claims that if you have a wider product range for the salesforces to sell, and really focus on sales management, they will have more to sell and will sell more," says Roy Smith of NYU's Stern School. This is a very cost-effective way for a company to boost sales. In addition, studies have shown that with each additional product you sell, your ability to hold on to a customer grows exponentially.

There is only one problem: Cross-selling is very hard to do. In fact, many academics and analysts say it has never really worked -- at least in a way that really benefits a company's bottom line. Richard Bove, a securities analyst at the investment boutique Hoefer & Arnett, says that almost everyone has considered the idea and then rejected it after some initial clumsy attempts.

"The history is dismal," says Thomas Kempner, an executive at the former Loeb Rhoades. "Nobody has succeeded. And I have very real questions in my mind as to whether they ever will because I think that the skills to sell life insurance are quite different than the skills it takes to sell securities."

Some of Weill's own attempts at implementing cross-selling strategies have been clumsy as well. In December 2001, Weill announced he was spinning off Travelers Property Casualty to the public. One of the reasons he gave for unloading the business was that efforts to cross-sell had actually backfired when it came to financial results. He attributed that to adverse selection -- that is, Citigroup customers who bought the insurance filed more claims than the average Travelers customer. "We were able to get customers, but they weren't the right customers," Weill said in an interview with the authors. "Most of them seemed to be accident prone."

Yet Weill insists cross-selling is working in Citigroup's other businesses. He cites success in selling Citibank mortgages to high-net worth clients of the private bank and Salomon Smith Barney. He says Citibank account holders throughout the world are buying Smith Barney mutual funds. And by the end of 2001, customers of three divisions of Citigroup-Salomon Smith Barney, Primerica Financial Services, and Citibank-had bought over one billion dollars worth of Travelers annuities. "The one that you read about most, which has worked out really well, is the connectivity between our Citibank commercial banking business and the corporate investment bank," Weill said in an interview.

But Weill still has some convincing to do before the outside world will acknowledge that he has been able to make cross-selling work. Several articles in 2000 and 2001 chided Weill for not being quicker to show the benefits of cross-selling, since he cited that as a major reason for the merger of Citicorp and Travelers.

Yet analysts and investors have never really held Weill accountable for his cross-selling goals, because Weill has created so much value in other ways that his devotion to the idea is simply chalked up as an idiosyncrasy. Their thinking goes something like this: "If cross-selling -- crazy as the idea is --inspires Sandy to make another well-timed acquisition, then we'll let him believe in such fairy tales."

Weill's devotion to the idea of cross-selling represents his best opportunity to be remembered for something other than simply executing deals and then making the numbers work. It's a chance to do something that no one else has been able to do. And one thing is certain: No one is ready to declare cross-selling at Citigroup dead. Weill has proven his ability to learn from mistakes. Just because the world hasn't learned how to cross-sell yet, Kempner says, "that doesn't mean Sandy or someone like Sandy won't be able to come up with a formula for making it work."

Hopes for the potential of cross-selling provided a major impetus for Weill's 1981 decision to sell Shearson Loeb Rhoades to American Express -- to create what was, using the buzzword of the day, a "financial supermarket." The experiment ultimately proved a personal and business failure for Weill at many levels (although a financial windfall), and for reasons other than American Express' inability to cross-sell.

Sandy Lewis and His Big Idea

The idea of a merger between American Express and Shearson Loeb Rhoades was dreamed up by Salim "Sandy" Lewis, who believed the combination would not only create the ultimate financial services powerhouse, but also establish his fledgling one-man investment bank, S.B. Lewis & Co. Lewis pitched the idea to his old friend, American Express CEO James Robinson III, at a breakfast meeting in late 1979. Robinson didn't take the bait. But he mulled over the idea through the early days of 1980.

Around the same time, American Express and Shearson began discussions on creating a cash management account similar to the one Donald Regan had devised, which had become a gold mine for Merrill Lynch. Merrill's Cash Management Account (CMA) functioned like a traditional bank account, but with higher interest rates than banks were allowed to offer. The account-holder could also invest the money in securities. Because brokerage, checking, and debit card services were integrated, the account offered the appeal of one-stop shopping. It became a huge hit with customers. Both Shearson and American Express hoped to replicate that success with their own version.

Robinson Weighs the Deal

Encouraged by the two companies' discussions regarding the potential cash management system, Robinson began to consider an American Express acquisition of Shearson. (In fact, he even authorized a four million-dollar investment in S.B. Lewis & Co.)

Given its profits, Shearson looked like a very good company to own. In 1980, Shearson earned $56 million on revenues of $5.5 billion. The bull market was roaring, and there was no reason to expect anything but strong double-digit growth going forward. Most important, Shearson had a salesforce of about 3,500 brokers who had the kind of face-to-face relationship with customers that American Express lacked. The AmEx brand was represented by its credit card, which had over 12 million customers. Robinson must have had visions of well-off cardholders snapping up stocks and bonds and money management services from those aggressive brokers at Shearson.

Courting Sandy Weill

Before Lewis invited him to breakfast at the elegant Stock Exchange Luncheon Club on August 29, 1980, Weill had very little acquaintance with him. It was a clever move on Lewis' part to suggest that particular spot. The self-reverential Stock Exchange Club draped itself in Wall Street nostalgia and played up the Street's prominence in the world of finance. As head of Shearson, one of the new pillars of Wall Street, Weill was comfortable in this setting. This was his world, one that he had helped create. Weill accepted the invitation.

Well aware of Weill's deal making prowess and penchant for emerging on top, it took plenty of courage for Lewis to suggest a deal in which the Shearson CEO would come out second or even third. Weill later recalled that when Lewis first brought it up, his reaction was, "Geez, I don't see how that's possible. I don't think that Jim is ready to retire, and if he's not, I don't see how we can do anything."

The truth is that Weill would have been crazy not to jump at the deal. American Express had a reputation for quality that surpassed any other firm. As the financial world became more global and new kinds of complex derivative securities began to proliferate, Weill knew it was going to take a lot of capital and first-rate technology to stay on top.

Plus, there were cross-selling opportunities. As his interest in doing a CMA-like product showed, Weill clearly had his eye on the 12 million-strong American Express cardholders. At that time it was one of the largest international customer groups in the world (far surpassing Merrill Lynch's 2.5 million customers at the time). All of these AmEx customers represented potential Shearson clients.

Still, Weill had doubts about merging with AmEx. He questioned what his initial role would be with the parent company. Weill was also somewhat unsure about his potential working relationship with Robinson. At this point in his career, could he work for someone else?

Prudential-Bache Merger Primes the Pump

On March 20, 1981, while Weill was in Hong Kong visiting Shearson's Far East operations, accompanied by former President Ford, news broke about the imminent takeover by Prudential of Bache. Their merger marked the first salvo in a battle sparked by the combined forces of consumer demand and deregulation: to become a financial services supermarket.

After the Prudential-Bache deal, the tenor of the negotiations between Shearson and American Express changed. In this environment, it was clear that the biggest, most diverse financial firms with the strongest capital bases would be the survivors. To stay on top, both American Express and Shearson knew they had to move and move fast.

The merger discussions between Weill and Robinson were marked by their contrasting personalities and backgrounds. Weill was a striver who had fired thousands and alienated some of his former partners and, doubtless, many others on his way to the top. Robinson had glided into power, it seemed, stepping on few, if any, toes. Weill was as emotional as Robinson was cool. Shearson was as loud and noisy as AmEx was buttoned-down and corporate. They knew there would be a culture clash, but they hoped the new firm would gain the best of both cultures.

Not only were Robinson's and Weill's personalities and backgrounds different, so were their management styles. At the time of his merger negotiations with Robinson, Weill still ran Shearson as he had run CBWL-Hayden Stone, smoking cigars, getting in subordinates' faces, making snap decisions, and continuing to combine personal and professional lives. For example, he and Joan would go on vacations with key executives and their wives after weeks of all-nighters working on a deal.

Robinson, known as "Jimmy Three Sticks," ran American Express like the Fortune 500 company it was. Son of a banker from a prominent Atlanta family, he spoke with polish. Thoughtful and considerate, Robinson embodied the image of a courtly Southern gentleman. In his frequent speeches and public appearances around the world, he came across as a strong, hard-charging CEO, yet inside the firm, his leadership style could be described as conservative. He eschewed risk, preferring a bureaucratic, committee approach to decision making. A formal process was in place to vet new ideas. Things moved slowly

and inefficiently to avoid mistakes.

Importantly for Weill's later showdowns with John Reed (the CEO of Citibank, who became co-CEOs of Citigroup with Weill in 1998), Robinson shared some similarities with the deep-thinking Citicorp banker. Both took the reins of power in their early 40s. Both were firm believers in the transforming power of technology. Both were happy to delegate authority, preferring to conceive of grand plans and let others perform the at-times mundane efforts to carry them out. Weill, of course, shared none of these characteristics with the two biggest adversaries of his career. Luckily for him, he had to face only one at a time.

A Done Deal

Wall Street and corporate America were shocked as the rumors of an impending American Express/Shearson merger surfaced in the spring of 1981. Even though the Pru-Bache deal was expected to trigger more such mergers, Shearson was no Bache; Weill's company was in great shape.

On April 20, 1981, the AmEx board approved the deal in principle and all that remained was for Weill to sign on the dotted line. During some late-night negotiations, Joan Weill had to convince her husband to trust Robinson. At one point, according to one account, Weill even looked at Joan with Robinson sitting right there and asked her: "Do you believe him?" Joan said she did.

The agreement was finally signed. Weill hadn't gotten everything he wanted, but he did extract a promise from Robinson: There would be no obstacles to his advancement at the company.

Despite any misgivings he might have had about reporting to Robinson, Weill could feel very good about one thing: The deal made him very wealthy and provided a big payday for other Shearson shareholders as well. From a price of $34 shortly before the merger was announced, Shearson's stock climbed to $49 when news of the deal broke and kept rising to $65.

American Express purchased Shearson for about $900 million in stock, a price equal to roughly three times the book value of the firm. Weill himself held $30 million worth of stock as his shares of Shearson converted into nearly 600,000 shares of AmEx, making him the company's biggest shareholder. In fact, Weill ended up with 40 times more AmEx stock than Robinson did.

The deal was approved by Shearson shareholders on June 19, 1981. From the initial breakfast with Sandy Lewis to the board approval, 10 months had gone by. At one point during the bittersweet shareholders meeting, Weill was asked whether the whole company, not just the securities unit, would be called Shearson/American Express. "Not yet," he said. When the meeting ended, Weill drew a standing ovation.

Weill, didn't do much to mask any of his ambitions in those heady early days, when it seemed everything was on the table for discussion: potential acquisitions, his own role at AmEx, the nature of the relationship between his brokerage house and the parent company. But as time went on and Weill settled into the job, few of these discussions would go his way.

(To read of Weill's frustrations at Amex, see BW Online, 6/26/02, King of Capital Part 2)

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


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