Painewebber Group Inc.
Painewebber Group Inc.
Incorporated: 1970 as Paine, Webber, Jackson & Curtis Inc.
Assets: $17.9 billion
Stock Index: New York Pacific
The PaineWebber Group is one of the largest financial service companies in the world, offering asset management, investment banking, and brokerage activities to both institutional and individual investors. From a tiny partnership founded more than a hundred years ago, PaineWebber has grown into a major international presence.
Paine & Webber was founded in 1880 by William A. Paine and Wallace Webber, formerly clerks at Boston’s Blackstone National Bank, who set up shop on Congress Street in Boston. The next year, Webber acquired a seat on the Boston Stock Exchange. The firm admitted Charles Paine as a partner in 1881 and changed its name to Paine, Webber & Company.
From there, Paine Webber embarked on a steady course of expansion that would last well into the next century. In 1890, the firm joined the New York Stock Exchange. It purchased seats on the Chicago Board of Trade in 1909 and the Chicago Stock Exchange in 1916. Paine Webber opened its first branch office in 1899 in the copper mining town of Houghton, Michigan. Nine branches sprang into existence during World War I, including Paine Webber’s first in New York City, in 1916. Before this office opened, business in New York had been conducted by wire and through New York brokerage houses. During the feverish years of the late 1920s, five more offices opened and six moved to larger quarters. By its 50th anniversary, in 1930, the firm could boast of 25 branch offices in 22 cities spread throughout the Northeast and upper Midwest, and a position as one of the largest firms on Wall Street.
But the bull market that had fueled this growth came to a shattering end in October, 1929, and the Great Depression that followed brought lean times to the brokerage industry. Paine Webber maintained its standing as a leading Wall Street firm, but did not emerge from the Depression unscathed. By the late 1930s, its presence had shrunk to 19 cities. Not only did the Depression mark the end of the Paine Webber’s steady growth, but it had to face this period of crisis without the guidance of its founders. Wallace Webber had retired in 1894, and William A. Paine, who had continued to head the firm, died in September, 1929.
Paine’s son Stephen was a partner in the firm by this time, but it was through him that Paine Webber found itself embroiled in one of the major securities fraud cases of the decade. In the Continental Securities Corporation scandal of 1938 to 1939, a group of American and Canadian financiers gained control of six different investment trusts, sold off their portfolios, and filled them up again with unmarketable securities of dubious value, including shares in dummy companies owned by the conspirators themselves. Creditors of these trusts found themselves defrauded of more than $6 million. Paine Webber, through Stephen Paine, loaned the money used in four of the takeovers and sold off the portfolios for the conspirators. The firm itself was ultimately cleared of all wrongdoing and ended its role in the case with damage payments to some of the creditors. But the New York Stock Exchange suspended Stephen Paine and Frank Hope, a fellow partner and former governor of the New York Stock Exchange, for ignoring evidence of the fraudulent nature of these transactions. Paine was also convicted in federal court of mail fraud and served four months in prison.
World War II finally ended America’s economic slump, and in 1942 Paine Webber merged with Jackson & Curtis, a fellow old-line Boston house. The resulting conglomeration of Paine, Webber, Jackson & Curtis listed 23 branch offices. For two decades after the merger, Paine Webber remained essentially the same kind of establishment it had been for the first 60 years of its existence: a privately owned brokerage house that made most of its money in the retail trade, buying and selling securities for private customers. Although it had long been one of the largest firms on Wall Street, it was still tiny by today’s standards.
In the late 1960s and the 1970s, lower stock market volume combined with two important legislative changes to radically alter the brokerage industry. The first of these, the Employee Retirement Income Security Act of 1974, increased the importance of institutional investors as a revenue source. The second, the abolition of the brokers’ fixed-rate commission structure in May, 1975, slashed profit margins by allowing fierce price competition among houses. Together, these factors forced brokerage houses to merge and expand in order to increase their working capital and compensate for reduced profit margins. Conservative companies whose mainstay had always been the retail trade were forced to enter new markets. Paine Webber, although it was often slow to innovate and to this day relies heavily on retail sales, was caught up just like its competitors in the changes in the brokerage industry during these years.
Much of this change broke upon the firm during the watch of a single CEO, James W. Davant. When Davant assumed the post in 1964, Paine Webber had fewer than 40 branch offices, annual revenues of $30 million, and $1 million in capital. When he retired in 1980, Paine Webber’s 229 branches earned revenues of $900 million and capital had reached $240 million.
As if to usher in this new era of change and expansion, Paine Webber moved its headquarters in 1963 from genteel Boston to New York City. In 1967 it made the first acquisition in its history. An industry-wide trend had developed in which large, New York-based houses were acquiring regional securities firms in order to increase their presence nationwide, and Paine Webber joined it by buying the brokerage house of Barret Fitch North, based in Kansas City, Missouri. The acquisition also marked a break from the Northeast-upper Midwest area of operation to which Paine Webber had confined itself since the turn of the century.
In 1970, Paine Webber moved into the mid-Atlantic region by acquiring the principal offices of the securities firm Abbott, Proctor & Paine, based in Richmond, Virginia. It also conducted unsuccessful merger talks with Dean Witter & Company, the first of several efforts on its part to merge with another major house to form a brokerage juggernaut.
The firm underwent a major reorganization that year, incorporating and changing its name to Paine, Webber, Jackson & Curtis Inc. This decision was taken for the sake of tax benefits and greater operating flexibility. Once again, Paine Webber was joining a trend rather than starting one. In breaking the news of the pending incorporation, The New York Times described the company as “one of the last major brokerage-house partnerships.” The transformation of the old New York houses from private partnerships to publicly-held corporations began as a result of the financial setbacks suffered by the securities industry during 1969 and 1970, when lower stock market volume showed up the fragility of the retail trade and forced companies to search for more dependable sources of capital. Paine Webber finally went public in 1972 when it absorbed Abacus Fund, an investment company, and paid Abacus stockholders with Paine Webber shares.
The firm took a great leap in 1973 when it opened its first overseas offices, in London and Tokyo. But the other significant events of the remainder of Davant’s stewardship have a more familiar ring to them. In 1973, Paine Webber acquired two more firms: F.S. Smithers and Mitchum, Jones & Templeton. The firm underwent another reorganization in 1974, forming a holding company for Paine Webber called PaineWebber Incorporated. Two more proposed mergers with major houses fell through: the first, with Shearson Hammill & Company in 1972, drew a Justice Department antitrust inquiry and would have formed the nation’s second-largest brokerage house behind Merrill Lynch Pierce Fenner & Smith; the second, with Oppenheimer & Company, fell through in 1976. The company also completed more acquisitions, buying four offices from duPont Walston in 1974 to bolster its retail capacity; acquiring the securities research firm of Mitchell Hutchins in 1977; and merging with Blyth Eastman Dillon & Company in January, 1980.
The merger with Blyth Eastman Dillon nearly proved ruinous, however. PaineWebber, caught up in the intricacies of assimilating the investment banking firm, was blindsided by the explosion in stock market volume which presaged the bull market of the 1980s. The company’s operating systems were overloaded and many customer orders were left unprocessed or even lost. These orders then had to be tracked down manually, at great expense of time and money, and created further order backlogs. Eventually PaineWebber was forced to suspend some of its businesses, including bond and over-the-counter stock trading. For fiscal year 1980, the firm reported a $6.9 million loss on revenues of $896 million in what should have been an exceptional money-making year.
Davant waited until the Blyth Eastman Dillon crisis had simmered down before passing the baton to Donald Marron in May, 1980. The two men offered something of a contrast with each other. Davant, described by The Wall Street Journal as “courtly” and “low-key,” spent virtually all of his adult life with Paine Webber, rising through the ranks to CEO. When asked at the press conference announcing his retirement if he would consider returning to the securities industry, he quoted Oscar Wilde in reply: “To win back my youth... there is nothing I wouldn’t do—except take exercise, get up early or be a useful member of the community.”
Marron, on the other hand, charted a more aggressive and entrepreneurial career on Wall Street. He came to Paine Webber through Mitchell Hutchins, an acquisition he had brought about as president of the smaller firm. He had a reputation as a prodigy and a forceful self-promoter—at the age of 25, he was running D. B. Marron & Company, his own investment banking firm, which merged with Mitchell Hutchins in 1965.
Under Marron, PaineWebber continued to diversify. In 1983 it acquired Rotan Mosle Financial Corporation, a southwestern company which still functions under its old name, and First Mid America, headquartered in Nebraska. In 1984, the firm acquired Becker Paribas Futures, a commodity-futures trading firm, to expand its presence in that market and moved into mortgage banking with the purchase of Rouse Real Estate Finance. Also in 1984, a reorganization of the company combined the three subsidiaries, Paine, Webber, Jackson & Curtis; Blyth Eastman Paine Webber; and Paine Webber Mitchell Hutchins, under one name, PaineWebber Incorporated. Paine Webber Group Inc. was established as the parent holding company. In 1985, Marron declared in Fortune that he intended to make PaineWebber one of Wall Street’s top five investment bankers within four years (it was generally ranked ninth at the time). Pursing its new goals in investment banking, PaineWebber participated in the leveraged buyouts of National Car Rental in 1986 and Greyhound in 1987 and brokered the purchase of Braniff in 1988 by a group of East Coast investors.
In the wake of the October, 1987 stock market crash, most major brokerage houses reported tiny profits or even losses for the fourth quarter of the year. PaineWebber was no exception, citing pre-tax earnings of $35,000, versus figures in the tens of millions for the previous three quarters. The firm streamlined by selling its commercial paper operations to Citicorp in November, 1987 and its venture capital unit to the unit’s managers in January, 1988. Also in 1987, the company began to move some of its operations to Lincoln Harbor, New Jersey. Paine Webber also moved to bolster its capital, selling an 18% equity interest to the Japanese insurance giant Yasuda Mutual Life Insurance Company in November, 1987 (the proceeds were earmarked for its merchant banking unit) and acquiring Manufacturers Hanover Investment Corporation in early 1988.
The October, 1987 collapse in stock prices frightened away many small investors and few of them returned to the market over the next year. This lack of interest proved damaging to Paine Webber, reliant as it is on the retail trade. Paine Webber hopes that its new corporate strategy, announced in July, 1987, will help lure back some of these investors. The strategy focuses on four core businesses: investment and merchant banking, capital trading, asset management, and retail and institutional sales. So far this plan seems to be working, with 1989 earnings up about 25% over the year before.
Paine Webber International Inc.; Paine Webber Inc.; Paine Webber International Bank Ltd.; Paine Webber International Capital Inc.; Paine Webber Properties.; Paine Webber Capital Inc.; Paine Webber Development Corp.; Paine Webber Mortgage Finance.; Rotan Mosle; Mitchell Hutchins Asset Management, Inc.; Mitchell Hutchins Institutional Investors.
Paine, Webber & Company: A National Institution, Paine, Webber & Company, Boston, 1930.