Shearson Lehman Brothers Holdings Inc.
Shearson Lehman Brothers Holdings Inc.
74% Owned Subsidiary of American Express
Revenues: $11.18 billion
Stock Exchanges: New York Pacific
SICs: 6211 Security Brokers, Dealers and Floatation Companies; 6221 Commodity Contracts Brokers and Dealers; 6159 Miscellaneous Business Credit Institutions; 6162 Mortgage Bankers and Loan Correspondents; 6282 Investment Advice; 6411 Insurance Agents, Brokers and Service
Shearson Lehman Brothers Holdings Inc. is one of the largest investment banking firms in the United States. The company is known for its expertise in mergers and acquisitions, having taken over some 40 firms during its rise to prominence, including such older firms as Hayden Stone, Shearson Hammill & Company, Loeb Rhoades, Hornblower & Company, Lehman Brothers Kuhn Loeb, and E.F. Hutton. Shearson Lehman Brothers is a subsidiary of American Express, which owns 74 percent of the company.
Sanford Weill was Shearson’s guiding force through much of its rise to prominence. Beginning his career as a runner for the firm of Bear Stearns, Weill helped form the investment firm of Carter, Berlind, Potoma & Weill in 1960. With some $215,000 in capital, CBPW was a small firm, but Weill’s ambition and his genius for melding companies would characterize its growth. In 1965 the firm evolved into Carter, Berlind, Weill and Levitt, Inc., and Weill became chairperson. Two years later, CBWL made its first acquisition, taking over Bernstein Macauley, Inc., a firm that specialized in investment management. This first acquisition had most of the characteristics of later Weill deals— Weill would take over a well-respected firm that had run into trouble and merge it smoothly into his operation, usually cutting back its office employees and keeping its sales representatives.
Frequently, the target firm specialized in an area of investment banking in which Weill’s firm was weak.
Weill’s next acquisition, in 1970, represented an influential merger unlike anything yet seen on Wall Street. That year CBWL acquired Hayden Stone, a retail brokerage that had grossed $113 million in 1968, five times its gross in 1960, earning significant profits. In the late 1960s, however, like many Wall Street firms, Hayden Stone had difficulties with their administrative functions. The firm, whose business had almost tripled during the decade, had expanded too rapidly, and it was forced by the New York Stock Exchange to cut back on its trading.
When losses accelerated in 1969, and the situation worsened in the first months of 1970, Hayden Stone began to look for a merger partner. CBWL, whose gross revenues that year were only $11 million, emerged as the leading candidate when Walston & Company decided to limit its acquisition to 15 retail offices due to Hayden Stone’s lack of capital.
However, several of Hayden Stone’s private investors proved more interested in suing the firm than in selling it. Convinced they had been duped into investing, these investors argued that Hayden Stone should be allowed to fail, and that the NYSE should have to pay for the losses, as an example to other firms allowed to remain in violation of NYSE capital rules. The NYSE and CBWL engaged in a furious effort to convince investors to agree to the sale—which included a clause prohibiting them from suing. Eventually the investors agreed to the deal, and Hayden Stone merged with CBWL. This deal also led to several significant reforms in the operations of the New York Stock Exchange. This takeover thrust the firm, now called CBWL-Hayden Stone, into Wall Street’s limelight. Weill was able to successfully merge the two companies, and his strict control of the administration helped turn Hayden Stone around and stem losses.
During the recession of the early 1970s, Wall Street suffered along with U.S. industry. Many firms decided their best chance for survival was to join forces, and CBWL-Hayden Stone took advantage of the difficult days of 1973 to acquire H.L. Hentz, another brokerage, and Saul Lerner & Company. Then came its 1974 acquisition of Shearson Hammill & Company, easily the most ambitious takeover Weill had yet attempted. Despite its strong retail sales force, Shearson Hammill had become strapped for cash, and the firm opted to merge with the smaller, but better capitalized, CBWL-Hayden Stone. The two firms became known as Shearson Hayden Stone. The Shearson name was retained for its wide recognition as a major underwriter, one looked to on the biggest deals. Shearson Hayden Stone made two major acquisitions in 1976: Faulkner, Dawkins & Sullivan, a regional brokerage with one of the best research divisions in the industry, and Lamson Brothers, a well-regarded commodities broker.
By 1977, Shearson’s holdings were consolidated, resulting in the seventh largest investment banking firm in the country. Its revenues had more than tripled since 1972, to $134 million in 1977, and employees now numbered more than 4,000.
Shearson’s growth and success contrasted with the general environment on Wall Street in the mid-1970s. Now legally prohibited from both advising and underwriting a client on a single deal, most firms’ overall trading volume dropped significantly. New York Stock Exchange seat prices were down by a factor of ten (by 1976 prices were down to $40,000 a seat), and some were calling for more liberal membership requirements. Furthermore, Wall Street faced increased regulatory pressures from the Securities and Exchange Commission and competition in its traditional fields from a variety of sources. Some companies took to underwriting their own issues. Mergers and bankruptcies had driven the number of New York Stock Exchange member firms down from the 1960s high of 681 to 490. In addition, on May 1, 1975 fixed commissions were eliminated, and price cutting ensued, which further increased the pressure on firms to perform well.
In 1979, Shearson acquired Loeb Rhoades, Hornblower & Company, one of Wall Street’s oldest and most successful firms. The takeover of Loeb Rhoades made Shearson second in the investment banking world. Weill’s mastery of mergers paid off as he brought the two large firms together. One of the most important aspects of Weill’s acquisition policy was to ensure that Shearson kept absolute control of administrative functions, which allowed both firms to run smoothly. Furthermore, Shearson usually incorporated firms very slowly, a kind of patience rarely seen in Wall Street firm mergers.
By 1981, Shearson had averaged a 60 percent yearly increase in profits over the last four years. That year Weill gambled, directing the takeover of the Boston Company, a money management firm. The $47 million takeover was in direct violation of the Glass-Steagall Act, which separated commercial and investment banking after the stock market crash of 1929. While many banks protested the violation of Glass-Steagall, several hoped that it would increase their chances of being allowed to underwrite securities and perform other actions that Glass-Steagall had denied them. Shearson eventually was allowed to keep the Boston Company.
Soon thereafter, Weill approached the American Express Company, suggesting that it take over Shearson. Knowing that a well capitalized partner would serve as a stabilizing factor in uncertain times, Weill also hoped that American Express’s capital could help give Shearson more dealmaking power. In addition, American Express and Shearson together would be able to offer customers more services. The potential scope of the combined company was much broader than that of any bank.
However, the $900 million deal had some potential drawbacks. Some felt that Shearson might lose its flexibility when mired in the bureaucracy of a $21 billion company like American Express, making it unable to practice its aggressive strategies. Others remembered American Express’s previous venture into the investment banking world, when it bought 25 percent of Donaldson, Lufkin & Jenrette only to see the firm, and the investment, fizzle. Nevertheless, Shearson and American Express fit together rather neatly. Within 18 months of the deal, Shearson had acquired four more companies and its capital had more than doubled.
Shearson did not make another major acquisition until 1984. In May of that year, Shearson acquired Lehman Brothers Kuhn Loeb for $360 million. Only ten months before, Lehman Brothers had reported another in a string of exceptionally profitable years. Then, in a surprisingly short time period, the firm fell apart, due largely to the combined forces of a market downturn in 1984 and an internal power struggle in which Peter Peterson was replaced as chief executive by Lew Glucksman. Acquiring Lehman Brothers established Shearson as a dominant force on Wall Street. It also marked Peter Cohen’s coming of age. Cohen, Weill’s longtime personal assistant, had taken over as CEO when Weill became president of American Express in 1983.
Between 1984 and 1987, Shearson rode a lengthy bull market smoothly, surviving the insider trading scandal of 1986 better than most. After a period of low activity, the firm saw increased action in 1987. First, in March of that year, American Express sold 13 percent of Shearson to Nippon Life Insurance, a Japanese company, for $508 million. Later that year Shearson went public, with American Express retaining 61 percent of the firm. Then came the stock market crash of October 19, 1987, and Shearson suffered along with the rest of Wall Street. For the year, revenues were flat, at $6.7 billion, and earnings dropped 70 percent, to $101 million. But only two months after the crash, Shearson announced an important deal: the purchase of E. F. Hutton.
Hutton had been in difficulty for some time, and its top officers had debated heatedly before rejecting an offer from Shearson in October 1986. Hutton’s fortunes plunged after the crash, so when Shearson returned in late 1987 offering $962 million, Hutton accepted. While the timing seemed poor, coming so soon after a tremendous downturn, Shearson had frequently made its acquisitions during troubled times on Wall Street. The key would be whether Cohen could continue Shearson’s tradition of smoothly merging disparate corporate cultures.
After the acquisition, Shearson became Shearson Lehman Hutton and established itself as a retail force second only to Merrill Lynch on Wall Street. But 1988 brought continued problems. In the takeover, Shearson Lehman Hutton laid off 6,000 employees and closed or merged 150 offices. It also absorbed charges of $165 million due to the acquisition.
The firm began 1988 with a strong first quarter, but performance declined throughout the year, and dropped sharply when Kohlberg Kravis Roberts & Company beat Shearson’s bid for the right to underwrite the RJR Nabisco leveraged buyout, the largest in world financial history.
Losing the deal damaged Shearson’s reputation, as did a scandal at its Boston Company subsidiary in 1988. The firm also suffered setbacks the following year when three of its top officers left Shearson, due to conflicts of personality and strategy with Cohen. Furthermore, in the face of SEC objections, Shearson had to abandon its attempts to sell a new investment instrument, the unbundled stock unit, after only four months. Nevertheless, Shearson advised Time, Inc. in its purchase of Warner Communications, one of the year’s biggest deals.
In February 1990, Cohen resigned and was replaced as CEO by American Express’s chief financial officer, Howard L. Clark, Jr., a change greeted with relief by many. At the time of Clark’s takeover, Shearson was struggling to protect its credit rating, and, following a failed share offering, had hastily announced a rights offering to its common shareholders.
With a plummeting stock price and serious financial and morale problems, Shearson and Clark had their work cut out for them. Clark and American Express CEO James Robinson III worked to reverse the trend that saw Wall Street’s second largest firm lose $1 billion in 1989 on junk bonds, real estate, and just plain bad deals. Amex purchased an additional 13 percent of Shearson and injected the ailing subsidiary with more than $1 billion. Robinson and Clark laid off 2,300 employees: Shearson had reduced the workforce by about 15,000 since the 1987 stock market crash. The reorganization was further reflected in the subsidiary’s name change to Shearson Lehman Brothers Holdings Inc., with Shearson as a retail investment unit and Lehman Brothers as an institutional investment group. Jonathon Linen, a former Amex card executive, was charged with the retail arm, and the institutional division was headed by Richard Fuld and J. Tomilson Hill III, the former a trader and the latter a banker. Fuld and Hill applied cost cutting measures to their division by firing 20 percent of Lehman Brothers’ bankers, merging commercial banking with trading, and combining the mergers and acquisitions department with general corporate finance. Linen diminished fixed costs by closing 110 branch offices and laying off 3,000 administrative employees, which reduced break-even expenses by one-fourth. American Express’s customer service ideals were also adopted by the reinvigorated company. Each broker’s desk was equipped with a table tent that enumerated the parent’s guiding principles. The changes helped SLB raise its tangible net worth from practically nil to $722 million by the end of 1991.
But Shearson Lehman Brothers still faced several challenges. In 1991, 28 percent SLB-owned First Capital Holdings, a California Insurance company, went bankrupt. Shearson worked with California Insurance Commissioner John Garamendi to bring subsidiary First Capital Insurance Co. back to viability. The plan called for SLB to pump $50 million into First Capital and guarantee policies that would be kept up-to-date for five years. In 1997, Shearson planned to be able to acquire the assets and policy holder liabilities of First Capital for just 20 percent of the appraised value. The bankruptcy also brought litigation from First Capital creditors, who accused Shearson of recommending First Capital services to 60,000 Shearson customers despite the knowledge that the undercapitalized insurance company was overloaded with junk bonds. The $300 million lawsuit alleged that Shearson bought into First Capital to shelter itself from shareholder lawsuits. Shearson denied the charges of “gross mismanagement and breach of fiduciary duty.”
And when Amex put Shearson’s Boston Company subsidiary up for sale in 1992, rumors spread that the parent company was improving SLB’s equity-to-assets rating so that it could jettison the brokerage. The $1.45 billion sale of Boston Co. to Mellon Bank Corp. brought Shearson’s bond rating closer to an “A,” making it a more attractive candidate for acquisition. But Amex CEO Robinson maintained that the credit card company was committed to Shearson Lehman Brothers, although Amex was interested in lowering that commitment to 40 percent.
Shearson Lehman Hutton Inc.; Shearson Lehman Brothers International; The Robinson-Humphrey Co., Inc.; Foster & Marshall Inc.; The Boston Co.; The Balcor Co.; Shearson Lehman Mortgage Corp.; Lehman Management Co.; Shearson Asset Management, Inc.; Shearson Lehman Commercial Paper Inc.; Shearson Lehman Money Markets International, Inc.; Bernstein-Macaulay, Inc.; The Ayco Corp.; Shearson Management Inc.; Shearson Equity Management; Shearson Lehman Investment Strategy Advisors, Inc.; Shearson Lehman Global Asset Management Ltd.; Shearson Lehman Hutton Asia Inc.; Shearson Lehman Hutton International, Inc.; Shearson Lehman Hutton Mortgage Corporation; Shearson Lehman Hutton Puerto Rico Inc.; Shearson Lehman Hutton Special Financing Inc.; SLH Asset Management.
Picker, Ida, “The Robinson Raj at Shearson Lehman Brothers,” Institutional Investor, August 1991, pp. 57–62.
Spiro, Leah Nathans, et al, “Is Shearson on the Block, Too?” Business Week, August 24, 1992, pp. 64–65.
“To the Rescue at Shearson,” Fortune, November 18, 1991, p. 108.
—updated by April S. Dougal