Shearson Lehman Hutton Holdings Inc.
Shearson Lehman Hutton Holdings Inc.
Incorporated: 1983 as Shearson Lehman Brothers Holding Inc.
Assets: $84.84 billion
Stock Index: New York Pacific
Shearson Lehman Hutton is one of the largest investment-banking firms in the United States. The firm has had a lot of practice in mergers and acquisitions as it took over some 40 firms in its rise to prominence, including old-line firms such as Hayden Stone, Shearson Hammill & Company, Loeb Rhoades, Hornblower & Company, Lehman Brothers Kuhn Loeb, and E.F. Hutton. Today it is a subsidiary of American Express, which owns 61% of the company.
Sanford Weill was Shearson’s guiding force through much of its history. Starting out as a runner for Bear Stearns, Weill eventually became president of American Express in 1983. Weill and then his protege, Peter Cohen, led the firm on an aggressive route that has involved some of the most famous deals on Wall Street.
In 1960 Weill helped form the investment firm of Carter, Berlind, Potoma & Weill. With some $215,000 in capital, CBPW was tiny, but Weill’s ambition and his genius for melding companies characterized its growth.
The firm made little news during its first five years. In 1965 it evolved into Carter, Berlind, Weill and Levitt, Inc., and Weill became chairman. Two years later, CBWL made its first acquisition, taking over Bernstein Macauley, Inc., a firm that specialized in investment management. This first deal had most of the characteristics of a Weill deal—a long-established, respected firm would run into trouble, and Weill’s firm would take it over, merge it smoothly into his operation, usually cutting its back-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.
After the takeover of Bernstein Macauley, Weill waited three more years to acquire another firm. This time, the deal was a bizarre and influential merger unlike anything yet seen on Wall Street. On the surface, the facts were straightforward. In 1970, CBWL acquired Hayden Stone, an old-line retail brokerage that had fallen victim to what can only be called an excess of success. Hayden Stone had grossed $113 million in 1968, five times its gross in 1960, earning significant profits. In the late 1960s, though, many Wall Street firms had difficulties with their back-office functions, and Hayden Stone’s difficulties were among the worst. Its rapid expansion (the firm had almost tripled, to more than 80 offices within the decade) was too much for it to handle, and it was forced by the New York Stock Exchange to cut back on its trading.
When losses accelerated in 1969 and then worsened in the first months of 1970, Hayden Stone began to look for a merger partner. CBWL, whose gross revenues in 1970 were only $11 million, emerged as the leading candidate when Walston & Company decided, due to Hayden Stone’s lack of capital, not to acquire all of the firm but to take just 15 retail offices instead.
Several of Hayden Stone’s private investors proved more interested in suing the firm than in selling it, though. These investors felt that they had been duped into investing, and that Hayden Stone, which the New York Stock Exchange (NYSE) allowed to operate despite its being in violation of NYSE capital rules, should be made an example of and allowed to fail (for which the NYSE would have to pick up the tab, since Hayden Stone was a member firm). 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, after President Richard Nixon’s name was invoked, the last investor 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 back office helped solve Hayden Stone’s biggest problem and stemmed losses at the firm.
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 in the difficult times of the early 1970s, the firm opted to merge with the smaller, but better-capitalized, CBWL-Hayden Stone. The two firms became known as Shearson Hayden Stone, keeping the Shearson name because the brokerage had been a “major” underwriter, one looked to on the biggest deals, a status Hayden Stone did not have.
Shearson Hayden Stone made two major acquisitions in 1976. One was Faulkner, Dawkins & Sullivan, a regional brokerage with one of the best research divisions in the industry. The other was Lamson Brothers, a well-regarded commodities broker.
By 1977, Shearson’s holdings were consolidated, and the result was 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 seemed to defy the environment on Wall Street in the mid-1970s. Firms were now legally unable to both advise and underwrite a client on a particular deal. Overall trading volume had 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 membership requirements to be liberalized. Wall Street also faced increased regulatory pressures from the Securities and Exchange Commission (SEC) and competition in its traditional fields from a variety of sources. Some companies even took to underwriting their own issues (Exxon most prominent among them). Mergers and bankruptcies had driven the number of New York Stock Exchange member firms down from the 1960s high of 681 to 490. Worse, on May 1, 1975 fixed commissions were eliminated. Price cutting ensued, which further increased the pressure on firms to perform well.
Even long-standing, highly successful firms suffered under these pressures. 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 number-two in the investment-banking world. Weill’s mastery of mergers paid off as he brought the two large firms together. One of the keys to his methods was to ensure that Shearson kept absolute control of back-office functions, which allowed both firms to run smoothly as they joined. Also, Shearson usually incorporated firms very slowly, a kind of patience rarely seen in Wall Street-firm mergers.
In 1981, after Shearson had averaged a 60% yearly increase in profits over the last four years, Weill gambled big—he directed 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.
Many banks protested this violation of Glass-Steagall, but a number of the major money-center banks were in favor of it because this made it more likely that the banks would be allowed to underwrite securities and perform other actions that Glass-Steagall had denied them. Shearson eventually was allowed to keep the Boston Company.
Not long afterwards, Weill approached the American Express Company to suggest that it take over Shearson. Weill wanted the capital that American Express could provide to give Shearson more deal-making power. A well-capitalized partner is also a stabilizing factor in uncertain times. 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.
The $900 million deal had its hitches. Some felt that risk-taking Shearson would lose flexibility when mired in the bureaucracy of a peace-of-mind oriented, $21 billion company like American Express, making it unable to practice its aggressive strategies. There were also those who remembered American Express’s previous venture into the investment-banking world, when it bought 25% of Donaldson, Lufkin & Jenrette only to see the firm, and the investment, fizzle.
But 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 stunningly short span, 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. The firm had been quiet for longer than usual, but 1987 made up for it. First, in March 1987, American Express sold 13% of Shearson to Nippon Life Insurance, a Japanese company, for $508 million. Later that year Shearson went public, with American Express retaining 61% of the firm. Then came the stock market crash of October 19, 1987.
Shearson suffered along with the rest of Wall Street. For the year, revenues were flat, at $6.7 billion, and earnings dropped 70%, to $101 million. But only two months after the crash, Shearson announced a blockbuster deal: the purchase of E. F. Hutton.
Hutton had been in difficulty for some time; in fact, 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.
Hutton was not like Shearson at all. While Shearson’s employees were from all sorts of backgrounds, Hutton’s were almost all long-term Hutton employees, and from a firm that at the height of Wall Street’s takeover craze had boasted that it still had only one name.
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 swallowing Hutton, 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 in 1989. Three of its top officers left Shearson, due to conflicts of personality and strategy with Cohen. And, in the face of SEC objections, Shearson also had to abandon its attempts to sell a new investment instrument, the unbundled stock unit, after only four months. But Shearson also 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. This change was greeted with relief by many. At the time Clark took over, 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 have their work cut out. But Shearson also has a strong parent company and a capable new leader to shoulder the burden of returning it to profitability.
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.
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