Financial Firms Find ‘Synergy’ an Elusive Goal : Diversification Gets Mixed Grades; Few Are Able to Be One-Stop ‘Supermarkets’

When the investment house of Merrill Lynch & Co. entered the real estate brokerage business in 1979, it saw that field as yet another lucrative way to offer a broad array of financial services to the American consumer.

Home buyers, the firm reasoned, would also be excellent targets for the sale of stocks, mutual funds and other Merrill Lynch investment products.

“Homes are the single biggest investment made by most Americans, so we think this is an excellent financial service for us,” Donald T. Regan, then Merrill Lynch’s chairman and chief executive and now White House chief of staff, said in 1980 as his firm was building what eventually became one of the nation’s largest home sales operations.

But last week, wanting to raise capital to defend its core securities businesses, Merrill Lynch announced that it would sell the Merrill Lynch Realty Associates unit. “We can’t be all things to all people,” Merrill Lynch Chairman William A. Schreyer said in announcing the planned sale.

Merrill Lynch’s abortive foray into real estate illustrates the perils that have struck many companies trying to become diversified financial services firms offering a broad range of investment products under their corporate umbrellas.

Since the 1970s, dozens of banks, insurance companies, brokerage firms and other financial services firms have diversified, often hoping to capitalize on the “synergism” created by having salespeople offer related financial products to the same customers.

Many also see financial services as an area of exploding growth, as banking deregulation has aided the proliferation of dozens of new products and consumers have become more sophisticated. Or they feel threatened by slower growth in their traditional businesses or believe that the future under financial deregulation belongs to giant financial “supermarkets” able to serve all of a consumer’s investment needs.

Non-financial firms, ranging from computer companies to retailers, also have jumped on the financial-services bandwagon, seeing the industry as a source of fast profits, cash flow, tax writeoffs or other benefits to moderate swings in their own businesses.

Such developments have blurred the distinctions among financial services firms. Today, for example, consumers can obtain home loans not just from their local bank or savings and loan association but also from insurance companies such as Prudential, mutual fund companies such as Dreyfus Corp., retailers such as Sears or even such companies as General Motors or General Electric.

Some Success

And some companies, such as Citicorp and American Express, have achieved certain degrees of success though offering a broad array of financial services, experts say.

But for many firms, results of these diversification efforts have been decidedly mixed, reflecting in many ways the problems that industrial companies have encountered on the rough road to diversification.

Some firms have discovered that some investment products are not compatible or do not necessarily appeal to the same customers. Some customers have resisted the idea of buying all their products from one vendor.

Some companies have also found that salespeople are unable or unwilling to sell a broad range of products. They have found that diversification is too costly in terms of training, advertising, sales commissions or facilities, or that becoming profitable took longer than shareholders--ever conscious of the bottom line--were willing to wait. Some found managing the diverse elements too difficult. Or, like Merrill Lynch, some have found that they were spreading themselves too thin and needed to focus on their core businesses, or that the field is too competitive or that profits are too low.

“An awful lot of people are trying to be full-service providers of consumer financial products,” said Gary C. Wendt, president of General Electric’s Financial Services unit, which itself is a major player in the industry, with $44 billion in assets. “The field looks kind of crowded.”

“The idea of synergy is to add two plus two to get five, but it happens about that often,” said Anthony M. Frank, chairman and chief executive of San Francisco’s First Nationwide Bank, which is cautiously exploring various ways to market auto loans, credit cards and other products jointly with its parent, Ford Motor Co. Marketing different financial products to the same customers “is no slam dunk,” Frank added.

Accordingly, some firms have been retreating from being something for everybody. BankAmerica, trying to bolster its financial position, has sold off commercial finance, auto leasing and other subsidiaries in recent months. Merrill Lynch not only plans to sell its real estate brokerage operations, but also a portion of its leasing operation.

Others are staying in the game but have taken some lumps along the way. American Express, while remaining committed to offering a broad range of financial products, spun off 73% of Fireman’s Fund after the insurance unit’s profits slipped. Many of the investment banking talent of Dean Witter left the brokerage after it was acquired by Sears.

K mart is trying to sell its insurance operations because of disappointing profits and is instead focusing solely on renting out store space to banks and other financial firms.

“We see opportunities for providing customers with financial services inside K mart stores. But we’ll defer to the experts to do it and operate on a landlord-tenant basis,” said Jon M. Hartman, K mart’s director of financial services.

Yet despite the drawbacks, many firms remain committed to broadening their financial services umbrellas. Many see financial services as providing benefits for their parent companies. Investment bankers at Shearson Lehman Bros., for example, help raise capital for their parent, American Express.

Generally, firms trying to diversify in financial services have taken one of two approaches.

The first is the supermarket approach, where an array of financial products is offered in one location. General Motors is trying this on a test basis in Michigan by offering home mortgages, auto loans and insurance in certain offices of its General Motors Acceptance Corp. auto-financing unit.

But perhaps the best example of this is Sears, which offers the services of its Coldwell Banker real estate brokerage, Dean Witter stock brokerage and Allstate insurance firm at many Sears stores nationwide. Those buying a house through Coldwell Banker get discounts on appliances, furniture and other Sears retail products.

Another variation of this approach is for one firm to place its products within the offices or stores of another. Security Pacific National Bank, for example, plans to begin marketing personal loans, mutual funds and other services at certain J. C. Penney stores in California. Safeco Insurance Co. is selling insurance at branch offices of First Interstate Bank of California, which is itself restricted by federal law from selling insurance. Dreyfus is one of several investment companies offering mutual funds through banks.

The second approach is “cross-selling”--keeping operations separate but using sales personnel from one to sell the products of the other.

Holders Targeted

Prudential’s insurance sales agents, for example, sell mutual funds developed by the firm’s Prudential-Bache brokerage unit. Meanwhile, Prudential-Bache brokers sell annuity products developed by the insurance parent.

Several firms are targeting their credit card holders for cross-selling. American Express, for example, markets mutual funds, insurance and other products to its card holders. Sears also is trying to market a number of products, such as Dean Witter individual retirement accounts, through its new Discover card.

But neither approach is easy to pull off, experts say.

Consumers buying one product may not be in the frame of mind to buy another product, consultants say. “These are not impulse items you’re selling. You don’t go to Sears and see Coldwell Banker and say, ‘Gee, I want to buy a house,’ ” said one top executive of a major West Coast bank, who asked not to be identified.

Often products are quite different in terms of sales approach and customers, experts say. A case in point is life insurance and stocks. Life insurance is a long-term product bought by people trying to minimize risk. It also tends to appeal more to middle- and lower-income people. Stocks, on the other hand, are often shorter term and riskier and appeal to the more affluent.

Combining different financial services firms also presents management problems, particularly if the different services have disparate corporate cultures or back-office procedures.

Totally Different

“The cultures in an insurance company are totally different than at a brokerage firm,” said Susie Wong, a senior consultant at the research and consulting firm of SRI International in Menlo Park. “The incentive structure is totally different.”

Another case of clashing cultures is with real estate brokers, experts say. They often do not want to spend their time selling insurance or other products when they make far more in commissions from selling homes, said Walter Montgomery, spokesman for American Express, which studied entering real estate brokerage in 1980 and rejected it.

Another clashing example could be trying to sell auto loans and home equity loans together. The idea of using home equity loans to finance cars has been heavily ballyhooed because the new tax reform bill will end deductions for interest on car loans but keep them for home loans.

But car dealers want customers to drive away with new cars the same day they come in the showroom. However, a home equity loan can’t be written and approved in one day, First Nationwide’s Frank said, because of the time needed to get an appraisal, title search and other home lending requirements.

Comparison Shopping

Consumers also have a greater tendency to shop around, consultants say. Many are not going to buy a product from the same vendor just out of convenience alone.

“You’ve got to offer the consumer something special,” Frank said. “You can’t sell mortgages through the mail.”

“Too many people have forgotten the fundamentals--what real value are you adding for the consumer?” said Walter G. Jewett, senior vice president and head of the national banking practice at the management consulting firm of Booz-Allen Hamilton Inc. “As a result, you’ve added cost and glitter but not any real value.”

Recognizing these problems, a number of firms are trying different strategies. Some are entirely avoiding dealing directly with consumers as a way of holding down costs. Such is the case at General Electric, whose GE Financial Services unit is involved in a wide range of activities, ranging from investment banking to commercial real estate lending to financing of purchases of GE appliances.

But in each case, the firm deals with other businesses, not the consumer directly. Financing for GE appliances, for example, is handled through GE appliance dealers.

“The commercial business is more lucrative and less expensive,” said Charles Biederman, spokesman for GE’s financial services unit. The firm tried offering its own credit card and second mortgages but gave up on them as too costly.

Many firms say they are keeping their financial services operations separate, preserving their independence and management and seeking cross-marketing only as a peripheral activity.

“We see some opportunities in synergies but never thought we could hit grand-slam home runs with them,” said American Express spokesman Montgomery. “Instead, we’re going for singles and doubles.”

Limited Partnerships

American Express, he said, has 150 cross-marketing and other joint projects. For example, financial planners at the firm’s Investors Diversified Services unit sell limited partnerships created by its Shearson Lehman Bros. unit, while Shearson brokers offer IDS-created annuities.

But the firm largely lets its subsidiaries maintain separate identities. “Shearson has a brand name that means something to investors buying securities,” Montgomery said. “The American Express name in terms of marketing securities doesn’t mean anything.”

Another practitioner of this leave-alone strategy is Kemper Corp., the Chicago insurance firm. Kemper in recent years has acquired several regional stockbrokerages, including Los Angeles-based Bateman Eichler, Hill Richards. But it has kept their names and regional identities, holding down costs by sharing merchandise and back-office expertise. Letting the firms keep their autonomy has allowed them to better watch their markets and respond with new products, Kemper Chairman Joseph E. Luecke has said.

Humble Origins

Other firms start small when entering a new financial services field, minimizing initial competition. Such has been the case at American Can, which since 1981 has almost totally transformed itself from a packaging firm to a financial services giant. It began by buying a medium-sized insurance firm, Associated Madison, built by Gerald Tsai Jr., a former Wall Street mutual fund guru who recently was named American Can’s chief executive. Since then, it has bought several other small-to-medium-sized insurance concerns.

More than anything else, some experts say, building a financial services lineup takes patience and management vision. Citicorp, for example, began building its mesh of consumer finance, conventional banking and investment banking slowly as long ago as the 1950s, said David C. Cates, a New York banking consultant. “It’s a tremendous piece of entrepreneurial architecture,” Cates said, noting that the firm has pioneered numerous financial products and now has its hands in virtually every area of financial services.

Patience also has been in abundance at John Hancock Mutual Life Insurance, which, because it is owned by its policyholders, has not had to tussle with profit-hungry shareholders and thus can afford to take a long-term approach. It has added a few small brokerages and a bank, credit cards, home mortgages and other operations--many during the past five years.

But progress has been slow. It took 10 years, for example, before the company’s entire sales force of 10,000 got the necessary licenses to sell mutual funds and other securities products, which the firm began adding in 1968, spokesman Charles McGillicuddy said. And even then, it has been a struggle to get insurance agents motivated to sell mutual funds, which earn them far less in commissions than selling life insurance.

“There are different cultures here,” McGillicuddy said. “It’s been a slow learning process.”