Primerica to Buy Smith Barney for $750 Million : Hailed as Coup for Tsai, Who Shifted Packaging Firm Into Financial Giant
Smith Barney, one of Wall Street’s oldest and best-known investment firms, said Wednesday that it has agreed to a $750-million takeover offer from Primerica, a company run by former mutual fund guru Gerald Tsai Jr. and which until last month was called American Can.
The alliance, widely hailed as one of the most astute moves of Tsai’s career, extends both the transformation of Primerica from a packaging firm to a giant financial services firm and the casualty rate of Wall Street’s old-line investment houses.
Over the last decade, a parade of such well-known firms as Dean Witter, Shearson, Kidder Peabody, Lehman Bros. and Donaldson, Lufkin & Jenrette have traded their independence for the huge sources of capital offered by the big financial services companies that are now their parents. Smith Barney--the 114-year-old parent company of the Smith Barney, Harris Upham & Co. brokerage-- was the last of those privately held full-line investment banking firms.
Management Will Stay
The deal must be approved by regulators and shareholders. But Smith Barney, which is 78% employee-owned, said a group of Middle Eastern shareholders owning 22% of the stock and Smith Barney officers and directors controlling another 11% already have agreed to vote their shares in favor of the merger. Thus, the deal is virtually certain and is scheduled for completion next month.
Smith Barney will be run “as an autonomous unit of Primerica” and its current management team will stay on, Tsai said in a statement announcing the deal.
Despite the praise from many analysts, in some ways it is an unlikely teaming.
“They make money the old-fashioned way; they earn it,” the catchy jingle recited by actor John Houseman that made Smith Barney a household name, is an apt characterization of Smith Barney’s reputation: traditional, conservative, even staid.
Contrast that with scrappy deal maker Jerry Tsai. The Shanghai-born Tsai is a financial magician whose brash investment style made him an overnight hero in the go-go 1960s--and an overnight goat when his high-flying Manhattan Fund mutual fund crashed.
Transforming Company
Written off as a flash-in-the-pan, Tsai engineered a dramatic comeback culminating in his appointment 13 months ago as chief executive of the then-American Can.
Now, he is overseeing the company’s transformation from the nation’s preeminent can maker to one of its largest financial services companies.
“Jerry Tsai is a very smart guy, and he’ll have fun running Smith Barney, but I just don’t understand this,” one senior Wall Street executive said after hearing about the planned acquisition. “I just don’t see the fit there.”
Countered a Primerica spokesman: “It isn’t so much that we overlap” with Smith Barney “as it is this will let us expand into new areas.”
Primerica--a name American Can adopted after it sold off the can business on which it was founded--is in the specialty retail business through its Musicland audio equipment and prerecorded music stores and its Dunham’s athletic goods outlets.
But its big push for the past five years has been into financial services. It manages mutual funds, sells insurance and makes mortgages. Last year, it was the nation’s largest underwriter of individual insurance policies and originated more home mortgages than any U.S. mortgage bank except Lomas & Nettleton Financial Corp.
Securities analysts who follow Greenwich, Conn.-based Primerica said that with the acquisition of Smith Barney, it gains a distribution network of 100 domestic and overseas branch offices through which it can “cross-market” its financial products.
Through cross-marketing, companies keep their operations separate but use the sales personnel from one to sell the products of the other. So Primerica insurance sales agents might be called on to sell packaged securities developed by Smith Barney, and Smith Barney brokers would be expected to sell annuity products developed by the insurance business.
“This is a brilliant move by Primerica,” said Joan Goodman, an analyst in Chicago with Pershing & Co. “They will use Smith Barney’s distribution system to market all of (Primerica’s) products.”
Tsai himself said in a statement announcing the acquisition that the alliance “combines the best qualities of an institutionally oriented investment banking and securities firm and a retail distribution network.”
Analysts said they expect the merger to bring immediate financial gains to both firms.
Primerica’s cash flow will improve immediately because Smith Barney has an unsurpassed annual growth record among the large Wall Street investment houses and is a cash generator.
And Smith Barney--the nation’s 17th-largest investment firm with $413 million in capital--will be able to tap into “additional capital to enable it to develop its existing lines of business more rapidly,” Tsai said.
