Rothschild to Let Go 625 in Major Restructuring, Will Stay Independent
Conceding that it can’t be the full service investment firm that its management had hoped to become, L. F. Rothschild Holdings Inc. announced Monday that it will lay off about 625 employees in a major restructuring. The decision comes a year after the firm’s best known partners resigned in a feud over the company’s direction.
The beleaguered firm also said it won’t sell its retail brokerage business, apparently after failing to find a buyer at a price that it considered reasonable, but will transfer its transaction-clearing business to a unit of Merrill Lynch & Co.
The latest round of layoffs began Monday, the 88-year-old firm said, and will be completed within three to six months. The cuts will be across the board but will be concentrated in Rothschild’s so-called back office, which handles customer accounts and executes orders--the very area that Securities and Exchange Commission Chairman David S. Ruder last week urged investment firms not to cut.
When combined with the 175 workers whom Rothschild laid off over the past two months, these layoffs represent about 40% of the mid-size firm’s work force.
In percentage terms, the cutback is the largest in a series of layoffs by Wall Street investment houses in the aftermath of this year’s collapses in the stock and bond markets. Just last week, Kidder, Peabody & Co. said it will lay off 1,000 employees and Shearson Lehman Bros. said its acquisition of E. F. Hutton Group will result in as many as 5,000 layoffs.
But some analysts think a 40% cut won’t be enough to solve the problems at Rothschild, which is perhaps best known for taking fledgling high-technology companies public.
“My own feeling is that further steps will have to be taken for them to continue to be in business, and in all honesty that means more layoffs,” said veteran Wall Street analyst Perrin Long, with the New York firm of Lipper Analytical Securities.
Rothschild’s announcement that it will undergo a major restructuring but remain independent also disappointed Wall Street. Ever since the firm’s announcement in late October that it had suffered a huge $44-million trading loss from the Oct. 19 stock market crash, Wall Street analysts have characterized Rothschild as seriously undercapitalized and have speculated that only a merger with a stronger firm would save it.
“I had hoped they could sell their retail business and downsize to an investment house boutique,” Long said. “As it is, unless the (securities) environment gets better next year, they may not be able to make it as an independent firm.”
Shearson Lehman Bros. Chairman Peter Cohen had fueled speculation of such a sale last week when he acknowledged that Shearson had engaged in preliminary discussions to buy Rothschild’s retail brokerage business.
But at a press conference at its New York headquarters Monday, Rothschild’s four top executives said that, after discussions with Shearson and the New York investment company Integrated Resources, they decided against both merging and “going under the auctioneer’s gavel piecemeal.”
“We decided not to pursue those” overtures, said Francois Mayer, Rothschild’s co-chief executive.
Sources familiar with the discussions between Shearson and Rothschild said, however, that it was Shearson--not Rothschild--that terminated the discussions.
Rothschild “would have been delighted” to sell its retail business but “they didn’t get any takers,” one senior Wall Street executive said. “They’re keeping the business and cutting back only because they have to. This isn’t their first choice.”
By reorganizing, “we have accepted the fact that we can’t be all things to all people,” Mayer said. But he denied that the reorganization is an admission of serious trouble.
“No, we are not in trouble,” he said.
As a first step in reorganizing, Rothschild said it is negotiating an agreement with the Broadcort Capital Corp. subsidiary of Merrill Lynch to transfer its retail-account clearing operations to Broadcort in order to cut costs and free up its capital for other businesses.
By turning its clearing activities over to Broadcort, Rothschild estimates that it would cut costs about 40% and free up $50 million to $55 million in capital.
With the lower level of revenue that would result from Rothschild transferring its clearing operations, analyst Long said, the $143 million in equity capital that Rothschild reported as of Dec. 3 is adequate.
With the extra cash at its disposal once the clearing operations are transferred, Rothschild President Andrew L. Berger said the firm will focus its attention on wealthy individual investors, as well as on fixed-income trading and sales, over-the-counter market making, investment banking and arbitrage.
It was the latter business--risk arbitrage--that got Rothschild into trouble when the stock market crashed. Long estimates that the firm had $200 million to $225 million tied up in arbitrage--a gamble on the outcome of proposed or rumored takeovers--when the stock market began its steep decline Oct. 16. That is a huge amount for a firm whose equity capital totaled only $190 million as of Oct. 1 and has now fallen to about $143 million, according to Joel Miller, the firm’s chief financial officer.
“Arbitrage is what they have prided themselves on, but it was arbitrage that killed them” in October, Long said. “I find it disappointing that they are staying in it.”
Rothschild’s other co-chief executive, Robert Schoenthal, said that while the firm “did pull back substantially” from its commitment to risk arbitrage after the crash, Rothschild will remain in the business.
Rothschild’s problems actually began in 1985 when the closely held firm escaped a hostile takeover bid from General Felt Industries by going public. But they accelerated last year when an internal struggle at the top of the firm, then known as L. F. Rothschild, Unterberg, Towbin, triggered the departure of the firm’s two best-known partners, Thomas I. Unterberg and A. Robert Towbin. (Towbin’s brother and Unterberg’s father helped form C. E. Unterberg Towbin Co., which in 1977 was combined with L. F. Rothschild & Co.)
Unterberg and Towbin wanted the firm to stick to its knitting and remain a mid-size firm with a handful of specialties. Their younger partners, Schoenthal and Mayer, argued that such diversified investment bank powerhouses as Merrill Lynch and Shearson Lehman were the way of the future.
In late 1986, Schoenthal and Mayer won. Unterberg and Towbin defected to Shearson Lehman.
“Unterberg and Towbin must be rubbing their hands with glee,” said the president of one Wall Street firm. “In retrospect, theirs certainly was the better strategy.”
Rothschild’s management team denied Monday that the reorganization is tantamount to an admission that the diversification approach was wrong.
But Mayer conceded that Rothschild’s “expansion has been too rapid.”
And the consolidation, he said, “will be more painful than it would have been had the expansion not been.”
