Gutfreund Denies Plans for Buyout : Salomon Chairman Says Troubles Are Over
Salomon Inc. Chairman John Gutfreund says the big Wall Street investment bank is well on the road to recovery from its recent troubles, and denies Wall Street rumors that it is contemplating a leveraged buyout.
In a turbulent recent history, the firm’s earnings have declined steeply since their peak in 1986 and it has seen the departure of a number of key executives, the layoff of about 1,000 employees and an unwanted investment by corporate raider Ronald O. Perelman.
Some on Wall Street have speculated that the company will shield itself from further troubles by going private in a leveraged buyout. But Gutfreund, in an interview with Reuters at his desk overlooking the firm’s huge bond trading room, said no such buyout is contemplated.
“Not at this time,” Gutfreund said, adding that Salomon has not considered it in the past. Instead, he extolled the merits of the firm’s recovery plan and gave a bullish outlook for the embattled firm.
“We’re well positioned if market activity remains reasonably good,” said Gutfreund, a balding man with horn-rimmed glasses who made his reputation as a no-nonsense bond trader.
Salomon last week reported a fourth-quarter loss of $38 million, including a one-time charge of $180 million. But for the year as a whole, it reported a profit of $280 million, double 1987’s $142 million.
Analysts Skeptical
But the one-time premier Wall Street investment banking house, with a legendary reputation for its stock and bond trading, remains well below its peak 1986 earnings of $516 million.
Industry analysts remain skeptical whether the firm, which has suffered from high-level personnel defections, will be able to pull off a spectacular turnaround in earnings. Even the recent improvement was derived largely from the strength of its energy division, not its investment banking.
But they give Salomon good marks for cutting costs to correct an overexpansion of the firm in the midst of the bull market. Salomon withdrew from some businesses and trimmed staff levels just before the October, 1987, stock market crash.
“We have had to cut back on some of our businesses, reallocate personnel because we didn’t want to grow. We were 7,000 people. We’re back down to about 6,000. Strangely enough, with all the problems I’m as optimistic as I’ve been in a couple of years,” Gutfreund said.
Gutfreund also said the firm is undergoing its first major budgeting study, being conducted by chief financial officer Donald Howard. He said he expects no more staff cuts as a result of the study, but it may result in some reallocations.
The restructuring also considered asset sales, although Gutfreund said the firm has no specific sales targeted.
Even though its past cutbacks have hit foreign operations, Gutfreund sees continuing growth in Europe and Asia is a major goal for Salomon as an international stock and bond dealer.
“Technology is driving the business so hard, you really can’t as a major institution say ‘I’m going to be in America, I’m going to be in Europe, or I’m going to be in Asia.’ The linkages now are inextricable,” he said.
Seeks to Grab Share
He also hopes the firm can expand its “junk bond” business, possibly gaining ground from its towering rival in that business, Drexel Burnham Lambert Inc., whose insider trading scandal troubles of the past two years make Salomon’s woes seem slight.
“I’d like to pick up some of that share. . . . Through all their travails, they have done very well maintaining market share. The only way we can improve as well as the rest of the competition is if we provide better service,” he said.
He also talked about the firm’s efforts to expand in merchant banking, in which stockbrokers take part as investors in takeovers. Most recently Salomon joined in a failed effort with a group of investors in vying to take over RJR Nabisco Inc., which was won by Kohlberg Kravis Roberts & Co.
Analysts remain mixed about this and other parts of the Salomon recovery. Larry Eckenfelder of Prudential-Bache Securities Inc. said: “It’s going to have be a wait and see situation. The firm has gone through a lot of strategic refocusing which has yet to pay dividends. Their earnings continue to be going so-so. There’s been changes and talk but no real results you can hang your hat on.”
Gutfreund said he sees no takeover threat from Warren Buffet, who bought a $700-million, 14.5% stake as a friendly investor and Perelman, chairman of Revlon Inc., who said he would buy up to 25% of the firm when he was refused the chance to strike a deal like Buffett received.
Gutfreund said he believes that Perelman is no longer interested in building a position in Salomon stock. Revlon Inc. had no comment and it could not be determined how many, if any, Salomon shares he bought. Perelman was perceived as a hostile threat after Salomon declined to sell him a 14% stake that was available in 1987.
