When Shearson Lehman Hutton trotted out its shocking proposal last fall to take RJR Nabisco private in what was to be the largest deal of its kind, the investment banking firm was showing a certain cockiness that most people on Wall Street could excuse. After all, Shearson was in the middle of an incredible winning streak, one that saw the firm put together a record-shattering 180 deals, worth more than $74 billion, in just one year.
Shearson didn’t get to take RJR Nabisco private. The tobacco and consumer products giant opted for a competing $25-billion transaction put together by Shearson’s archrival Kohlberg Kravis Roberts & Co.
Losing a big deal like that is noteworthy in itself. But the RJR Nabisco fiasco--coming as it did during a year of phenomenal success and strain--seems also to have brought to a head a number of smoldering personnel problems inside Shearson Lehman’s merchant banking operation.
Several key deal makers have already defected in the past few weeks, and sources say tension is running high even as the firm continues to try to put together large numbers of eye-popping transactions.
What’s happening at Shearson is also going on at firms like Salomon Bros. and First Boston. In all cases, highly paid Wall Street executives can afford a less stressful life style that comes with starting your own firm or working with a smaller shop. But in the case of Shearson, the trend could be harmful to the firm as a whole.
“There’s a tremendous talent drain,” says one source familiar with the goings-on inside Shearson Lehman Hutton. “And these are the rainmakers who are leaving. These are the guys who bring in the business.”
In all, about a dozen key members of Shearson’s merchant banking group have left in the past year. They include Peter Solomon, head of merchant banking; Daniel Good, a managing director and a key link to an assortment of corporate raiders; Francois Saint Phalle; Gilbert Harrison; Vincent Mai; Philip Waterman; David Stein, and Roger Altman--all of whom are well known in their business circles.
Analysts who follow the investment banking industry contend that it’s only a matter of time before the loss of these people starts affecting Shearson. But sources at the investment banking firm, in off-the-record remarks, dispute that claim. They say that the firm expects to put together at least as many deals as it did last year and that its backlog of transactions is already “substantial.”
That argument could go on all year. But the size of Shearson’s backlog of deals is of no small consequence since it’s one of the key things the company has going for it these days.
Like every other investment firm, Shearson’s business with small investors--commonly called its retail operation--has been doing horrendously. To make its situation worse, the firm greatly expanded its retail network at the worst possible time in late 1987 by acquiring the faltering E. F. Hutton & Co.
Investment banking accounted for $1.4 billion of Shearson’s revenues in 1988, nearly double the $793 million in 1987. That increase--along with the Hutton acquisition--pushed the firm’s total revenues up to $10.5 billion last year from just $6.7 billion in 1987.
But Shearson’s after-tax profit was just $96 million in 1988, compared to $101 million the year before.
So the defections in the merchant banking operation comes at a particularly bad time for the firm.
Perrin Long, who tracks the investment banking industry for Lipper Analytical Services, is one who believes that the RJR Nabisco episode was the last straw for many Shearson investment bankers. “A number of the bankers at Shearson thought (it) was a major mistake,” Long says.
Sources inside and outside of Shearson say the bankers were particularly bothered by the fact that the firm came off in the episode as trying to ram through a deal that would have enriched RJR Nabisco’s management at the expense of shareholders.
But the RJR Nabisco situation only compounded a problem that already existed for many of the investment bankers. Some weren’t getting along with Peter Cohen, Shearson’s 42-year-old head. Others simply felt that--given how well Shearson’s investment banking division was performing--they weren’t being paid enough.
“There is a bit of a problem at Shearson’s merger and acquisition department,” said another analyst who follows the company. “People want to keep the fees for themselves.”
Since many investment bankers these days have visions of setting up their own firm anyway--like Bruce Wasserstein and Joseph Perella did so successfully after their falling out with First Boston--experts say that some of Shearson’s people decided to use their annoyance over RJR Nabisco as an excuse to jump ship. (Shearson officials, incidentally, say that some of the defectors left by “mutual agreement.”)
And even though these investment bankers may have considered themselves underpaid, they did make enough money over the years to have a degree of financial independence. Some--like Solomon and Good--have decided to set up their own firms; others are able to afford to go work for smaller investment houses with more of a boutique feel.
“The two primary reasons these people are leaving,” said one person who left, “is a feeling that Peter Cohen doesn’t understand the investment banking business and he’s not compensating them enough.”
Cohen’s lack of rapport with his own investment bankers could have even deeper implications. It could hurt the firm’s profits at a time when American Express, Shearson’s parent, is looking to unload some of its 61% stake in the firm. And that could get James D. Robinson, American Express’ chairman and Cohen’s boss, awfully mad.
Stock prices have been down sharply during the past few weeks, but what’s more troubling to the experts monitoring the market is that professional investors don’t seem overjoyed anymore when there is good news.
Take, for instance, last Tuesday’s report that consumer prices rose only 0.4% in February and not the 0.5% or 0.6% that experts had been predicting. Stock prices shot up sharply at the start of trading but languished the rest of the day.
Ever since the government announced earlier this month that producer prices rose an astounding 1.0% in February--or at a 12.6% annual rate--investors seem unwilling to be cheered up.
This new attitude is quite different from what it was in January and February, when the market would rally at the slightest sign of a slowing economy (housing starts, industrial production or retail sales), despite the fact that the outlook for interest rates was still glum.
“It’s hard to revive these patients,” said Hugh Johnson, chief investment officer with First Albany Corp., of stunned investors. “It suggests the tone of investors has turned on a dime. Good news is not seducing them back into the market.”
Which, to a lot of market watchers, means that big-time investors are finally facing the reality of the interest rate and inflation situation. They now realize that high interest rates are disastrous for stocks and that rates are not going to come down anytime soon.
“It was totally shocking to everybody,” Aubrey G. Lanston & Co. economist David Jones said of the producer price figure that turned investors sullen. He thinks the Federal Reserve will have to tighten credit once again, perhaps towards the end of the second quarter.
Without the 1% jump in producer prices, experts say the Fed might have held out a little longer before raising rates. And investors would have been able to continue living in dreamland.
Larry Perlman, the new president and chief operating officer of Control Data, is known for being a very tough guy. When he was head of Data Storage Products, Perlman trimmed the company’s work force sharply.
Now analysts on Wall Street think that Perlman will take out his saber again soon and start lopping off heads at Control Data. And once the Minneapolis company’s costs are down, Perlman will start getting rid of entire businesses (perhaps Control Data’s computer systems and maintenance operations) that he doesn’t want.
All of this surgery could start by the end of this month, when bank covenant agreements will put pressure on the company to improve its profits. Under the agreement, Control Data has to be profitable for the trailing year, something that it might accomplish by the end of March only because of the recently announced sales of some minor assets.
“It’s not clear yet what goes and what stays,” says Charles Frumberg, an analyst with Mabon, Nugent & Co. But what is certain, he says, is that a lot of assets must go. Control Data’s management is said to be reviewing the situation right now, and analysts expect it to have a decision by the end of this month.
In its own peculiar way, Wall Street is looking forward to the blood bath. Analysts’ opinions of Control Data have become more positive over the last few weeks. “We have upgraded our opinion on the stock to ‘buy’ based on the increasing possibility of either a breakup or a significant downsizing of the company,” says Roger Redmond of Piper, Jaffray & Hopwood in Chicago.
Challenger, Gray & Christmas, the outplacement company, predicts that rising interest rates will soon lead companies to lay off workers. It suggests that employees raise their visibility in the eyes of their bosses (“it is not time for false modesty”) so they won’t be the ones let go . . .
Fried, Frank, Harris, Shriver & Jacobson, one of the premier takeover law firms on Wall Street, is the latest to warn clients that the Federal Trade Commission is clamping down on corporate raiders who try to bypass regulations by using loopholes in the Hart-Scott- Rodino antitrust law. Investment bankers are said to be taking the threat seriously and are warning their clients to stay within the filing regulations . . .
Traders, meanwhile, are angry at two particular government filings: BSN Corp.'s 13D on Athlone Industries and Sequa’s Hart-Scott-Rodino filing on Precision Cast. Both BSN and Sequa promptly sold their holdings at a profit shortly after publicly admitting that they owned the stocks.