Setbacks of ’88 Part of Shearson’s Growing Pains
In the past 18 months, Shearson Lehman Hutton appears to have lost its Teflon coating.
For example, while Salomon Bros., the largest Wall Street securities house, found itself coming out of the crash in a quagmire of bad press and rumors about job losses and internal bickering, Shearson seemed to be going from strength to strength.
Its fine reputation was only enhanced by its decision to snap up cheaply the troubled E. F. Hutton.
Since those glory days, the investment firm seems to have had an inordinate share of setbacks and they have begun to stick.
As one observer put it: “Shearson can afford to make some mistakes, but it has begun to look un-Shearsonlike. It always had a reputation for efficiency and staying out of trouble, but what we have seen is a pattern of management messing things up.”
No one at Shearson denies that 1988 was a difficult year. Low retail volume in the capital markets has hit every securities firm on Wall Street, but Shearson had to tackle a sharp drop in commissions, while at the same time absorbing the immense costs of merging with Hutton.
Fortunes Began to Change
A series of unfortunate events particular to Shearson followed. The company had to take a $105-million pretax writeoff to reflect the decline in value of its $150-million holdings of stocks and bonds in MCorp, the troubled Texas bank holding company.
It had to restate its earnings for the first nine months of 1988, slicing $30 million off its profit, because of an overstatement in earnings by its Boston Co. subsidiary, whose president was dismissed.
Shearson then found itself on the losing side of the fight for RJR Nabisco and was somewhat tarnished in the press because it was acting for Ross Johnson, RJR’s chief executive, who for a while became a national symbol of greed.
Earlier this year, Shearson suffered the embarrassing failure of unbundled stock units, a new product that foundered because of accounting complications with the Securities and Exchange Commission. There also had been some resistance among U.S. corporations and the investment community to the new instruments.
What does all this amount to? The most general conclusion, which Shearson acknowledges, is that the uneven performance of the past 18 months is almost inevitable when a company is growing so rapidly.
Shearson’s President Jeffrey Lane says: “We doubled the size of this firm within months of the crash and so achieved our five-year goal in a very short period. We have to accept that there has to be consolidation with growth this quick and I think we are in a digestive phase now.”
He rejects the notion that losing the RJR battle and shelving the stock units were failures.
New Business Unaffected
He contends, with some justification, that losing RJR has not affected the company’s ability to attract mergers and acquisitions clients. Among other new business this year, Shearson was called upon to advise Texas Eastern on its sale of North Sea assets to Enterprise Oil, and Time on its multibillion dollar merger with Warner Communications.
There has been much talk of discomfort within American Express, which controls Shearson, about the firm’s aggressive style.
James Robinson, American Express chairman, was openly disturbed when people in Pennsylvania cut up American Express cards on television in protest at the takeover of Koppers by Beazer PLC of Great Britain, for which Shearson was adviser.
Perrin Long, securities analyst at Lipper Analytical, believes that American Express may be somewhat uncomfortable with the level of risk assumed by Shearson.
However, he adds: “There are really no earth-shaking problems. Some of the decisions Shearson made in 1988 were not the best, but they are not overextended in any one particular area of their business where they are going to take a big hit.”
As far as unbundled stock units are concerned, Lane believes that the firm should not be knocked for trying to be innovative, even if it didn’t come off. “When you swing for the stars with a brand new idea, you are not going to win every time.”
