Drexel’s Retail Brokerage Operations Put Up for Sale
Moving swiftly to reorganize in the wake of its recent legal problems, Drexel Burnham Lambert said it will sell its retail brokerage operations and focus exclusively on its core businesses, including “junk bonds,” general investment banking services and bond and stock trading for institutional investors.
The decision was discussed in a weekend meeting of Drexel’s board of directors and disclosed for the first time Tuesday when Frederick H. Joseph, the firm’s chief executive, went on Drexel’s public address system.
Joseph said the firm wants to sell the entire retail brokerage to a single securities firm with a larger retail operation. In a written statement, Drexel said it hoped to conclude a deal by next week. The firm said it hasn’t reached agreement yet with any potential buyer.
The retail unit, which mainly serves individual investors and employs 1,100 brokers in 42 offices around the country and in Puerto Rico, accounts for only about 10% of the firm’s revenue. One source at the firm said the retail operations recently haven’t made a profit.
The decision to sell the retail business wasn’t unanimous, and sources said more than one member of Drexel’s board voted against it.
The firm also said it plans to “curtail” its activities in municipal securities, over-the-counter stocks and market-making and research in foreign stocks. A spokesman said it hadn’t been decided yet whether these units would be closed or just reduced in size.
The announcement of plans to sell the retail unit infuriated many of Drexel’s brokers, some of whom said in off-the-record interviews that they felt betrayed by the firm. A broker in one of the firm’s West Coast offices said Drexel in recent months had repeatedly reassured brokers that it was committed to maintaining the retail business despite the firm’s problems. The broker, who asked not to be identified, said that on Tuesday “Fred Joseph came over the (intercom) system and knocked brokers over the head, unconscious.” He added that, as a result, “There are a tremendous number of very disgruntled people here.”
Drexel’s retail brokers have long been overshadowed by the firm’s main money-making operation, the high-yield junk bond trading and underwriting based at the firm’s Beverly Hills office.
It was also disclosed Tuesday that Drexel’s board decided for a second time in the past two years to scrap plans to move its headquarters. The firm announced that, because it will have fewer employees as a result of the sale of the retail operation, it is abandoning plans to build a new building in lower Manhattan.
Above-Average Revenue
There were rumors Tuesday that several potential buyers were interested in the retail operation, including Smith Barney, Harris Upham & Co. and Merrill Lynch & Co., among others. But Merrill Lynch declined to comment, and a Smith Barney spokesman couldn’t be reached for comment.
Although the Drexel retail unit may not have been profitable, its brokers specialized in dealing with wealthier customers and are said to have produced gross commission revenue per broker of over $300,000, well above the industry average. Steven Anreder, a Drexel spokesman, said this makes the unit attractive to potential buyers.
The unit is believed to have been unprofitable because of the relatively small number of brokers compared to the operation’s overhead costs.
In explaining the decision to sell, Drexel cited both the adverse publicity that the firm has received and the weakness that all Wall Street firms currently are suffering in their retail business. Because of these factors, Drexel said the growth prospects for its retail unit weren’t good.
Drexel has announced plans to plead guilty to six federal felony counts and pay $650 million in penalties in connection with allegations of securities fraud and insider trading. The firm also reached a settlement last week of civil charges filed by the Securities and Exchange Commission. The agreement with the SEC subjects Drexel to the most stringent outside supervision ever imposed on a major securities firm. In addition, Michael Milken, the former head of Drexel’s junk bond department, recently was indicted on racketeering and other charges.
Perrin Long, a securities industry analyst at Lipper Analytical Services, said the publicity about Drexel’s legal problems probably has made it difficult for Drexel brokers to attract new customers and keep existing accounts. In addition, he said, “It could be a stigma over the next few years with the Milken trial going on.”
‘Depressed State’ of Industry
A broker at another of Drexel’s West Coast offices confirmed that the constant press reports about the firm’s legal problems worried customers and made it especially difficult to attract new customers. Brokers also speculated that selling the unit may greatly reduce the legal problems Drexel is expected to have with state regulatory authorities. Many state government securities regulators are expected to take action against the firm, with charges similar to the federal ones.
But in its statement, Drexel emphasized the industrywide softness of retail stock and bond trading as the main reason for its decision. Stock trading by individuals has fallen off sharply since the October, 1987, crash.
“Clearly, given the depressed state of the securities industry, the anticipated lack of participation by individual investors and the mounting competition that can be expected as commercial banks become more active due to the recent easing of restrictions on their securities activities, the plan is a necessary step to ensure our firm’s future vitality,” Drexel said.
The firm said by concentrating on its core businesses, “Drexel will be able to maintain its role as the major factor in the underwriting of securities of industrial companies.” The firm also said it expects its financial condition to remain one of the strongest in the securities industry.
Drexel confirmed that it plans to continue its present operations in mortgage-backed securities, arbitrage, commodities and as a dealer of government securities.
