Up to 6,000 Layoffs Seen at Shearson : Wall Street: The ailing company may close up to 50 retail brokerage offices as part of a retrenchment, sources say.
American Express Co. is expected to order a significant number of layoffs--perhaps two or three times the 2,000 already announced--at its troubled Shearson Lehman Hutton brokerage unit in an attempt to stem losses, insiders and securities industry analysts said Monday.
In the wake of American Express’ announcement Sunday that it will buy all shares of Shearson that it doesn’t already own, the firm is expected to move swiftly to streamline the unit. Definitive plans will await the outcome of a strategic review of all of Shearson’s business lines, announced last week by Shearson’s new chairman and chief executive, Howard L. Clark Jr.
But American Express is expected to deal with several obvious problem areas at Shearson, including a real estate lending unit with big exposure to losses. The unit, Balcor Co., which specializes in commercial real estate lending and property management, has more than $110 million of non-performing loans on its books but has reserves to cover losses of only $10 million. In the short term, Shearson will probably have to make much larger reserves, while perhaps looking for a buyer for the unit or winding down its loan portfolio.
The firm also has a $500-million short-term bridge loan to Prime Computer Inc. that it has been unable to convert into marketable junk bonds. Shearson will inevitably have to undertake some kind of refinancing of the loan. Lawrence W. Eckenfelder, a securities industry analyst at Prudential-Bache Securities, also speculated that Shearson may soon substantially curtail unprofitable or marginally profitable operations in Europe.
Sources also said Monday that Shearson is planning to close between 45 and 50 retail brokerage offices nationwide as part of a retrenchment that has been under way since the firm acquired E. F. Hutton & Co. two years ago.
The definitive word Sunday that American Express had abandoned longstanding plans to reduce its stake in Shearson sent American Express’ stock price tumbling Monday as investors anticipated a continuing drag on the parent company’s earnings. American Express shares closed Monday at $27.50, down $1.875, in heavy New York Stock Exchange composite trading of more than 3.4 million shares. It was the second most active issue on the NYSE. Shearson’s stock ended the day at $11.875 a share, down 62.5 cents.
Perrin Long, a securities industry analyst with Lipper Analytical Services Corp., said the price that American Express is paying to public shareholders appears to be fair. He said the transaction probably will be approved without difficulty by a special independent committee of Shearson’s board set up Sunday to review the deal.
American Express currently owns about 61% of Shearson. The merger, through a tax-free exchange of stock, was valued at $350 million. This will be in addition to a cash injection of $750 million that American Express had already announced and $250 million that it contributed to Shearson’s capital in December.
Shearson currently has slightly more than 35,000 employees, and the firm said last week that it would lay off 2,000. Sources said the number inevitably will be much higher, perhaps reducing Shearson to 30,000 employees by the end of the year. “It’s a logical conclusion that if you’re going to be streamlining, you don’t just lose assets,” one Shearson insider said. “You’ll be losing people as well.”
The precise areas to be cut remain to be seen. While speculation continued that American Express still might wish to sell Shearson if an attractive offer came along--or make some other dramatic move such as splitting up the retail brokerage and investment banking units and selling one of them--Eckenfelder and other analysts said such steps are unlikely. They said Shearson could probably return to profitability by concentrating on attractive operations in both the retail side, which sells stocks and bonds to individual investors, and the investment banking side.
Overall, the firm’s retail brokerage business and certain aspects of its investment banking business--including, at least until recently, mergers and acquisitions--remain profitable. Eckenfelder predicted that Shearson’s management will examine each product and line of business separately, paring selectively rather than making dramatic wholesale cuts.
He estimated that, taking into account a large writedown associated with cost-saving measures, Shearson will post a pretax loss for its first quarter of between $400 million and $500 million. Eckenfelder said that, even with aggressive trimming of assets, it would probably take a year for Shearson to return to profitability if the current downturn in the entire securities industry continues.
