Stripping away the last of its ill-starred Wall Street acquisitions, American Express said Monday that it will spin off its Lehman Bros. investment banking unit into an independent company owned by American Express shareholders and Lehman employees.
What will remain is a core of service businesses--the signature charge card, corporate services, travel and financial planning--that can be marketed under the American Express brand name, said Chairman and Chief Executive Harvey Golub, who took over a year ago with a mandate to streamline and invigorate the firm.
Following the $1-billion sale last March of the Shearson retail brokerage business to what is now Travelers Corp., the long-predicted Lehman spinoff will complete the reversal of what had been the strategy of Golub's predecessor, James D. Robinson III. Robinson had acquired disparate financial services companies in what proved to be a vain hope that they would fit together.
American Express said it will inject $1.09 billion in capital into Lehman to make the newly independent company financially viable and assure it an "A" credit rating. In exchange, American Express will get a share of Lehman's potential future profits, as well as the share of Travelers profits Lehman receives as a result of the sale of Shearson. But the former parent will have no directors on Lehman's board.
Lehman employees will pay $160 million for newly issued shares of Lehman stock, boosting the total capital infused into the new company to $1.25 billion--the amount Golub said credit ratings agencies told him was needed to get the good rating.
Strong ratings are critical for securities firms, in part because they depend on short-term borrowing in their day-to-day business.
"We will end up with two separate entities at the end of the day, both of which are prudently and adequately capitalized and both of which will end up with excellent ratings from the ratings agencies," Golub said. American Express said its shareholders will receive a dividend in the form of stock in the newly independent Lehman.
The spinoff will be completed in May or June, Golub said.
When American Express sold Shearson to Travelers, Travelers Chairman Sanford Weill did not want the Lehman segment of the business, which specializes in investment banking, trading and underwriting new issues of stocks and bonds. So American Express held on to the unit while taking steps to shore it up for an eventual sale.
The spinoff will give Lehman executives what they have dreamed of for years: freedom from American Express.
Long an independent pillar of Wall Street, the august Lehman Bros. was acquired by American Express in 1984 and merged with Shearson. But the Lehman culture never fit with Shearson or American Express, and the firms never developed the synergies that Robinson envisioned.
Instead, during crisis periods for Shearson Lehman, American Express had to pay more than $2 billion in capital to the securities businesses.
American Express also announced its fourth-quarter and year-end earnings Monday. For the quarter, it reported income from continuing operations of $291 million, or 57 cents per share, compared to $255 million, or 51 cents, for the same period in 1992.
The spinoff was not announced until after the markets closed Monday.
American Express stock closed up 62.5 cents at $31.50 on the New York Stock Exchange.
Back to Basics
The landscape of American Express Co. has changed dramatically over the past few decades as the company sought to diversify. Here is a brief chronology of events.
* 1968: Acquires Fireman's Fund Insurance Co., a large property and casualty insurer.
* 1977: James D. Robinson III becomes chairman and chief executive.
* 1979: Hostile attempt to take over McGraw Hill Publishing fails.
* 1981: Acquires Shearson Loeb Rhoades, a leading brokerage house. Shearson becomes an independently operated subsidiary and acquires Robinson-Humphrey, a brokerage firm; Foster & Marshall, a securities firm, and Balcor, a real estate syndicator.
* 1982: Reorganizes under a holding company called American Express Corp.; its travel services become a wholly owned subsidiary, American Express Travel Related Services.
* 1984: Purchases Investors Diversified Services, a financial planning company. Shearson acquires Lehman Bros. Kuhn Loeb, a brokerage firm, and becomes Shearson Lehman Bros. Holdings Inc.
* 1985: Fireman's Fund Insurance Co. is spun off, marking the beginning of American Express' formal exit from the insurance business.
* 1987: Optima Card is introduced, allowing cardholders to extend payments for purchases over time.
* 1988: Shearson subsidiary acquires E.F. Hutton, becoming Shearson Lehman Hutton Inc. Shearson later discovers that Hutton came with huge hidden liabilities.
* 1990: Shearson subsidiary reports a $900-million first-quarter loss, one of the biggest ever by a securities firm.
* February, 1993: James D. Robinson III resigns as chairman and CEO. Harvey Golub is named to replace him.
* March, 1993: Retail brokerage segment of Shearson is sold to Primerica Corp.
* Jan. 24, 1994: Plans are announced to spin off Lehman Bros. to its shareholders and the firm's employees.
Sources: Times reports; company reports; "Company Histories 1990"; "Everybody's Business 1990"; Bloomberg Business News
Researched by ADAM S. BAUMAN / Los Angeles Times