Travelers to Buy Salomon Bros. for $9 Billion
Travelers Group, bidding to become the world’s premier financial-services conglomerate, said Wednesday that it would buy investment-banking powerhouse Salomon Brothers for more than $9 billion in stock.
Salomon will be folded into Travelers’ huge brokerage unit, Smith Barney Inc., to form the nation’s second-largest securities firm, behind recently merged Morgan Stanley, Dean Witter, Discover & Co. but ahead of Merrill Lynch & Co.
But Travelers, led by the wily Wall Street veteran Sanford I. “Sandy” Weill, 64, is much more than just a securities firm. Over the last decade, Weill has assembled a one-stop financial supermarket that also offers life and property-casualty insurance, credit cards, consumer loans and mutual funds.
Wednesday’s deal marries Smith Barney’s U.S. sales force of 10,000-plus brokers with Salomon’s international bond-trading, securities underwriting and investment advisory businesses. “This is about giving Travelers a global franchise,” said analyst Richard K. Strauss at Goldman Sachs & Co.
The merger is part of the consolidation wave sweeping the securities industry. This year alone, there have been at least half a dozen $1-billion deals involving securities firms, capped by the Morgan Stanley-Dean Witter blockbuster announced last February and valued at $10.5 billion.
Such consolidation has been going on for years, but the intense competition for securities firms has stepped up in recent months because of the emergence of commercial banks as buyers. The dismantling of Depression-era barriers separating commercial banks from brokerages has touched off what one observer called a “feeding frenzy among the banks.”
Recent deals have included Fleet Financial Group’s $1.5-billion acquisition of discount broker Quick & Reilly Group Inc.; NationsBank Corp.’s $1.2-billion purchase of San Francisco-based investment bank Montgomery Securities, and Bankers Trust New York Corp.’s $2-billion takeover of the Baltimore brokerage firm Alex Brown Inc.
In a statement Wednesday, Weill said the deal would “substantially strengthen Travelers Group’s earnings stream and capital base, catapulting Salomon Smith Barney into the top tier of global securities and investment banking firms.”
Travelers also operates Travelers Life & Annuity, Primerica Financial Services, Travelers Property Casualty Corp. and Commercial Credit Co. It does not own a commercial bank, though its name recently surfaced as a rumored buyer for Bankers Trust.
Salomon’s stock leaped $4.75 Wednesday to an all-time high of $76.25 on the New York Stock Exchange. The stock gained $4.44 on Tuesday as rumors of a deal swept Wall Street. The two-day surge added nearly 14% to the shares’ value.
Travelers, meanwhile, was off $2.63 Wednesday, closing at $69.44 on the NYSE.
Travelers will issue 1.13 shares of its stock for each share of Salomon Inc. stock. At Wednesday’s closing price for Travelers shares, the indicated price for Salomon holders was $78.46 per share.
That price is equal to--in Wall Street parlance--13 times Salomon’s estimated 1997 earnings per share. That would appear to be a bargain at a time when most blue-chip companies, including Travelers, are trading at 20 times earnings per share or more.
Salomon’s reputation was indelibly scarred by a 1991 scandal in which its traders allegedly rigged the auction market in U.S. Treasury securities by secretly cornering supplies of certain issues.
Although criminal charges were never filed, the firm’s chief executive, John H. Gutfreund, was forced to resign, and Salomon paid penalties of $290 million to settle federal civil charges.
Rudderless and financially crippled, Salomon was rescued by billionaire investor Warren E. Buffett, who had earlier bought a major stake in the firm. Buffett installed new top management and helped steer the company out of trouble.
But Buffett, reportedly disenchanted with the firm, earlier this year signaled that it was for sale by saying that his 18% Salomon stake was “not a core holding.”
“Solly had to do something,” said Stephen Willard, a Washington securities lawyer and former executive of CS First Boston. “They never really regained their position after the Treasury-bond scandals.”
Analysts said one of the risks in Wednesday’s deal is whether Salomon’s risk-taking, individualistic culture can successfully be integrated with the more buttoned-down style of a retail outfit such as Smith Barney.
After all, it was Salomon’s aggressive bond traders, with their eight-figure bonuses, who were the collective model for Sherman McCoy, the ethically-challenged antihero of Tom Wolfe’s satiric novel “Bonfire of the Vanities.”
Smith Barney, meanwhile, reacted to 1980s excesses with the finger-wagging ad slogan: “We make money the old fashioned way. We earn it.”
“If the acquirer were almost anybody else, you’d worry whether they could pull it off,” said Roy Smith, finance professor at New York University’s Stern School of Business and a former general partner of Goldman Sachs.
But Wall Street regards Weill as a wizard for his ability to combine disparate financial services businesses into a profitable and smooth-running entity.
Over the last five years, Travelers’ stock price has multiplied almost sevenfold, with very few dips along the way. “Nobody else has his track record,” Smith said.
Indeed, otherwise sure-footed firms such as General Electric Co., American Express Co. and Sears Roebuck & Co. all stumbled painfully when they tried to diversify into the securities business, through Kidder Peabody, Shearson Lehman Brothers and Dean Witter Discover, respectively.
“They didn’t know the business, and for them it was only a sideline,” Smith said. “Sandy knows this business.”
Which is not to say that Weill has never faltered. An earlier attempt to inject more of a deal-making culture into Smith Barney blew up in his face.
Robert Greenhill, a mergers-and-acquisitions whiz whom Weill recruited from Morgan Stanley to be Smith Barney’s chairman, stirred dissension in the ranks and finally resigned in early 1996, taking with him a golden parachute that reportedly topped $20 million.
Buffett, who never actually sold his 18% stake, gave Weill a vote of confidence Wednesday, saying in a statement: “Over several decades, Sandy has demonstrated genius in creating huge value for his shareholders by skillfully blending and managing acquisitions in the financial services industry. In my view, Salomon will be no exception.”
A person who has worked closely with Buffett said of his Salomon investment: “It isn’t a home run, but it’s a stand-up double.”
Travelers said it expects a restructuring charge to lower its profits by $400 million to $500 million when the transaction is complete. Part of that money will go for severance payments, the firm said in its statement.
Salomon gave no details Wednesday about how it would achieve cost savings from a restructuring, but some think the firm’s legendary bond-trading operation could be a casualty.
Michael Lewis, who turned a stint as a Salomon bond salesman into the scathing and funny 1989 bestseller “Liar’s Poker,” observed Wednesday that the larger and more diverse a securities firm grows, the harder it is to support a maverick operation like a trading desk.
Said Lewis: “People at the firm look at a trader and say, ‘He’s betting our future. If he gets it wrong, we go down the tubes. If he gets it right, he gets $25 million.’ ”
Another view was offered by a Salomon insider who disputed Lewis’ portrayal of the traders as reckless gamblers.
“This money isn’t being produced by cowboys,” he said. “It’s being produced by chess-playing PhDs from MIT.”
Besides, he went on, the trading operation is a “cash cow” that steadily produces the bulk of Salomon’s profits. “If Sandy Weill didn’t like the proprietary trading business, he wouldn’t be buying.”
James Dimon, chairman and chief executive of Smith Barney, and Deryck C. Maughan, chairman and chief executive of Salomon Brothers’ investment arm, will serve as co-chief executives of the new Salomon Smith Barney division. Robert E. Denham, chairman and chief executive of Salomon Inc., Salomon Brothers’ parent company, said he would resign after the sale closes.
The buyout, expected to be completed by the end of this year, has been approved by the board of directors of both companies but is subject to federal regulatory approval.
* Times wire services contributed to this story.
