Shearson gains power as Wall Street gets leaner
Shearson Lehman Brothers Inc. has built a reputation for being able to take over firms that are struggling. Last week's agreement to buy the E.F. Hutton Group Inc. for $960 million will further the abilities of the constantly evolving Shearson. The firm will try to accommodate and absorb Hutton's 18,000 employees and operations in a changing - and consolidating - financial services environment.
The Wall Street of the future will be leaner. In the aftermath of the Dow Jones industrial average's 508-point plunge Oct. 19, analysts and business managers expect the world markets to cool down following the bull market's run from 1982 through 1987.
In the last two months, nearly 1,000 people have lost jobs on Wall Street. During the bull market, however, employment skyrocketed, with some firms tripling in size. High salaries lured many workers, particularly younger ones, to trading desks and floors. Veteran analyst Perrin Long has estimated that 50 to 60 percent of Wall Street's employees did not work in the 1973-74 bear market.
This is the stage that the Shearson-Hutton deal will step onto. Yesterday, Shearson began its $29.25-per-share public tender offer for 28.1 million shares of Hutton's 32.9 million shares. Shearson will exchange the other 4.8 million shares for $139.8 million in debt.
The merged company will have almost 3 million customers, $3.7 billion in capital, and $102 billion in assets under management. The first Wall Street merger since the stock market's slide will create the largest retail broker network. Hutton's worldwide retail sales force is considered one of the strongest in the industry. The addition of 6,500 account executives to Shearson's 5,700 brokers will surpass current leader Merrill Lynch's force of 11,500.
One of the highest costs of the retail brokerage business is the computers and other services needed to support those brokers. Last year, Shearson spent $200 million to expand its securities processing operation, which the added brokers will use. The company is also credited with having an efficient retail organization. These two factors bode well for the merger.
Retaining employee loyalty will be a tougher challenge. Shearson, known for its cost-conscious attitude, pays lower commissions than Hutton. In addition, once Hutton announced in November that it was looking for cash, uncertainty about the firm's future grew.
Employees who stay on will get a bonus a year from now based on their performances. The big producers will get special bonuses. Analysts estimate that between 5,000 and 6,000 Hutton employees may be let go; half of the losses may come through attrition. While Hutton's retail operations are clearly a plus, its banking and trading departments are not considered as strong.
Whenever a merger or acquisition takes place, the first area management focuses on is overlapping operations, says financial services analyst Nancy Young of Tucker, Anthony & R.L. Day, New York. Shearson will ``decide which offices they want to keep and what Hutton has besides its retail offices.'' Hutton has almost 400 offices, and Shearson 310. After eliminating the overlapping offices, about 600 will remain.
Shearson is the second-largest Wall Street investment house in equity capital, with $3.25 billion, following Salomon Brothers Inc., which has $3.5 billion. Adding Hutton's $1.7 billion equity capital will give Shearson a total of $4.95 billion.
In total capital, which includes long-term debt, Merrill Lynch is the leader; even after the merger its $8 billion will be greater than Shearson's $5.1 billion and Hutton's $1.8 billion.
Throughout its 27-year history, Shearson has grown by acquiring some major firms and smaller regional brokerages. As one Shearson executive says, ``There's probably not a dozen people here who started with the original firm.''
In 1981 American Express Company acquired Shearson Loeb Rhoades Inc. The new firm, called Shearson-American Express Inc., bought the investment house Lehman Brothers Kuhn Loeb Inc. in May 1984, thereby building up Shearson's mergers and acquisitions department.
Last March Nippon Life Insurance Company of Japan bought 13 percent of Shearson for $538 million. In May American Express raised more than $600 million by selling 18 percent of Shearson stock to the public. American Express now owns 61 percent of Shearson.
Shearson tallied a $316 million profit in 1986, on revenues of $4.6 billion, up from $201 million in 1985. The company did lose $70 million in October, however, mostly from underwriting its share of the Oct. 30 British Petroleum Company offering.
On Nov. 23, the 83-year-old Hutton announced it would consider being acquired. The stock market's collapse affected the company in a couple of ways. First, it raised concerns about the ability of the company to raise money. Hutton's stock hit a low of $11 a share after the plunge, a figure that was less than half the company's book value, or net worth, of $26 a share. Second, Hutton was concerned about retaining its credit rating, which affects how much interest a corporation pays to borrow.
These factors aggravated the company's $90.3 million loss in 1986 and its inability to shake the publicity from a May 1985 bank fraud scandal. Hutton was charged with 2,000 counts of mail and wire fraud. The guilty plea harmed employee morale and customer confidence, leading to a change in management.
``The cash management problem revealed that Hutton had not changed with the times,'' adds Ms. Young. ``Hutton had been riding on its reputation; it hadn't adjusted to the environment in new markets.''
It was the second time Hutton and Shearson tried to cut a deal. A year ago Hutton turned down a $1.6 billion offer from Shearson, or $50 a share; Hutton wanted $55 a share. This time around Shearson offered $25 a share in cash and $8 in preferred stock. One of the liabilities facing the new management, which has yet to be determined, might well be lawsuits from Hutton stockholders against Hutton directors for not taking the first Shearson offer.
For the merger to go through, a majority of Hutton shareholders must tender their stock. In addition, the government must rule that the merger does not create any antitrust concerns.
``It's very exciting,'' says the Shearson executive. ``You have two powerful firms getting together.''