Salomon seen as possible takeover target

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The Independent Online

Wall Street was yesterday forecasting that Salomon Brothers, the US investment bank that earns part of its living by broking deals for others, is under threat of a bid itself.

The speculation follows moves by prominent hedge funds that are betting on a big shake-up at the firm, perhaps even before October when its largest single investor, Warren Buffet, must decide what to do with some of his near-20 per cent stake.

Perrin Long, of the New York investment firm Brown Brothers Harriman, says: "On its own Salomon could stay in business as long as it wants. It has penty of capital. But it all depends on what Warren Buffet wants. One thing's for sure, if someone does take it over it will have to be a goddam large bank."

Mr Long estimates that Salomon is worth about $3.5bn. This week its shares rose more than $1 to more than $37 in spite of a credit rating downgrade from the rating agency, Standard and Poor's.

The shares moved up due to speculation of a shake-up at the firm, where pressure is building for its British chief executive, Deryck Maughan.

The downgrade was not exactly unexpected - Salomon had been put on standby for some weeks - but it has once again raised questions about the future of the bank at a time when its employees' nerves are already frayed due to the proposed implementation of a new remuneration scheme.

The most important date in the calendar, though, is 31 October, when Mr Buffet has the option of being paid out by Salomon for 20 per cent of his preferred stock or transfering the same amount into ordinary stock at $38 a share.

Peter Russ, of the New York investment firm Shelby Cullom Davis, says: "When he decides what he is going to do, Mr Buffet will be sending investors and analysts a signal of what he thinks about the future of Salomon Brothers."

The bank lost $831m last year and it announced a $65m loss in the second quarter of this year. There is talk that Mr Buffet, who brought in British- born Mr Maughan as chief executive in 1992, might move to split the chief executive's job into two positions and name an outsider to fill the post.

But a couple of prominent US hedge funds have been betting on the theory that Mr Buffet might seek a merger partner to put an end to all the turmoil instead.

Mr Maughan could not have dreamed for a better start at Salomon. In the year after his appointment the bank announced record profits of $1.56bn but the bubble burst the following year mainly because the bank, like most others, was caught out by a rise in US interest rates.

The current downturn in the bank's notoriously volatile business has also prompted a rethinking of Salomon's remu- neration structure.