Salomons agrees to $9bn merger with Smith Barney

The consolidation of Wall Street took another giant step when Travelers Group, owner of Smith Barney, paid $9bn (pounds 5.6bn) for the parent company of Salomon Brothers. David Usborne in New York and Tom Stevenson in London assess the creation of the latest mega-corporation.
The latest in a series of giant mergers was unveiled on Wall Street yesterday as Salomon Incorporated, the parent of investment bank Salomon Brothers, said it had agreed to an all-share buyout by the financial services giant, Travelers Group.

The after-shocks for Wall Street are expected to be monumental, establishing Travelers, and its retail stockbroker Smith Barney, as a new Goliath on the securities landscape. It elevates the enlarged firm to the mega-institution status of rivals such as Merrill Lynch and the recently merged Morgan Stanley Dean Witter.

The new company will be called Salomon Smith Barney Holdings. Its creation is certain to trigger extensive lay-offs at both companies to eliminate overlapping, especially among fixed-income traders and analysts. News of the merger came as a complete surprise in London where only a handful of senior Salomons employees were aware of the takeover.

The agreement also sees the departure of Robert Denham, chairman and chief executive of Salomon, and confirms the rise and rise of Deryck Maughan, the 49-year old British chief executive of Salomon Brothers, who will serve as co-chief executive of the new firm alongside James Dimon, 41, chief executive of Smith Barney.

Mr Maughan's promotion is the culmination of a meteoric rise for the son of a Durham miner, who spent 10 years in the Treasury before moving into investment banking. He was promoted by Salomon's biggest shareholder, investment guru Warren Buffett, after the firm was found to have rigged US treasury bond auctions in 1991, the low point of a turbulent 10 years for the bank.

Mr Maughan took over as chairman and chief executive following the departure of three of Salomon's most high-profile directors, legendary chairman John Gutfreund, Salomon's president Thomas Strauss and trader John Meriwether.

Mr Maughan was seen then as the epitome of the new squeaky clean image Mr Buffet wanted to foster following a famous description of the bank as "rotten to the core".

He was dubbed "Mr Integrity" by the Salomon staff who dominated the American bond market in the late 1980s and served as role models for the "Masters of the Universe" in Tom Wolfe's novel, Bonfire of the Vanities.

Mr Maughan worked in the British Treasury between 1969 and 1979 before being seconded to investment bank Goldman Sachs in London, where he stayed for four years before being lured over to Salomon in 1983.

In 1986, he went to Japan for five years building up the group's highly profitable Tokyo operation and had just returned to New York when the treasury scandal blew up.

Peter Middleton, the former monk who unexpectedly quit Lloyd's of London to head up the bank's European operation, has been named head of the combined business in Europe. Salomon employs 1,500 in Europe, compared with Smith Barney's 250.

Travelers, with its red umbrella logo, has long been publicly parading its desire to find new partners and extend its operations. Headed by the highly regarded Sanford Weill, Travelers offers financial services ranging from life, property and casualty insurance to annuities and mutual funds.

"The complementary strengths of these two organisations ... will create a financially powerful and formidable competitor in virtually ever facet of the securities business, in any region of the world," Mr Weill said in a statement. Travelers is offering 1.13 shares of stock for every Salomon share.

Until only a few days ago, rumours had it that Mr Weill had his sights on Bankers Trust. It was suggested that Salomon was a second or third choice for Mr Weill. Goldman Sachs may have been his most favoured option but is understood to have resisted Travelers' advances.

Initial reaction to the Salomon deal was overwhelmingly enthusiastic. "We think this combination will create nothing short of a powerhouse," said Erik Gustafson of the Stein Roe Stock Fund, which has holdings in both companies.

Even on Tuesday, shares of Salomon soared to a historic high of $71.50 as first rumours of the buyout began to leak and speculators saw their chance for a killing. By mid-morning yesterday, they were trading at $78 a share.

Attention is now likely to focus once more on the two securities houses that still remain independent on Wall Street but which have long been seen as inevitable targets for acquisition: Paine Webber and Lehman Brothers.

"The merger and acquisition mania is just going to continue," Robert Froelich of Kemper Funds suggested. "I don't think there's any company in financial services which is too big to be taken over".

There are serial attractions to yesterday's link-up. A good match is promised between Smith Barney's strong equity and retail operations with the famous fixed-income franchise of Salomon Brothers. In addition to its bond business, Salomon is also a force in commodities and global markets trading.

The deal also answers Mr Weill's desire to give Smith Barney an international presence that had been lacking. "I think that Mr Weill wanted that international footprint in Salomon Brothers," Mr Gustafson suggested. Salomon has a big network of offices world-wide, notably in London.

Questions will be asked, however, about Salomon's heavy dependence on the proprietary division, where traders make huge leveraged bets in the international bond markets with the firm's own capital.

This is a notoriously volatile business that Mr Weill may very well like to see phased out.