Sanford I. Weill in April 1997

TRAVELERS: THE CHAIRMAN IS HAPPY IN TEN YEARS' TIME, SANDY WEILL HAS TRANSFORMED A COLLECTION OF UNSPECTACULAR BUSINESSES INTO A FINANCIAL SERVICES POWERHOUSE.

By CAROL J. LOOMIS REPORTER ASSOCIATE LIXANDRA URRESTA
April 28, 1997
(FORTUNE Magazine) – In a corner of Sanford I. Weill's wood-paneled office at Travelers Group Inc. in lower Manhattan there hangs a neon sign--yes, neon--given him by one of his executives. It's a vacancy/no vacancy sort, capable of a two-way message: "The Chairman is Happy" or "The Chairman is Not Happy." And which gets the nod? Bet on the first version. This is a guy who's ten years into a corporate adventure--first called Commercial Credit, and then Primerica, and now Travelers--that would make any boss light up.
Travelers' 1996 revenues of $21.3 billion rank it No. 40 on this year's FORTUNE 500 list, and its profits of $2.3 billion put it higher still, 32nd. Moreover, in those respects, and in total market value--that's a big $34 billion--Travelers outranks a certain other financial services company, American Express. Weill, now 64, used to hang out there as president and, in his words, "deputy dog." You don't think Weill, a cash-strapped kid out of Brooklyn originally, likes surpassing American Express? Get real. Or how about the fact that Travelers has just been placed in the 30-stock Dow Jones industrial average (of which American Express is a long-standing member)? When Weill learned in mid-March that Travelers had made that blue-chip club, he had a "Wow" reaction, says a Travelers executive: "He was ecstatic."



Small wonder. This is an unlikely outcome for a man who just over a decade ago was unemployed and batting .000 in his job applications; he'd tried to nab a division of American Express, and then the whole of BankAmerica, and failed both times. Then, when he finally connected, he bought what looked like dregs--first, a small-loan business, then a sleepy brokerage firm and an outfit that sold term-life insurance across kitchen tables.
From this start, a bare ten years ago, Weill builds a company with $2.3 billion in profits? One person marveling is General Electric's Jack Welch, who says of Weill: "He's been fantastic. He took air and turned it into this big, successful thing. It's been remarkable." Says a Travelers director, in an earthy summary: "Sandy is a genius at running crappy businesses."
Naturally, his stockholders appreciate this talent. True, they are likely to share Weill's opinion that the company's earnings-per-share growth--an annual rate of 28% over the last ten years--merits a higher valuation for the stock than the price/earnings ratio of 15 or so that Travelers has lately been getting. Still, Weill has escaped his single-digit P/Es of the 1980s.
And on a dollar basis, Weill's stock has moved: The shares that carried the name Commercial Credit in 1986 and are now called Travelers have risen by about ten times, to a recent price of $51. Along the way, Travelers has run up a $33 billion increase in market value--some of that from issuing new shares to make acquisitions, but most of it simply from the climb of the company's stock price. If you compile a list of CEOs who held their jobs at the end of 1986 and still have them, and then figure who's added the most market value over this period, Weill makes the top ten. Above him are Roberto Goizueta of Coca-Cola (he's got $129 billion for this particular decade); Jack Welch of GE; Bill Gates of Microsoft; John Reed of Citicorp; Maurice "Hank" Greenberg of American International Group; Hugh McColl of NationsBank; Michael Eisner of Disney; and Warren Buffett of Berkshire Hathaway. Not a bad crowd to be running with.
This chairman's a nut about creating shareholder value. It can't hurt that he's got a whopping stake in this company himself, in part because he's been paid richly in options. He owns 8.8 million shares, worth some $450 million, and holds options on another 6.5 million shares carrying a book profit of nearly $140 million.
Weill instinctively thinks as an owner, not as a hired hand dealing with other people's money. Famous for loving to make deals, he's equally known for buying shrewdly. Jack Welch, despite his admiration for what this fellow has done, got a personal taste of Weill's unrelenting negotiating tactics in 1992 when Weill haggled hard over buying a major part of GE's Kidder Peabody--a deal that never did come off.
Once into an acquisition, the owner in Weill is sure to cut the stuffing out of its costs--and when he's well along in that process with one company, he'll probably buy another. He'll spend cheerfully for assets that land on the balance sheet. The costs that run through the income statement--visionary spending, say, on new projects that may never pay off--he'd just as soon skip.
He will, though, pay up for talent. Weill's tack is to load managers with options and restricted stock, and then pressure them to retain all the equity they get. Both his management team and Travelers' directors have sworn--internally, this is called the "blood oath"--not to sell any Travelers shares (except to finance the costs of exercising options and any resulting tax bills). Imprisoning most of an executive's net worth in his company does tend to focus him on what's best for shareholders.
Then again, if an executive persists in not focusing, Weill slides him out of his job, often by moving somebody in beside him to take over authority. An offender seldom gets fired: Weill hates confrontation and besides, being a sociable type, he tends to become pals with not only the people working for him but their families as well. So the executive who's not performing stays on, becoming a member of the group known inside as Friends of Sandy's. Asked about all this, Weill grins a bit sheepishly and says, "Guilty," adding that sometimes he does go so far as to stop talking to an FOS. Do the big salaries these people draw really equate with delivering shareholder value? He bristles a little: "I think I'll just stand on our results for the shareholders."
The "I" in that sentence conveys a lot about how Travelers operates. This company, like any large organization, needs a fine executive team and has built one. James Dimon, 41, Travelers president and Weill's right-hand man for the past 15 years, justifiably gets his name in lights in what's sometimes called the "Sandy and Jamie show." But fundamentally, this is Weill's company. Says an executive who once worked closely with Weill: "There is nothing of significance that goes on in Travelers that he doesn't personally have a hand in. He's involved in every detail of that business--in everything."
He's even got his family working in the shop. His son, Marc Weill, 40, is chief investment officer of Travelers, which puts him in charge of $56 billion of securities and real estate. His daughter, Jessica Weill Bibliowicz, 37, runs Smith Barney's mutual funds operation, whose assets under management are $75 billion. (There are no reports that the Weill children are in any way out of their league: Ask around the Travelers organization, and you'll hear that both are well respected.)
Then there's the chairman's wife, Joan, 62, who's been doing unpaid corporate duty for their 42 years of marriage. As wives of CEOs go, she is an unusually close adviser. At dinners masquerading as pure social events, she looks over people he's thinking of hiring--sometimes giving them a thumbs down, he says. She listens endlessly to his ruminations about the business. "If I'd talked to my wife as much as you do to yours," a friend of Weill's once said to him, "I'd still be married."
She's even a featured speaker at Travelers events. We're not talking spousal breakfasts, but rather main-tent--and smash--appearances at big company gatherings. She is a particular hit at the huge, revival-type conventions of the Primerica Financial Services division, that part of Travelers still selling term insurance across kitchen tables. The PFS sales force is largely part time, ethnically diverse, packed with husband-and-wife teams, and very middle class. So the audience eats up Joan's stories about how she and Sandy scraped along in the 1950s when he was a Wall Street beginner earning $150 a month. That didn't give them enough money, she says, to pay the milkman and the diaper man in the same week. And the crowd roars in appreciation.
For all this, Joan Weill doesn't usually make the press. But she did get there in a downbeat way in 1990, because of disclosures she'd made earlier to her psychiatrist about two big deals of her husband's that she feared might disrupt their lives. The first deal was Weill's 1981 sale of the brokerage firm he had built, Shearson, to American Express, and the second was his ultimately unsuccessful assault on BankAmerica in 1986. Hearing these pieces of news--and proving, said the Financial Times, that here was a shrink who actually listened to his patients!--the psychiatrist bought Shearson's and BankAmerica's stock and also wised up a broker who engineered other trades. Caught years after the fact, the psychiatrist was fined, sentenced to five years of community service, and ordered to take an ethics course. Mrs. Weill was not charged with wrongdoing. In fact, she brought a $5 million suit against the psychiatrist, which was later settled out of court.
It is unsurprising that Joan Weill agonized over the BankAmerica assault. That was a part of the difficult 13 months in 1985 and 1986 when her husband was unemployed--though by then fat in the wallet--and looking impatiently for the right way to get back into the financial services business. He'd gotten out of it by leaving American Express, after having failed in a bid to buy its troubled property and casualty insurance operation, Fireman's Fund, which he'd personally been parachuted in to rescue. With him out the Amexco door went Jamie Dimon, then 29, a smart, confident Harvard business school graduate who had been Weill's assistant for three years.
Back then the two, plus a secretary, holed up in a painfully quiet five rooms in Manhattan's Seagram Building, sometimes catching sight of other animated beings only when breaking for lunch (often at the elegant downstairs spot soon dubbed "the company cafeteria," the Four Seasons). Mostly they pored over the documents of financial services companies and talked to dealmakers. Bank-America got in Weill's sights because it was a laggard--you can buy laggards more cheaply than leaders--and pretty soon he was making it brassily clear to the incumbent CEO, Sam Armacost, that he'd be happy to replace him. The board support that Weill had counted on failed to solidify, and he was told to get lost. So he went back to reading and talking to dealmakers.
FORTUNE then played a part in his liftoff by publishing an article called "Sanford Weill, 53, Exp'd Mgr, Gd Refs" (May 12, 1986). Reading the piece, two financial officers of Commercial Credit, of Baltimore, had a "Eureka!" reaction. Without breathing a word to their CEO, the two came to Weill to urge that he buy the company from its owner, Control Data. Weill already knew that the parent was eager to sell, because Commercial Credit had been shopped to American Express when he was there. His visitors, though, told him things were getting untenable. Control Data was losing money and Commercial Credit, tarred by its parent, was in danger of losing its access to the capital markets. Also, Commercial Credit had diversified itself aimlessly and unprofitably, having strayed into such losers as leasing in Israel and Latin American loans.
Weill listened. Maybe he wouldn't have earlier, when he was thinking grand thoughts like BankAmerica. But now he'd spent ten frustrating months on the sidelines. Besides, he has always been an opportunist. As he peered through the fog surrounding Commercial Credit, he saw a solid core not visible to all: a lending business that made good money and, on the side, a property and casualty operation, Gulf Insurance, that would return Weill to a business he knew.
Before long Weill had worked out a deal with Control Data, which sold 82% of Commercial Credit to the public in November 1986 at $20.50 a share (since converted into about $5 by splits) while Commercial Credit itself raised money by issuing a new chunk of shares. Weill, taking over as CEO, personally invested $7 million, and Dimon, who at age 30 became the company's chief financial officer, scraped up $425,000 for stock--"a lot more money than I had, I'll tell you." What they got for this commitment was a company that in 1986 made $46 million on $1.1 billion in revenues. Core profits from small loans and Gulf were about $25 million, and the new bosses saw opportunities for getting that to $75 million pretty quickly. None of it could exactly be called thrilling, says Dimon. "But it was a start; it was a platform; it was life."
It was also hard, intensive work. Dimon literally moved to Baltimore for a while, and Weill, along with an executive team that included Robert Lipp, a management refugee from Chemical Bank, encamped there each week from Monday to Friday. In time the Israeli leasing operation, the Latin American loans, and other diversions disappeared from the books, and so did innumerable inefficiencies in the core operations.
Two years later, in 1988, Weill had strengthened the business enough to reach out again, buying Gerald Tsai's Primerica Corp. for $1.5 billion in cash and stock. Out went tangential businesses like mail-order merchandisers Fingerhut and Figi. Weill focused instead on financial services, including the term-life operation then known as the A.L. Williams business and now called PFS.
But the Primerica prize that really mattered to Weill was Smith Barney, the vehicle that put him back in the brokerage business that is his undying love. He was a broker himself, gets an eternal kick out of schmoozing with brokers, and can't for long keep his eyes off the stock prices running across the screen in his office. He also has a chart of Travelers' stock price in his head, consultable at any moment. Recalling that Primerica was tough to digest and that the stock market in 1990 didn't like financial services companies anyway, he says, "Our stock dropped then to $17--no, $16 7/8." And then a wry, "Not that we watch."
It was also in 1990 that Weill made his first try at recapturing Shearson from American Express, which had controlled the firm since buying it from Weill. That effort foundered, but in 1993 Weill succeeded, going on to merge Shearson with Smith Barney. Weill speaks of the acquisition with near reverence, saying it "changed everything." Smith Barney alone, in a really good year of the brokerage cycle, had the ability to make $150 million to $200 million, he says. The Shearson purchase, taking into account both the revenues added and the efficiencies gained, created a firm capable, he figures, of exceeding $1 billion. Smith Barney in fact made $889 million in operating profits in 1996, which was 37% of Travelers' total. Smith Barney's return on equity--above 30% last year--has also been outstripping that of all of its big, publicly owned competitors.
Out of this event that "changed everything" and that in effect put the finishing touches on that earnings-growth record of 28% comes the obvious question of what Weill plans to do for an encore. If he's thinking another 28% decade, he's not saying that. His announced goal is to double earnings every five years, which would translate into a growth rate of roughly 15%. Doing even that would be first-class performance: In this year's 500, there are only 67 companies that increased their earnings at a rate of 15% or better over the past decade. And most started from a small base, as Weill himself did with Commercial Credit. Today, though, he's riding an elephant in the top 50 of the list. Making that creature lumber along at a 15% rate is a different, and much tougher, kind of job.
Logic says that good lumbering won't occur without at least three things happening. First, Travelers is going to have to do well in insurance. Second, the company's executives must pull off the usual management challenge: cut costs, raise revenues. Third, you just know that Weill is going to make more acquisitions. That's his pattern, his thing, his shtick.
The centrality of the insurance job is signaled by the company's newest name: Travelers. Weill has long held Gulf Insurance, of course, and next came the A.L. Williams business that got rechristened PFS. But then Weill remade the map of Hartford, buying the whole of Travelers Insurance in 1992 and 1993 for $4 billion and tacking on the property and casualty operations of Aetna in 1996 for another $4 billion.
Today all that has been reorganized into three divisions. In a flash after buying "old" Travelers, Weill sold its health insurance business for close to $900 million. "That business was way too scary for us," says an executive of today's Travelers. Weill then put all the P&C operations into a company now called Travelers Property Casualty (nicknamed TAP) and sold off 18% of it in 1996 to public and private investors.
The other two insurance segments are Travelers Life & Annuity and PFS. These two are the kind of step-siblings you don't want in the same bedroom, since they have historical reasons to dislike each other. Travelers Life has long been a part of the insurance "establishment" that made its money on whole-life policies. PFS is the citadel of the war cry "Buy term and invest the difference." A PFS salesman likes nothing better than finding a whole-life policyholder, who could easily be a Travelers Life customer, and persuading him to shred his policy and buy PFS term.
PFS could have been an albatross for Weill, but instead turned out to be a quintessential example of what makes him so successful. PFS's huge sales force of 90,000 is not on Travelers' payroll. These people are independent contractors, paid instead--though they hate the description at Travelers--through a "pyramid type" structure, in the manner of Mary Kay and Amway. In the A.L. Williams days, which continued for a while after Weill bought Primerica, the sales force tended to be conspicuously out of control, so aggressive in behavior that it was continually under investigation by regulators. But then Weill moved his own executives into authority and pushed for more training, more discipline, more professionalism in general.
That brought on extreme pain, including a sharp falloff in both the number of salespeople--who at one point totaled as many as 200,000--and sales of new life policies, which in dollar terms tanked in three years by 56%. But Weill kept changing PFS's management team, looking for the right leadership, and by 1993 the operation was back on an upward track in sales. By then it was also gaining real respectability. There can be no clearer sign of that than a recent article by the conservative, establishment-oriented Best's Review. "As much of the life insurance industry dodges the withering fire of market conduct actions," the article notes, referring to the scandals that have dogged such onetime exemplars as Prudential and Metropolitan, "the once vilified industry pariah--what used to be known as A.L. Williams--emerges unscathed, perhaps even a role model for its lawsuit-weary rivals."
Beyond all that, PFS has become the main strike force in an aggressive drive by Weill to raise revenues by "cross-selling." The PFS salespeople, for example, are merchandising loans "manufactured" by Commercial Credit; auto insurance policies underwritten by TAP; and mutual funds created by Smith Barney. PFS's distant sibling, Travelers Life & Annuity, is also into the cross-selling game in an important way. It manufactures annuities that are sold by Smith Barney and encourages the firm's brokers (called financial consultants) to search among their clients for small-company owners who might want to sign up for Travelers Life 401(k) programs.
Don't think of cross-selling at Travelers as right now financially important; it probably accounts for less than 3% of the company's profits. But it is a fact that many financial services companies, among them American Express when Weill was there, have bombed at cross-selling. One man who's noticed that Weill is succeeding on the second try is Peter Lynch, whose Magellan fund bought into Commercial Credit when Weill took it over in 1986 and who today still keeps Travelers in the portfolios of charities he helps run. Recently, Lynch dug a 1988 Wall Street Journal clipping out of his files and sent it to Weill. Written at the moment of Weill's move into Primerica, the Journal article described both the general skepticism on Wall Street about financial supermarkets and the industry's specific doubts that Weill could make a go of the cross-selling he was identifying as one reason for the merger. Says Lynch: "Sandy doesn't shout a lot when he gets criticism. He just goes out and does what he says he's going to do."
Of course, he sometimes flounders too, and that's been highly visible in Smith Barney's continuing push to cure its biggest revenues shortcoming, which is weakness in investment banking. Weill tried to fix that in 1993 by hiring a Morgan Stanley top gun, Robert Greenhill, to run Smith Barney. Getting Greenhill and his crew was hugely expensive--and hugely disappointing. Weill wanted to see Smith Barney gain the investment banking status of a Merrill Lynch, but with a minimum of spending. Greenhill had a more expansive vision. Says Greenhill: "Hiring me to build this business was probably the biggest risk Sandy has ever taken."
Greenhill was, in the opinion of most, a terrible manager. Nor did he meet Weill's expectations in bringing in banking business. In early 1996, Weill ended the arrangement, though he urged Greenhill to stay around as a dealmaker. That offer could have made Greenhill a high-octane member of the Friends of Sandy's. But Greenhill went off to run his own investment banking boutique--richer by $66 million from his three years at Smith Barney, and in line to receive a slice of the firm's profits over the next three years.
Jamie Dimon is now head of Smith Barney and taking a different, definitely non-star system, tack about investment banking. He says the firm's equity strengths--in research, distribution, and trading--are unarguably large, and that the job is simply to get everyone in the place pushing to get that recognized. He's focusing both on midsize deals rather than giants and on industries in which Smith Barney analysts and bankers have special expertise, such as health care, technology, finance, and media/telecom. "It's going to work," Dimon says. "I have no doubt of that. Of course, I wish we would have figured it out earlier and cheaper, but we didn't. "
Weill's other major area of both opportunity and uncertainty is Travelers Property Casualty, now being run by Bob Lipp, 58, the onetime Chemical Bank executive, who is widely admired as a manager. Still busy folding Aetna's operations into the business, Lipp is in the gross stages, so to speak, of cost cutting. His goal is to cut $300 million in costs--about 15% of the total--out of TAP's business, and the details suggest there's at least some fertile ground for doing so. When he arrived at "old" Travelers Insurance in 1994 just after Weill bought it, the company had 28 people in its public relations operation. Lipp has pared that to two.
On a more long-term front, a central issue at TAP will be reserves, which are the estimates that insurers book for claims that have not been paid but that are expected to be due to policyholders. P&C companies always run the risk of being under-reserved, a fact that can take years to discover and that can cause a lot of mispricing in the meantime. Weill has some history with this phenomenon. When he went into Fireman's Fund in 1984, the company was reeling from severe under-reserving. He quickly raised reserves, but, as it turned out, not by nearly enough.
On the flip side, to a company that's got an earnings record to burnish, there's a sunny aspect to owning a P&C operation: Never has there been a business that so easily lends itself to the "management" of earnings as this one. Need earnings in a particular reporting period? Just hold down your estimates of what claim costs will be. Higher earnings will magically materialize. It's a game that can't go on forever, but it can go on for a long time.
A second question about TAP is whether Weill will decide down the road--there are no plans for this right now, he says--to sell off more of its stock to the public. Travelers might do that to reduce its stake in this industry or even to book a profit, which it did in 1996 when it sold off the 18%.
Balanced against that possible sale is the ever-present question of what Weill might buy next. He says he has no ambitions of broadening into any new areas, being happy with the types of businesses he's in--mainly securities, loans, and insurance. Naturally, that conjures up certain names: In the P&C business, could Cigna or USF&G be possibilities? Among brokerages, how about Prudential Securities? Weill isn't dropping any hints. He doesn't seem to mind that Dean Witter and Morgan Stanley are creating a brokerage firm that will demote Smith Barney from second place in size to third. "I think that just validates what we've been doing," says Weill.
Still, considering his history, he may have a deal in mind that would move him back up the ladder. Today Weill says he laments not going after Baring Securities harder in 1995, letting it fall instead to the Dutch company ING. He's convinced that Travelers, and particularly Smith Barney, need to get bigger overseas.
Is there an ultimate clue to when Weill will make his next move? Maybe it's his weight. That's right: One friend of Weill's has a theory that the chairman puts on major pounds when he's about to acquire something and then sheds them when it's in the bag. And Weill has been bulking up lately.
So what does the chairman have to say about this theory? He laughs, and then discloses that these days he's committed to slimming down. Who knows how to interpret that? Only one thing is certain: Regardless of what the scale says, this is a man who will keep right on making deals.

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