Warren Buffett and Sandy Weill

TRAVELERS: JUST GETTING STARTED SHOULD YOU BET ON SANDY WEILL'S FINANCIAL CONGLOMERATE? WELL, WARREN BUFFETT IS ENDORSING HIS VISION.

By ANDREW SERWER. REPORTER ASSOCIATE: MARIA ATANASOV
October 27, 1997
(FORTUNE Magazine) – So what does the future hold for Wall Street's latest behemoth? How successful will the new Travelers be? Only time will tell of course, but it's worth noting that Warren Buffett has just given Sandy Weill his ultimate nod of approval. After the merger is complete, Buffett will own some 3% of Travelers stock, now worth about $1.7 billion.
How solid an endorsement is this? Well, look at it this way. Buffett could have blocked the sale of Salomon to Travelers by refusing to do the deal if the payment was to be Travelers stock. And check out the handwritten statement Buffett issued the day the merger was announced: "Over the 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." In other words, Buffett is saying, Here's a guy who has done it before; he has to be thought of as a candidate to do it again. (Weill was so pleased with Buffett's statement that he plans to have Buffett autograph it, then tack it up on his office wall.)



Even without Buffett's endorsement, the evidence clearly points to Weill as the current master builder of Wall Street. "Sandy always had the clearest vision of anyone in this business," says Peter J. Solomon, who worked under Weill as co-head of investment banking at Lehman Brothers and now runs his own eponymous firm.
While conventional wisdom says the Salomon deal is merely the latest in a wave of consolidations washing over Wall Street, that view is probably too simplistic. Yes, there are some common themes driving these combinations--deregulatory openings, the search for global synergies, booming stock values that make high-priced deals seem cheap--but each has happened for very different reasons (see chart).
The Travelers-Salomon deal, it turns out, is probably the easiest to understand. During a recent visit with Sandy Weill in his 39th-floor office--which features a spectacular panoramic view of Manhattan--the architect of the Salomon deal sounded very much like the latest convert to the consolidation craze: "What we are trying to do is simply create a global financial company with unlimited potential for top-line growth." But to cast Weill as following someone else's trend would be a mistake: He has been sounding the growth mantra for his entire career and certainly well before his Wall Street brethren got religion.
Weill's first act--ancient history now--was assembling the brokerage firm Shearson, which he sold to American Express in 1981. After butting heads with Amex CEO James Robinson, Weill set out on his own. Over the past decade, Weill and his protege Jamie Dimon have stitched together an unorthodox assortment of consumer finance, brokerage, life insurance, and property and casualty businesses, creating one of the largest financial services companies in the world--and delivering huge shareholder gains. Blending this bunch together often proved tough, but ultimately each was integrated, costs were cut, and the businesses met higher growth targets.
Predictably, Weill has already begun gearing up the process at Salomon, where committees have fanned out across the firm, merging departments, planning Salomon's move to Travelers' headquarters, and of course looking for "efficiencies" (read: layoffs). The word is that Weill will let go some 1,500 employees. "I think we will lose most people through attrition," he says. "This is a business with 20% annual turnover."
Weill is famous for buying on the cheap, and though he is paying some 1.7 times book value for Salomon, he probably hasn't overpaid. "The average brokerage acquisition this year has been for over three times book," says Richard Strauss, a Goldman Sachs analyst. "And right now the average brokerage stock trades for 2.6 times."
And there are other advantages. "We were excited about the potential for overseas growth," says Weill. "Ten years from now, because of trends like privatization, we think there will be $10 trillion of new equity issued internationally." Up to now, Weill's Smith Barney has had almost no presence abroad. Salomon, on the other hand, offers an international banking presence (though dominated by bonds). "With Smith Barney, we never really had that business because we weren't global," says Weill, "and even though Salomon had the name, people would wonder if they should do business with them, because they wondered whether they were really going to be around in five years. Now we are global, and we will be around."
There are, of course, questions. First, Weill has had his troubles growing the investment banking business. In 1993 he hired Robert Greenhill and a passel of bankers from Morgan Stanley--which turned out to be a costly failure. Now Weill is hoping the Salomon name will be a catalyst. But as one competitor points out, "Adding two marginal investment banks together doesn't necessarily give you access to top-tier deals."
Then there's the proprietary-trading issue: using the firm's capital to make high-risk trades--in the case of Salomon, mostly with bonds and bond derivatives. By one informed estimate, Salomon will make about half its $700 million in estimated 1997 profit from proprietary trading, but this business is as risky as it is profitable, and investors may not reward Travelers for that risk. Indeed, with Salomon added in, Travelers' fee-based, recurring revenue falls from a hefty 66% of total profit to around 50%, which could result in the Street's assigning a lower multiple to Travelers' stock.
So. Will Sandy Weill shore up that potential weakness by adding another missing piece to his dream company? Or, more bluntly, is Salomon necessarily his last deal? "No," Weill responds unequivocally. He talks enthusiastically about the potential of the international pension business. By buying, say, a European money management firm, Weill could move Travelers into a growth business the firm has yet to penetrate and ramp up his company's fee income at the same time. Not to mention avoiding the high premiums now being demanded by U.S. asset management firms.
It's been a long time since Sandy Weill was derailed by the American Express imbroglio, and he has only now reached parity with Goldman Sachs, Merrill Lynch, and Morgan Stanley. Having come this far, it would be folly to believe he's satisfied to leave it at that. And as he moves ahead, he's almost certain to keep a close eye on creating more shareholder value--at least that's Warren Buffett's bet.