388 Greenwich Street
From its unprepossessing beginnings in Philadelphia more than a century ago, Smith Barney has grown into a financial powerhouse. The acquisition in 1993 of Shearson Lehman Brothers Holdings' retail brokerage and asset management businesses made the amalgamated firm, with an army of 11,000 financial consultants (brokers) and 495 branch offices, second only in the brokerage field to mighty Merrill Lynch. It also embarked on an effort to become a world-class investment bank. In 1995 Smith Barney Inc. was a subsidiary of the Investment Services division of Travelers Group Inc.
Charles D. Barney was a son-in-law of Jay Cooke, a banker who sold Treasury bonds to finance the Union cause during the Civil War but who later went bankrupt, precipitating the panic of 1873. He started his own brokerage and banking house, Charles D. Barney & Co., in Philadelphia in December 1873. Another Philadelphian, Edward B. Smith, founded an investment banking firm bearing his name in 1892.
Responding to the shifting of the nation's financial center from Philadelphia to New York City, Barney's firm purchased a seat on the New York Stock Exchange in 1898 and later opened a New York office. Among his clients were E.H. Harriman, Henry Frick, and William Rockefeller. Barney retired in 1907 and was succeeded as senior partner of the firm by J. Horace Harding, who was married to one of Barney's six daughters. Harding believed the company should maintain close ties with its corporate clients; accordingly, he served as director of almost 40 companies.
Although Edward B. Smith & Co. quickly bought a seat on the New York Stock Exchange, it did not move the center of its activities to New York City until the 1920s. During this decade the number of its employees grew from 114 to 671. By the 1930s Smith had been doing an extensive commission business for many years on the New York, Philadelphia, and Boston stock exchanges and had been engaged in the underwriting of new issues as well as in the financing of municipal and other issues.
For both Barney and Smith, the Great Depression proved an opportunity as well as a challenge. The failure of the Wall Street firm of Farnum, Winter & Co. in 1932 led Barney to open branch offices in Chicago, Milwaukee, Minneapolis, and St. Paul under the supervision of Wallace C. Winter. Smith benefited from a New Deal act that forced the Guaranty Trust Co. to divest itself of its securities affiliate, Guaranty Co., in 1934. Most of Guaranty's officers, employees, and clientele then joined Smith, which also added Guaranty's offices in Chicago, Pittsburgh, and London.
Smith ran short of cash during a 1937 Wall Street slump and, in order to remain in the underwriting business, merged with Barney at the end of the year to form Smith, Barney & Co. Each brought to the consolidated business distinct strengths: Smith in underwriting and investment banking; Barney in brokering stocks and bonds. The merged firm had 27 general partners, four limited partners, and a staff of 730. It closed several branches to concentrate on large institutional and individual investors rather than the general public.
One of Barney's grandsons, Charles Barney Harding, succeeded Joseph R. Swan as senior partner of Smith, Barney in 1944. In the ensuing years the firm was active in developing financing for emerging companies and mergers and acquisitions as well as for municipalities. By the early 1950s private placements accounted for nearly half of all its debt and preferred-stock issues. In 1963 Smith, Barney ranked 16th among major underwriters of corporate securities and eighth in sales of new municipal bond issues. The company also opened offices in London, Paris, and Geneva. Previously a private partnership, Smith, Barney became a corporation in 1964.
During the late 1960s, Smith, Barney became one of the most aggressive financiers in pursuing corporate mergers and tender offers. It played a part in 1968 in the merger of Bunker Hill Co. into Gulf Resources & Chemical Corp., Fairchild Publications into Capital Cities Broadcasting Corp., and MCA, Inc. into Spencer Gifts, Inc. Also that year, the company introduced the Smith, Barney Equity Fund, a no-load diversified mutual fund aimed at achieving long-term capital growth. By mid 1972 this fund had consistently outperformed the various market indicators and had total net assets of $89.2 million. Also in 1968, the company established the Smith, Barney Income & Growth Fund and Smith Barney Real Estate Corp., its real-estate arm, which was later sold to Security Capital Corp. in 1984 for $40 million.
In October 1975 Barney merged with another old-line investment firm, Harris, Upham & Co. By then Smith, Barney had 18 offices in the United States and abroad and employed a work force of 1,200. It was considered strongest in the financing of corporate and municipal bonds, institutional brokerage, block trading, asset management, and research but was not highly active in retail operations, where Harris, Upham was strong. Retail banking had become more important when mandatory commission rates ended in 1975, allowing institutional buyers to negotiate deep discounts. The combined firm became Smith Barney, Harris Upham & Co., which in turn became the principal unit of SBHU Holdings, a closely-held holding company, in 1977. SBHU Holdings was renamed Smith Barney Inc. in 1982.
According to most analysts, as Smith Barney began concentrating on retail business, it neglected what had been its strong suit: investment banking. Several big clients, such as Eastern Airlines, Atlantic Richfield, and G.D. Searle, took their business to other companies. In 1979 the firm decided to beef up its staff in mergers and acquisitions, project finance, and private placement. Smith Barney became one of five foreign investment banks accorded full-branch status in Japan in 1980 and expanded its European trading operation, which it moved from Paris to London. During the early 1980s it rose to 15th place among U.S. securities firms.
Smith Barney raised its public profile higher by means of a highly successful advertising campaign on television, begun in 1979 and continuing until 1986, that starred John Houseman, who had played a crusty law professor in the television network series "The Paper Chase." These spots exploited the company's long tradition; after touting Smith Barney's services to its clients, Houseman closed by growling, "They make money the old-fashioned way. They EARN it." The firm's retail sales force reached 1,450 registered representatives, one of the highest numbers in the securities industry, in 1983.
In 1982, 34 individuals and institutions from Saudi Arabia, Kuwait, and Bahrain bought (at an estimated cost of $40 million) almost a quarter of Smith Barney through a specially formed holding company. Four men received seats on the board of directors, and they used their influence to urge expansion, having found the company "supercautious and too conservative." The firm also entered the government-securities market for the first time.
Smith Barney's success continued through the mid-1980s. By 1987, despite a poor 1984, earnings had grown by an average of 25 percent a year for a decade, with an average annual return of 20 to 25 percent on equity. Its capital had grown to $413 million, compared to $175 million in early 1983, and its number of sales representatives to 2,250. However, it became clear that the firm would need even more capital in order to continue to expand. In June 1987 Smith Barney was sold to Primerica Corp., a diversified financial-service company, for $750 million. The deal turned sour for Primerica, however, when the stock markets crashed in October 1987 and Smith Barney lost $93 million before taxes, including $43 million trading in the previously hot arbitrage market.
The year 1988 brought more bad news. By August the firm had dropped from second to fifth place among underwriters of tax-exempt bonds, even though many competitors, including Salomon Brothers and L.F. Rothschild, had dropped out because they were losing money. The company's share of the taxable municipal market had also fallen, and it had missed out on renewed arbitrage profitmaking by disbanding its department in that field. In August Smith Barney fired five of its top public-finance officials in an attempt both to reduce costs and to cut losses in trading and underwriting. Smith Barney lost $53 million before taxes in 1988.
Primerica agreed in August 1988 to be acquired by Commercial Credit Group, Inc., whose president, Sanford I. Weill, immediately replaced Smith Barney's president with a close associate of his, Frank G. Zarb. (Commercial Credit was renamed Primerica in early 1989.) During the first nine months of 1989 the company had revenue of $1.1 billion, sixth among retail brokers. It reentered arbitrage trading in this period and also acquired 16 prime retail offices from troubled Drexel Burnham Lambert Inc., yet cut costs by $50 million. The company had net profit of $63 million in 1989 and had operating earnings of $51.7 million in 1990. In 1991 Smith Barney, now the nation's seventh-largest securities firm, posted a record $152.1 million in operating earnings. It topped this record with net income of $157 million in 1992, on revenues of $1.82 billion.
In March 1993 Primerica acquired the domestic retail-brokerage and asset-management businesses of Shearson Lehman Brothers Holdings Inc. for about $2.1 billion and combined it with Smith Barney, Harris Upham & Co. to form a new firm named Smith Barney Shearson Inc., a subsidiary of Smith Barney Holdings Inc. The amalgamated company, whose name was shortened to Smith Barney Inc. in 1994, became the second-largest brokerage firm in the United States. (Primerica Corp. merged with Travelers Corp. at the end of 1993 and, still under Weill's direction, changed its name to Travelers Inc. It became Travelers Group Inc. in 1995.)
The amalgamated company's new chief executive officer, Robert F. Greenhill, formerly president of Morgan Stanley & Co., vowed to offer corporate clients a full range of worldwide financial services. To do so he hired 22 former Morgan Stanley executives and investment bankers, offering them top dollar. Advisory services in the fields of credit cards, mortgage banking, and bank technology won the firm an impressive clientele among financial institutions. It became a leader in underwriting subordinated bank debt and as a dealmaker in over-the-counter bank stocks, and it rose from 22nd in 1992 to eighth in 1994 in mergers and acquisitions.
Smith Barney Shearson had net income of $306 million in 1993 on revenues of $3.37 billion and (as Smith Barney) $390 million on revenues of $5.53 billion in 1994, when its return on equity of 16.4 percent outperformed every other major firm in its field except Merrill Lynch. At the end of the year the company's equity capital totaled $2.3 billion, and assets under its management came to $74.1 billion. Of its net revenues of $4.8 billion, commissions constituted 41 percent; principal trading, 19 percent; asset management fees, 15 percent; investment banking, 14 percent; net interest-income, seven percent; and other income, four percent.
The company, however, seemed to be failing to meet its professed expectations. A Wall Street Journal article concluded in March 1995 that "Despite a two-year drive to build an investment-banking powerhouse, Smith Barney isn't quite ready for prime time.... Today, Smith Barney stands about where it was two years ago, a minor presence in the global rankings of stock and bond underwriters." It also noted that the firm had decided to close its unprofitable investment-banking operations in Hong Kong.
Subsequent news stories indicated that Smith Barney faced a considerable degree of internal dissatisfaction as well. The president of Smith Barney's Consulting Group resigned in August, raising concern over possible loss of the company's dominance over wrap accounts (investment programs sponsored by brokerage firms that wrap money management, financial planning, and brokerage services into a single package for one annual fee). The Consulting Group reportedly held 58 percent of the wrap-account market and more than $70 billion in client assets. Moreover, the head of Smith Barney's government-bond trading desk quit in May of that year, after his group lost $10 million in trades, infuriating his boss. Finally, the head of the firm's research department departed in October after that area fell from fifth to eighth place in a ranking by Institutional Investor.
Nevertheless, during 1995 Smith Barney rose from eighth to fifth in equity underwriting (excluding closed-end funds). And it was enjoying a spectacular year at the bottom line. For the first nine months of 1995, the company had net operating earnings of about $560 million, with a return on equity of 23 percent. Its profits were particularly impressive because its risk profile was lower than that of almost any other Wall Street firm. This happy state of affairs--high profits and low risk--was attributed to tight-fisted management; one securities analyst observed that Smith Barney's noncompensation costs were about one-third less than that of rival Merrill Lynch.