Shell Shock on Wall Street

Lehman, Kuhn Loeb merging

When Lehman Bros, and Kuhn Loeb announced merger plans last week, the proposal engendered much fear and trembling in the financial community. It was an indication that not even the most venerable and standoffish Wall Street houses can withstand the agonies of attrition that are engulfing the brokerage and investment banking business. Some other indications: 384 member firms of the New York Stock Exchange reported total profits for the first nine months of 1977 down 61 % from a year earlier, mostly because of competitive price cutting on commissions; more than 100 firms suffered losses. In the past five years, 75 firms have disappeared from the Big Board's roster through failure, acquisition or merger.

Speaking in London, Donald Marron, president of Paine Webber--which itself has merged with Mitchell, Hutchins Inc. --delivered an apocalyptic forecast. Said he: "The institutional equity business [e.g., handling of purchases by pension funds, insurance companies and bank trusts], standing by itself with full trading and research services, is no longer profitable for anyone. We may one day see a situation like that in accounting, where the business is dominated by a small group of very large firms." That time may not be too far off. Even today well over half of all revenues of Big Board members is earned by just 25 companies.

The combination of Lehman Bros. (founded in 1850) and Kuhn Loeb (founded in 1867) has rather a special rationale. Although both firms are leaders in the domestic investment banking business (basically, the underwriting of new stock and bond issues), Lehman has specialized also in money markets, commercial paper and U.S. Government securities. Kuhn Loeb is a major underwriter and adviser to scores of foreign governments from Austria to Venezuela. To underline this distinction, the name plate at U.S. headquarters in New York will be Lehman Bros. Kuhn Loeb Inc., while abroad the firm will be known as Kuhn Loeb Lehman Bros. International.

There is no question, though, that Peter G. Peterson, 51, as chairman and president of the combined firm, will be calling the shots for nearly 1,800 employees. A protege of Illinois Senator Charles Percy, Peterson succeeded Percy as chief of Bell & Howell in 1963, served in various capacities in the Nixon Administration (including Commerce Secretary), joined Lehman in 1973 and within months became chairman. The aristocratic John Mortimer Schiff, 73, now chairman of Kuhn Loeb, will become honorary chairman, and Harvey Krueger, 48, who is now president, will become chairman of the banking policy committee. But the amalgamation would seem to be more of a takeover than a merger, since the Lehman faction will control seven of the ten seats on the executive board. Moreover, Kuhn Loeb had been signaling for months that it would entertain merger proposals, because it needed capital. Of an estimated $78 million in capital for the combined firm, Lehman is expected to supply $60 million, the Schiff family and partners another $18 million. Although precise figures are not available, Lehman is reported to have earned more than $20 million in fiscal 1977. Kuhn Loeb is reported to have lost recently on the sale of mortgage bonds, but Chairman Schiff says the private firm is now operating healthily in the black.

Given Peterson's aggressive track record, plus the perilous state of affairs in the stock market (the Securities and Exchange Commission is threatening to allow Big Board member firms to conduct business off the exchange floor), it would be natural for the merged company to venture into other areas. An array of more profitable financial services, such as insurance, is a possibility. Even investment banking is no longer the easiest way to coin money. Exxon bypassed Morgan Stanley, its financial adviser, by doing its own underwriting for its last two bond issues, totaling more than $300 million. That action may point the way to how large corporations will behave in the future, and it certainly must have caused Pete Peterson's fertile mind to search for new and profitable ventures. qed

This file is automatically generated by a robot program, so viewer discretion is required.