A New Financial Supermarket

By John S. DeMott

American Express leaves home with Shearson

The deal was an exquisite nugget of Wall Street craftsmanship that concluded at 1:30 one morning last week after an elegant steak and wine dinner in the white and gold opulence of an executive dining room on the 106th floor of New York City's World Trade Center. It was big--very, very big--the biggest ever between two members of Wall Street's financial community. Giant American Express (1980 sales: $5.5 billion) and Shearson Loeb Rhoades, the second largest U.S. brokerage house (1980 sales: $653 million) agreed to merge. Terms: 1.3 American Express shares for each of Shearson's 16.3 million outstanding shares, an exchange worth $915 million at the time of the deal. Even Karl Maiden, the stone-faced star of American Express ads, should have broken into a smile. The American Express-Shearson marriage was part of a rapidly accelerating revolution in the U.S. financial world. Banks like New York's Citibank and brokerage firms like Merrill Lynch are now attempting to become nationwide financial centers that could eventually provide a shopper's choice of money services ranging from life insurance to traveler's checks. This trend got a big push in March when Prudential Insurance offered to pay $385 million to buy Bache Group Inc., parent company of Bache Halsey Stuart Shields, the sixth largest U.S. broker. Said James D. Robinson III, 45, chairman of American Express, after the agreement was reached: "We used to say, 'Don't leave home without us.' Now we've added, 'Don't be home without us.' " Sanford I. Weill, 48, the Brooklyn-born chairman of Shearson, said that the combination would amount to nothing less than "the greatest financial services company in the world."

The American Express contribution to the deal was $19.7 billion in assets from traveler's checks, more than 12 million generally affluent credit card-holding customers, and 44,000 employees in 1,000 travel offices and 77 international bank branches and investment offices. American Express also has some less well-known holdings, including a 50% interest in a cable television subsidiary of Warner Communications and total control of giant Fireman's Fund Insurance (1980 sales: $3 billion). Shearson's main offerings to the merger were 11,000 employees in 270 U.S. and overseas branches, plus $8 billion in assets in popular money-market funds, which in recent months have lured a small army of savers away from banks and thrift institutions.

Last week's merger was only the latest in a long line of financial couplings for the wily Weill, who started on Wall Street as a messenger in 1956. He opened his own firm with three partners in 1960 and then began taking over older, but weaker, investment houses. In 1979 he acquired Loeb Rhoades, Hornblower & Co. in what was then Wall Street's largest merger.

While on a business trip in the Far East last month, Weill read in the South China Morning Post about the Prudential-Bache deal and decided that the time had come for another partner. Investment Banker Salim B. ("Sandy") Lewis, managing partner of S.B. Lewis & Co., last summer had suggested to Weill a merger with American Express, but the Shearson chairman doubted that he could persuade his board of directors to accept any such agreement. Then Prudential showed the way. After returning from Asia, Weill called Robinson and opened serious discussions. Over Easter weekend, the two men conducted a traveling talkathon that moved from Weill's 13-room home in Greenwich, Conn., to his seven-room apartment on Manhattan's Fifth Avenue to Robinson's nearby residence. When the deal was finally set, it was agreed that Weill would remain boss of Shearson, which for now will continue to be a separate company, and also head American Express's executive committee. Robinson, meanwhile, will be the chairman of the new financial behemoth. Matchmaker Lewis will receive some $3.5 million for his services.

For American Express, the Shearson deal marked the end of a long, and sometimes embarrassing, search for a major acquisition. In 1972 American Express made a disastrous foray into the securities business by buying a 25% interest in Donaldson, Lufkin Jenrette, now Wall Street's 18th largest firm, for $29.3 million. Three years later, American Express gave up that investment for only $6.4 million. Then in 1979 American Express attempted an unfriendly takeover of McGraw-Hill, but the board of directors of the publishing firm unanimously rejected the bid.

Once last week's merger receives the expected approval from Washington and goes into effect, American Express is likely to begin selling new money services quickly. Said Weill: "You can let your imagination run about what we're going to be doing." The amalgam's first offering is likely to be a cash management account based on Shearson's money-market funds and similar to one created by Merrill Lynch in 1977. Under that program, customers with at least $20,000 in securities or cash in an account can put that cash into money-market funds, which currently earn about 14% interest. Customers can then use special Visa cards or checks issued through Merrill Lynch in stores, restaurants or anywhere else. Says Weill: "We can make the cash management account better." One idea: offer American Express's special gold credit card to Shearson's 500,000 customers.

Weill's new partner Robinson has already described his bold vision of the future of finance. Said he recently: "By the end of the decade, a typical consumer may have a stockbroker in California, a banker in New York, an insurance agent in Maryland and a real estate agent jetting back and forth from Chicago to Boston. All of that will be on his American Express card, of course."

--By John S. DeMott. Reported by Frederick Ungeheuer/New York

With reporting by Frederick Ungeheuer

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