The Deal That Changed Wall Street Forever

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In 1986, I wrote a series of feature stories for Investors Business Daily about the five-year anniversary of American Express's acquisition of Shearson Loeb Rhoades, then the second-largest brokerage firm in the United States.

I believed then -- and continue to conclude today -- that the June 1981 transaction was the most significant deal in Wall Street history. It underscored the changes going on in the financial services industry and foreshadowed the shifts that would come later on. It was a tumultuous time. Suddenly, commercial banks were acting like securities firms. Individual investors became stock market players, and mutual funds began to explode.

The acquisition underscored how Wall Street had a new regard for "the little guy." Seeing the potential for greater commission fees, the securities firms looked at the investor as a potential consumer of a myriad of financial services. It was such an important principle, such a breakthrough, that the Street continues to embrace it today.

By joining forces, American Express could potentially market a plethora of its cards to the upscale Shearson brokerage audience. Shearson could use AmEx's resources to expand its brokerage services as well.

"The idea was to establish a conglomerate dedicated to the business of money -- the money, people deposited and saved, the money people spent, the money people invested," wrote Tim Carrington, in his terrific 1985 book about the deal, The Year They Sold Wall Street: The Inside Story of the Shearson/American Express Merger, and How It Changed Wall Street Forever.

Carrington, who covered the deal as a Wall Street Journal reporter in New York, was spot-on. What exactly changed forever? For one thing, financial-service empires felt that they could break out of the ways of the past and create a new kind of financial supermarket. Now, individuals could fulfill all of their financial needs under one company's roof.

Shearson and American Express were the hardly the only merger-happy outfits at the time. (Actually, Prudential Insurance's acquisition of Bache Halsey Stuart Shields, a brokerage firm, preceded it by a few months, though that deal lacked the impact, memorable characters, and sheer charisma of AmEx-Shearson.) Before long, Sears Roebuck, the largest retail-store chain in the U.S. at the time, was acquiring Dean Witter Reynolds. The commodities-trading behemoth Phibro also gobbled up Salomon Bros.

Think of many of the U.S. financial powerhouses of today -- Citigroup, JPMorgan Chase, Bank of America, and others. They act as financial supermarkets, underlining the continuing impact of American Express' acquisition of Shearson.

Also noteworthy, the AmEx-Shearson deal altered the way that the U.S. media -- and through their writing and broadcasting, the public -- began to view The Big Deal. Business became sexy as journalists started to write more often about the people behind the curtains. Today, the media cover the likes of Warren Buffett, Bill Gates, and Mark Zuckerberg as rock-star billionaires. Much of that started with the AmEx-Shearson transaction.

Ah, yes, The Players. Financial reporters, eager to capture the inherent drama of the proceedings, focused nearly as much on the personalities of the dealmakers as the dollar figures involved.

The brainchild of a restless, brilliant investment banker named Salim B. Lewis -- himself a fascinating figure -- the AmEx-Shearson deal injected a dose of pizzazz into the cloistered world of high finance. The media covered the AmEx-Shearson like a Hollywood marriage.

The journalists endlessly speculated whether AmEx CEO James Robinson, a genial and genteel continuation of a waspy Atlanta banking dynasty, could co-exist with Sanford "Sandy" Weill, a blunt, volatile, cigar-chomping Jewish son of Brooklyn. This coming together of such an odd couple, as much as any factor, lifted this business transaction out of the financial-news section and placed it on page one.

Weill the doyen of Shearson, had sold the securities firm to Robinson with visions of leading a new Wall Street -- only to be forced out of the combined entity a few years later. The management talent at AmEx at the time was nothing short of dazzling. One of Robinson's lieutenants, for instance, was Louis Gerstner, who eventually left AmEx and became CEO of RJR Nabisco and IBM.

By the time I interviewed Weill in 1986 for my series on the AmEx-Shearson combination, he had changed considerably from the early 1980s. Weill, once the most iconic figure on Wall Street, was by then working in a quiet office in the Seagram Building at 375 Park Avenue in Midtown Manhattan.

Two uber-loyal assistants had joined Weill in his version of Elba on the Hudson. One was a cordial woman named Allison. The other was a bright, young, can-do assistant who would have a long and eventually combustible relationship with both Weill and Wall Street. The fellow's name was Jamie Dimon. You might have heard of him.

(It is a thought-provoking footnote. Do you want to know how else this deal changed the course of Wall Street history? Consider this: If Weill hadn't sold Shearson to American Express, he would have remained in control of the prominent firm. He might not have worked as closely with Dimon, who clearly learned a great deal about management from his mentor. Without the close interaction with Weill back in the 1980s, would Dimon be where he is today?)

Weill could intimidate reporters, but on this day in 1986, freed of the pressures of running a big firm, he was as affable as a Kiwanis elder. As we parted, I remarked how strange it would seem to much of Wall Street to find Weill working in apparent exile with a tiny staff. He flashed a big smile and said jokingly, "Tell everybody I said hi -- and don't be afraid to call."

Oh, they'd be calling Weill before long, all right. At that point, in 1986, he was quietly plotting his strategy to return to prominence on the Street. Weill would make his grand comeback complete by doing what he always had done -- buying once-prestigious but now-distressed firms on the cheap and building shrewdly.

He kept on expanding and eventually had command of the Travelers umbrella, and then the gargantuan Citigroup empire. He didn't miss a beat after he left American Express, as it turned out.

But Weill continued to court controversy, as well. In 1998, he and Dimon parted company when Dimon was forced out of Citigroup, ending a long and prosperous association.

Dimon's father had been a broker at Weill's Shearson, and Dimon had all but studied finance at Weill's elbow since he left business school in the early 1980s. Now Dimon was on his own. But as we have seen over the years, as Dimon has become the prince of the Street, Dimon learned the most important lesson of all -- how to make a comeback -- from his one-time mentor.

You might argue that I have a romanticized view of the American Express takeover of Shearson, a development that happened 32 years ago -- a lifetime on Wall Street, where what happened last week can seem like ancient history.

I covered the AmEx-Shearson deal as a very young reporter for Securities Week newsletter, my first big story as a professional journalist. So, naturally, this event has a special personal meaning for me. And I continued to cover aspects of the big deal even as I changed employers over the next decade. In fact, I became so fascinated by the deal that my then-BusinessWeek colleague John Meehan and I went on to co-write House of Cards: Inside the Troubled Empire of American Express (1992, Putnam).

American Express ultimately fared poorly. The Shearson takeover failed to fulfill its promise even though AmEx and Shearson's ambitions knew no bounds. Within a few years, they eventually devoured Lehman Bros., E.F. Hutton, Investors Diversified Services, Edmond Safra's Trade Development Bank, and other entities.

It all began to fall apart fairly quickly. The 1987 Crash caused tremors on Wall Street and Main Street alike. The futility of the American Express/Shearson combination to succeed in the $25-billion leveraged buyout of RJR Nabisco -- the company was outmaneuvered by Kohlberg Kravis Roberts -- was immortalized in the best-selling book Barbarians at the Gate, and a subsequent, highly entertaining HBO adaptation of it.

In the annals of Wall Street, certain mergers and acquisitions occupy a special place in deal-making lore.

In 1988, the leveraged buyout of RJR Nabisco captured the era's "greed is good" frenzy so perfectly that it landed on the cover of TIME magazine. The 2001 acquisition of Time Warner by AOL went so wrong so fast that it has invariably been dubbed the worst deal in history.

But the one takeover that has had the most long-lasting meaning still remains the 1981 combination of American Express and Shearson Lehman Brothers. American Express' purchase of Shearson set in motion a flurry of transactions that produced a deal-making frenzy.

These moves set the stage for the go-go 1980s, the decade that produced the RJR pandemonium, the program-trading rage that paved the way for Black Monday on Oct. 19, 1987, and the most notorious insider-trading spree in history.

American Express's acquisition of Shearson served as both a catalyst for and a mirror of the times. Its influence continues to resonate today. When an event still has resonance some three decades later, it makes all the difference in the world.

Jon Friedman is the co-author of House of Cards: Inside the Troubled Empire of American Express from Putnam.


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