Last year the banking industry held a megamerger party, but Salomon Brothers wasn't invited.
While three huge acquisitions were providing the biggest bonanza ever for merger advisers - a a whopping $72 million in total fees - Salomon had to settle for $2 million.
By most standards that wouldn't be too shabby. But for Salomon Brothers Inc., long a premiere adviser, it was a big disappointment.
Making matters worse, longtime clients passed Salomon over in two of the deals.
One of those customers was BankAmerica Corp. In 1986, Salomon advised the then-floundering company at perhaps its lowest point, when First Interstate Bancorp made unsolicited overtures.
With Salomon at its side, BankAmerica turned away its California rival and crafted a strategy to come back from the brink.
Yet last year, when a revitalized BankAmerica was plotting what would become the biggest bank merger ever - the $4 billion acquisition of Security Pacific Corp. - it turned instead to Morgan Stanley & Co. and Hellman & Friedman for advice.
"We were disappointed, there's no doubt about it," says Gerard Smith, who is co-manager of Salomon's merger business with financial institutions.
Likewise, in the late 1980s Chemical Banking Corp. often used Salomon, such as for the acquisition of New Jersey-based Horizon Financial Corp. But when the giant New York bank wanted to merge with Manufacturers Hanover Corp. last year, it tapped Goldman, Sachs & Co.
And while Salomon was involved in the third megamerger, it was strictly a bit player. NationsBank Corp. paid the investment bank $2 million in fees essentially to keep it on the sidelines during the acquisition of C&S/Sovran Corp., according to sources. Meanwhile, the lead adviser in the deal, Morgan Stanley, garnered $11 million in fees.
A Fall from the Top
Salomon's setbacks demonstrate just how mercurial the advisory business can be.
A few years ago, the Wall Street powerhouse, bolstered by stars like analyst Thomas Hanley and merger co-manager Lee Kimmell, was routinely near the top of the rankings of merger advisers.
But while Salomon did manage to play matchmaker in several big deals last year, the defection of key executives and the scandal involving its government securities operation have prevented the investment bank from taking full advantage of a booming market.
Last year it slipped to fourth place among advisers and was sixth in the first half of this year.
Despite missing the big deals, Salomon was paid $8.1 million in fees last year, a large amount by historical standards. But with the megamergers blowing the lid off the market, those totals were far eclipsed by First Boston Corp.'s $30.2 million and Morgan Stanley's $28 million, according to Securities Data Corp.
The challenge of catching up with those new advisory kings rests squarely on the shoulders of Mr. Smith and his co-manager, Robert C. Smith (who is not related).
While climbing back to the top is an ambitious goal, Salomon has some strong weapons, and few are counting it out.
For one thing, Salomon still has strong links with a number of banks, including Fleet Financial Group Inc. and PNC Financial Corp.
Furthermore, it can point to a number of recent successes. Most noticeably, Salomon was the catalyst in bringing together buyout firm Kohlberg Kravis Roberts & Co. with Fleet for their joint $625 million purchase of the failed Bank of New England last year.
Other triumphs: Salomon advised Indianapolis-based Merchants National Corp. in its $745 million sale to National City Corp. of Cleveland last year, as well as Affiliated Bankshares of Colorado in its $378 million sale to Banc One Corp.
Salomon's game plan for winning new merger business "is not mysterious and it's not a secret," says Gerard Smith.
Most merger business comes from the 50 largest banks, he points out, so Salomon will concentrates its calling efforts on those.
Mr. Smith sees Salomon's broad range of financing services as a big plus. "You must demonstrate that you're in this business for the long haul, that you have a wide range of investment banking services and other services like [equity] research coverage," he said.
Those other services can help develop relationships that will pay off in advisory business down the road, he says. A particular strength is debt underwriting. Salomon has underwritten $1.8 billion in subordinated debt for banks in the first half, more than any other investment bank. It was also the leading underwriter of debt backed by credit card or other consumer loans in the first half of the year.
Fallout from Scandal
Mr. Smith acknowledges that Salomon's admission that it made improper bids on government securities damaged the advisory business's drive for new clients.
"We were hurt, there's no question about it," he says. "But the overwhelming preponderance of people are willing to agree that we paid a sufficient price. We are doing business and getting hired."
Indeed, despite the scandal, the advisory group remains highly regarded. "Salomon is one of a small group that are real pros," says William Boardman, executive vice president and head of Banc One's bank acquisition unit, who has sat across the table from Salomon in merger situations.
And it is still feared. When NCNB Corp. was manuevering last year to purchase C&S/Sovran and create NationsBank, it retained Salomon solely to prevent it from working for C&S/Sovran, sources say.
A Damaging Departure
The defection of Mr. Hanley last year was another blow, Mr. Smith agrees. The 24-year Salomon veteran, considered one of the most influential bank analysts, moved over to First Boston, taking some of his clients with him.
Mr. Smith believes that Salomon's current bank analysts, John Leonard and Diane Glossman, produce high-quality analyses and will build a strong following among institutions over time.
More recently, Merrill Lynch & Co. lured away Lou Wolfe for its mergers department. Some investment bankers think Mr. Wolfe's contacts with Salomon clients such as PNC and Am-South Bancorp. could hurt Salomon in the future. Mr. Wolfe declined comment.
Even in cases where Salomon missed out on major merger business last year, the door appears to be open for future deals. BankAmerica, for example, tapped Salomon this year to evaluate Security Pacific Asia Ltd., a subsidiary that BankAmerica may sell.
Business Follows Defector
But to understand how fragile some business ties are, look no further than Salomon's relationship with Keycorp.
For the past two years, Saloman was the Albany, N.Y.-based company's main investment banker. In fact, KeyCorp's $800 million agreement to acquire Puget Sound Bancorp was Salomon's biggest merger deal in the past 18 months.
And Lee Irving, KeyCorp's treasurer, readily admits that Salomon did "a fine job for everything we'd asked them to do."
Yet KeyCorp has now decided to make Merrill Lynch its top investment banker, Mr. Irving says.
The reason: The departure of Mr. Hanley and John Gutfreund, who resigned as chairman because of the trading scandal.
Mr. Irving recalls how Mr. Hanley sat down with KeyCorp's management to discuss plans for raising capital. "His advice was invaluable," says Mr. Irvings. "It's unfortunate that Salomon lost such a distinguished analyst."
Another factor behind the arrangement was the relationship between Mr. Gutfreund and KeyCorp chief financial officer William Dougherty.
With the departure of Mr. Hanley and Mr. Gutfreund, KeyCorp's closest ties to Salomon were cut, says Mr. Irving. While KeyCorp might still use Salomon, it will first turn to Merrill Lynch.
"To the extent we could keep both investment banks happy we would be well served," he says.