Doing a Deal

The Salomon-Phibro merger

Even in the Year of the Merger, last week's announcement shocked the close-knit world of Wall Street. Salomon Bros., the world's largest trader in government securities and corporate bonds, was combining with Phibro, the world's largest commodity trader. The $550 million marriage will create a new international financial juggernaut. Said George Ball, president of E.F. Hutton: "There had been inklings of some internal dissatisfaction and potential losses for Salomon Bros., but nothing that had been a harbinger of a move to sell out to another firm."

About two months ago, David Tendler, 43, the chairman of Phibro, first began meeting socially in a New York suburb with John Gutfreund, 51, the managing partner of Salomon Bros., and several members of his seven-man executive committee. The talks were cloaked in the extreme secrecy that has become the hallmark of the two companies.

From each firm's point of view, a corporate marriage was attractive. Phibro, founded in 1914, had just been spun off from its smaller and less profitable parent, Engelhard Minerals & Chemicals Corp. of New York. Though it has been making record profits, Salomon had recently lost about $40 million in the highly volatile bond market. Several senior officials at Salomon, which is one of the few remaining partnerships on Wall Street, were also anxious to leave the firm and cash in their share of the operation.

Moreover, the two companies were very complementary. Phibro reaped profits of $467 million last year by trading in about 150 commodities ranging from tobacco and cocoa to zirconium and Peruvian bird droppings. It now wanted to offer new financial services like raising investment capital for its trading clients. The 71-year-old Salomon Bros., on the other hand, wished to expand its operations beyond traditional bond trading and corporate underwriting. Strategic metals, grains and other commodities, after all, have in recent years been some of the best investments around.

The 62 Salomon Bros, partners, though, still had to be convinced. On July 31, Gutfreund invited them for a long weekend to a conference center in Tarrytown, N.Y., 27 miles from Wall Street. Between lunches and dinners laced with vintage wines and intermittent sets of tennis, the partners added up the benefits and disadvantages of a merger. By selling out, most of them, like Henry Kaufman, the firm's well-known chief economist, would become millionaires several times over. Gutfreund stands to reap $25 million to $30 million as the biggest winner of the deal. But the Salomon partners would be losing the autonomy and privacy that comes from being controlling owners in the fast-moving world of bond trading and investment banking. "What we were giving up was sentimental and wonderful," said Gutfreund. "But looking at the '80s and '90s, this merger would pitch us way beyond what we could do alone."

The Salomon Bros.-Phibro agreement continues the pattern of recent megadollar mergers on Wall Street that began with Bache's acquisition by Prudential Insurance and the American Express takeover of Shearson Loeb Rhoades. The combined Salomon Bros.-Phibro firm, though, will not be going after new customers for credit cards or insurance. It will be making corporate deals on an unprecedented worldwide scale.

Phibro, for example, already sells alumina, the material used to make aluminum, for Guyana. If that South American country some day needs a new hydroelectric plant to supply power to an aluminum smelter, the Salomon Bros, wing of the new company could raise the capital for the plant, and the Phibro one would then market the final product. Said Hal H. Beretz, 45, the president of Phibro: "The parts of this merger are unique. There's nothing out there that is going to match this combination." That attitude was the driving force behind last week's merger announcement.

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