Fire Sale

By Alexander L. Taylor III

A buyer for Lehman Brothers

In its no-pictures, print-only television commercials, Shearson/American Express calls itself the stockbroker for the "serious investor." Last week the firm did some serious investing of its own. Only ten days after he had read in FORTUNE that Wall Street's Lehman Brothers Kuhn Loeb might be for sale, Shearson Chairman Peter A. Cohen, 37, signed an agreement to buy the old-line investment banker for $360 million. The combined companies will be known as Shearson Lehman/American Express.

The deal adds some important new aisles to the financial supermarket that American Express is assembling and brings an abrupt end to the 134-year-old history of Lehman Brothers as an independent investment banker. Founded in Montgomery, Ala., in 1850 by three immigrant brothers from Bavaria, Lehman Brothers moved its main office to New York City after the Civil War and soon established itself as a major investment firm. It helped finance such struggling young companies as Sears, Roebuck and Pan American World Airways, and one of its partners, Herbert Lehman, served as Governor of New York State and in the U.S. Senate.

During the past few months, however, Lehman Brothers has been roiling. A split over management and pay policies developed between its investment bankers, who manage the firm's traditional corporate business, and its traders, who buy and sell stocks and bonds. Three key banking partners have left, and others have reportedly been threatening to pull out. The remaining partners feared that more defections might be on the way.

The turmoil at Lehman Brothers was caused by Chairman Lewis Glucksman, 58. Glucksman is an uncompromising competitor who gets to the office each day before 6 a.m. He joined the firm in 1963 after working as an arbitrager with A.G. Becker, a stock brokerage. Eventually, he moved into securities trading and built it into one of Lehman's most profitable areas, at the same time making a reputation for himself as a sharp, shrewd analyst of financial markets.

Last May Glucksman was appointed co-chief executive with Chairman Peter Peterson, 57. A polished corporate diplomat and Commerce Secretary during the Nixon Administration, Peterson was well respected on Wall Street, but Glucksman hankered for his job. Said he: "This firm has been my life, and I had just one ambition--to run it." In July Glucksman went to Peterson and told him that he wanted the top job for himself. Publicly denying that there was any friction between the two men, Peterson obligingly stepped aside and took with him a financial settlement estimated to be $15 million. Glucksman's nervy initiative was accepted by the Lehman board after the fact.

Glucksman then set about recasting Lehman Brothers in his own image. He appointed as president another trader, Robert Rubin. The two handed out higher year-end bonuses to other traders than to investment bankers. When partners began pulling out and trading profits suddenly shrank, the board voted to put the firm up for sale.

For American Express, the Lehman Brothers deal is the latest in a series of dramatic acquisitions. After buying Shearson in 1981 for $930 million, it purchased part of the international banking operations of the Geneva-based Trade Development Bank Holding in 1983 for about $550 million and paid more than $700 million earlier this year for Investors Diversified Services, a mutual fund and insurance firm with headquarters in Minneapolis. However, some of its acquisitions have proved troublesome. Profits from Fireman's Fund Insurance, which was purchased for nearly $500 million in 1968, fell 88% in 1983, to $30 million.

Lehman Brothers is expected to be a neater fit. Its investment banking and securities trading operations complement Shearson/American Express's strengths in stock brokerage. The deal also gives American Express added firepower in the battle for national supremacy for all types of financial services against such other giants as Citicorp, Merrill Lynch and Sears.

While Glucksman will only be a consultant to the new company, he will not walk away empty-handed from the firm that has been his life. When his 4% share of Lehman is sold to American Express, he stands to make an estimated $13 million.

--By Alexander L. Taylor III.

Reported by Adam Zagorin/New York

With reporting by Adam Zagorin/New York