December 25, 1997 in Nation/World

Travelers’ Deal Could Backfire Salomon Purchase Garners Mixed Reviews On Wall Street

Bloomberg News
 

Travelers Group Inc.’s purchase of Salomon Inc. was hailed as a triumph for Chairman Sanford I. Weill when it was announced in September. Now it’s drawing mixed reviews on Wall Street.

Eight of nine analysts polled by IBES International Inc. have pared fourth-quarter earnings estimates for Travelers, which completed the $9.3 billion purchase last month. Analysts cut forecasts more than 13 cents a share on average, or about 20 percent, to 60 cents.

The lower profit forecasts followed Travelers’ disclosure last month that Salomon, the biggest trader in the global bond market, lost $60 million in October’s financial tumult.

Travelers, which already said it will shut down Salomon’s equity risk arbitrage, will likely clamp down on other money-losing activities, said Richard Strauss, an analyst at Goldman Sachs & Co. “We’re going to see a much more risk-averse Salomon,” he said.

Travelers’ decision to buy Salomon and combine it with its Smith Barney Inc. brokerage unit was a shock to many on Wall Street because the companies are so different.

Salomon, an investment bank that worked mainly with institutions, traditionally made most of its profits using borrowed money to bet in the bond market. Smith Barney, by contrast, concentrated on less-risky businesses such as providing brokerage services to individual and institutional investors.

Travelers made the announcement that it was shutting down Salomon’s New York-based equity risk arbitrage operations last month, after the unit lost about $100 million betting on British Telecommunications Plc’s bid for MCI Communications Corp.

“We’re going to see them do a lot of restructuring in the fourth quarter,” said Strauss.

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