Travelers Group to acquire Salomon for 13.4 times earnings

Weekly Corporate Growth Report, Oct 6, 1997

The Deal: Travelers Group has announced a pact to acquire Salomon Inc for $9 billion in stock. The new unit, to be called Salomon Smith Barney Holdings Inc., will boast leading spots in many businesses. The transaction is the secondlargest in the industry and is the latest in a string of sales by once invincible securities firms. The deal calls for Travelers to issue 1.13 shares of its stock for each Salomon share. The deal will be accounted for as a pooling of interests. On the news, Salomon rose $4.75, or 6.7%, to $76.25/share, while Traveler's shares fell $263, or 3.6%, to $69.48.

Discussion: After the combination is complete, Travelers will rival giants such as Merrill Lynch & Company, the American Express Company and Citicorp, as well as the largest firms in Europe and Japan.

Even though it has long been involved in insurance and mutual funds and owns Smith Barney, Travelers has lacked power overseas, as well as on Wall Street The company hopes to alleviate these problems with this acquisition. Travelers chairman Sanford I. Weill is betting that by combining Salomon's premier bonds business, its worldwide office network and its investment banking expertise with Smith Barney's huge smaller company and retail business, and by placing them all alongside Traveler's insurance businesses, he can leverage his franchise and use Salomon to expand internationally and provide Smith Barney with more bond and equity offerings to sell domestically

The deal is certainly not risk-free however, given the different cultures and businesses of Salomon, a big bond trading firm where brokers take home millions of dollars a year, and Smith Barney, Travelers' investment bank, which is primarily a retail brokerage with a strong franchise among smaller and midsize American companies. The two companies also have very different customer bases, with Salomon catering to large-cap mature companies, often telecommunications concerns, and Smith Barney appealing to small to midcap financial buyers and health care concerns.