Nowhere on Wall Street are the risks and rewards of the evolution in the investment industry as clear as they are at Paine Webber Inc.
Brokerage houses and otther financial firms are eager for merger partners that can widen the services they offer. But Paine Webber chief executive Donald Marron seems to be charting an independent course after turning around a firm that was headed for disaster.
It was Paine Webber's ill-managed consolidation in 1980 with Blythe Eastman Dillon & Co., the investment banking firm, that left its operations in shambles.
The merger with Blythe Eastman, one of the most active firms in its field, put an additional burden on a firm that lagged in introducing advanced technology at a time when stock trading was surging. Paine Webber's bookkeeping, which still relied on paper and ink rather than on computers, couldn't keep up; as a result, the firm was late in collecting debt from its customers. The firm's losses mounted, until it came within an eyelash of falling below federal regulators' minimum capital requirements.
Paine Webber was censured by the New York Stock Exchange, which fined iit $300,000 because of its back-office problems. The Securities and Exchange Commission did not seek penalties, but said the firm should have disclosed its difficulties. "If the SEC hadn't blinked, we might have been forced to shut down," said one source at the firm.
A combination of management changes, updating of inadequate computer technology, and Marron's insistence that the firm abandon what he called a "paternalistic" culture that was "not as focused on productivity and profits as you'd like" helped bring Paine Webber back from the brink.
Although analysts say Paine Webber's back office still is not quite the equal of others on Wall Street, Marron is given credit for helping seet a new competitive tone in both the investment banking and brokerage operations. Since its rebound, the firm has attracted investors in brokerage houses and haw become Wall Street's most appealing takeover target.
Its earnings reports and the rise in its stock price also are measures of its turnaround. Paine Webber has just reported the best two quarters in its history. In fiscal 1982, its earnings more than doubled to more than $35 million from $15.8 million the previous year. (In fiscal 1980, it showed a loss of $6.9 million.)
In its first fiscal quarter, ended Dec. 31, its profits rose to $28.1 million from $7 million in the same period a year earlier. Meanwhile, like other brokerage houses, its stock has taken off and is up more than 100 percent since 1981 -- compared with a gain for Merrill Lynch, for instance of 82 percent.
One sign of its new allure is the increasing interest in the firm by Reliance Financial Services Corp. Recently it was revealed that Reliance had raised its 5.7 percent stake in Paine Webber to 7.85 percent. Reliance chief executive Saul P. Steinberg said the Paine Webber securities, worth more than $40 million, were being held for investment purposes only.
Only Cigna Corp., the giant insurance firm, and Reliance hold more Paine Webber stock than Marron, who controls, individually and through a partnership, almost 6 percent of the firm's outstanding common stock. Cigna holds about 23 percent of Paine Webber, although about 17 percent of that is pledged to convertible securities that Cigna offered last year.
Marron said recently he isn't interested in selling the firm, and hostile takeovers of brokerage houses are considered senseless because without the old management, the acquiring firm loses what made the target valuable. "Securities firms really have no assets other than people, so I don't think they can be bought unless Marron and company want to be taken over," says Perrin Long, an analyst specializing in the brokerage business at Lipper Analytical Services Inc.
On the other hand, Marron, who has become a multimillionaire (last year he earned about $990,000 in salary and incentive payments), has demonstrated a certain skill at trading up. He merged an investment banking firm he founded in 1958, D.B. Marron & Co., with Mitchell Hutchins & Co. seven years laater, and wound up as president of Mitchell Hutchins in 1969.
In 1977, Mitchell Hutchins merged with Paine Webber Inc.; Marron became the new firm's chief executive officer in 1980, and a year later its chairman. He is also the co-founder, with economist Otto Eckstein, of Data Resources Inc., a leading economic data firm. That holding was sold to McGraw Hill in 1979 for $103 million.
Marrion said Paine Webber has the resources to compete with the giants of the financial services industry and is trying to carve out a distinctive place.
"Investors see several big firms looking very similar to each other," Marron siad. "We're going to distinquish ourselves. That's what we're embarking on now.
"We're appealing to the significant, intelligent investor who has more than one kind of problem. We're not as interested in the size of their transactions as we are in the idea that this customer is seriously interested in a set of problems." That customer, he added, "is more service-sensitive than price-sensitive" -- in other words, is willing to pay for investment advice.
That's a different customer than Sears Roebuck & Co. is chasing with its new financial center, linking Sears' insurance, brokerage and real estate subsidiaries in a concept being called the financial supermarket.
It is also a different approach from that taken by Shearson/American Express. Peter Cohen, Shearson's new president, likes the Bloomingdale's model when describing where he hopes to lead his firm. "You can't go to Bloomingdale's and get a dishwasher, but you can walk in and get the best general merchandise you might need," Cohen said.
But Paine Webber's recent difficulties have left it a step or two behind the competition. It was, for example, the last major firm to roll out a money-market type account, its Resource Management Account (RMA), which it is only now beginning to market widely to its 700,000 clients. Within a year, the goal is to bring in 96,000 accounts. (Merrill Lynch now has more than a million customers for its similar Cash Management Account.) But Paine Webber executives say the delay has enabled them to give their account features differentiating it from the CMA, like the use of a credit -- rather than a debit -- card, and features the return of canceled checks.
Paine Webber's management also is trying to establish a distinctive role for Blythe Eastman. The investment banking subsidiary, which said it initiated more mergers and acquisitions in 1981 than any other firm, is uncomfortable with the idea of participating in noisy, contentious takeovers.
"Let's look at hostile mergers," said Michael Johnston, Blythe Eastman's president. "The question is what and who did they help. Did they help industrialized society or employes?
"Our experience is that quiet acquisitions, divestitures or mergers work out," Johnston said. "It gives the decision makers time to quietly examine the pluses and minuses of the meeting of two resources. We see our role as that of a value-added investment banker. Friendly mergers are value-added."
Friendly acquisitions are also on Marron's mind. One of the firm's investment bankers has spent full time the last six months working with Marron reviewing possible acquisitions.Insurance companies, regional brokerage houses, real estate and money management firms arre among the possible targets, Marron said.
The immediate question is whether somebody makes a serious pitch for Paine Webber. One Wall Street source believes Marron would like to follow the example of Sanford Weill, the one-time Shearson chief who merged the firm with American Express Co. and now is chairman of the Amex executive committee.
Marron denies such ambitions, but is ready to listen to the right offer. "As the responsible head of a public firm, I have to be aware of all the possibilities," Marron said.
"But there's a place for a strong independent firm in this business and we want to be it. How we'll feel in three years might be different."