Salomon/Smith Barney Merger Announcement Fails To Garner Concern From Forex Industry

Initial reaction in the hours following Travelers Group's announcement last week that it would acquire Salomon Inc, and form a Salomon Smith Barney Holdings subsidiary, was that any impact on the foreign exchange market would be minimal.

Rumours of a Salomon acquisition have been floating in the market for quite some time, so the announcement did not come as much of a shock, say market participants. Indeed, when Morgan Stanley and Dean Witter merged earlier this year, speculation began almost immediately that Salomon or even Lehman Brothers, would be the next target for an acquisition (FXW, February 10). Sources say the FX market is less likely to be impacted by this latest consolidation than it was by the Morgan Stanley/Dean Witter move, which had a limited effect.

According to market sources, the two shops are very different operators in the FX market. Salomon has been described primarily as a proprietary trading shop, with little in the way of an interbank presence. "Salomon is a proprietary trading shop--it's small globally, but it takes a lot of risk--they're big punters," says one source in New York.

Meanwhile, Traveler's Smith Barney is largely described as a broker/dealer. "Smith Barney executes for their clients. They take some risk, but mostly, they're a conduit for customers in the marketplace," says another source, who adds that the shop is also not really an interbank player.

Smith Barney's global head of FX Martin Marx was previously quoted by FXW as saying: "Smith Barney has one real advantage over a lot of its competitors--it doesn't have a conflict of interest between proprietary and customer interests. Because Smith Barney is a passive, customer-oriented firm, it doesn't have that level of proprietary exposure--its sole motivation is servicing the customer" (FXW, November 4, 1996). In light of this comment, some sources say there could be a cultural clash between the two shops, yet others do suggest they may actually be complementary.

Smith Barney's forex operation is relatively young, having just set up shop in New York in July 1991 and in London three years later, in March 1994 (FXW, May 17, 1991 & February 14, 1994). In May 1994, the group took on PaineWebber's 40-strong FX and currency options team in Paris, which was later shifted to London (FXW, May 16, 1994 & November 4, 1996, respectively). At the end of 1995, Smith Barney set up a Far Eastern currency options desk in Hong Kong (FXW, December 11, 1995).

By the end of last year, Smith Barney had about 90 dealers globally, located between its three primary centres in New York, London and Hong Kong, as well as satellite sales units in Singapore and Paris (FXW, November 4, 1996). The global FX and commodities operation is run by co-heads Jack Lehman and Phil Waterman, while global FX, trading and sales, is headed by Marx. All three are based in New York. Marx declines comment through an assistant and Lehman and Waterman did not return calls seeking comment. Marc Fiorentino, who led the 40-strong move from PaineWebber, heads Smith Barney's asset management business and is the branch manager in Paris.

Meanwhile, at Salomon, the team is considerably smaller; however, recent numbers could not be obtained by press time. The last time FXW reported a head count was in August 1993, when the group had about 30 dealers between New York, London, Tokyo and Singapore. When global head of FX Hans Hufschmid left at the end of 1994, managing director in London Paul Brewer and managing director in New York Joseph Leitch took up his responsibilities (FXW, January 9, 1995). Neither Brewer nor Leitch returned calls seeking comment.

Several appointments have been announced initially, including that of New York-based managing director Thomas Maheras, Salomon's current head of global fixed income, who will maintain this position in the new group. According to a spokesperson at Salomon, the foreign exchange group currently falls under the fixed income division; however, he adds that it is unclear at this juncture whether or not FX will remain in this category when the institutions combine. The spokesperson also says that for the next 90 days, it will be business as usual for the foreign exchange department.

Additional appointments, among others, include Salomon's London-based vice chairman Shigeru Myojin as head of proprietary trading and Salomon's New York-based managing director Eduardo Mestre as head of investment banking. Each currently holds the corresponding positions at Salomon.

During the first half year period, Salomon reported net revenues of $1.051 billion in fixed income sales and trading, including FX, which was off 27 per cent from the year earlier when it reported $1.438 billion (FXW, July 28). For the second quarter, earnings were $532 million, off 25 per cent from the $706 million reported the year prior, but up from the first quarter's $519 million. Smith Barney's earnings could not be obtained by press time.

According to a joint statement announcing the merger, Salomon Smith Barney will be a global, full-service securities firm that, in particular, combines Salomon's traditional strength in fixed income and international presence with Smith Barney's traditional strengths in equities, retail distribution, municipal finance and asset management.