BRASH NEW MOGUL ON WALL STREET Impatient and abrasive, Peter Cohen has spurred Shearson Lehman toward the top in investment banking. Along the way the toes he stepped on included his own.
(FORTUNE Magazine) – REMEMBER those Thanksgiving family gatherings back in your childhood when you were forced to sit at a separate table with the other kids? Remember the early adolescent years, when it became especially galling to be excluded from the adults' table? Then you can appreciate the yearnings of Peter Cohen, 41, chairman of the Shearson Lehman Hutton brokerage firm. The career of this short, dark, intense chief executive has been a quest to take his place with Wall Street's giants. Early this year Cohen seemed to have arrived. Shearson's January purchase of E.F. Hutton for $962 million solidified its grip on the No. 2 position in the retail brokerage industry, narrowing the gap between it and that longtime leader of the bulls, Merrill Lynch. What's more, Shearson has been pulling off deals that have thrust it to the forefront of the highly lucrative investment banking business. According to Investment Dealers' Digest, which tracks mergers and acquisitions arranged by Wall Street's investment banks, Shearson ranked No. 1 during the first quarter of 1988 in the dollar volume of deals completed. Savor Cohen's triumph for a moment: Shearson, long scorned by investment bankers as a mere pinch-penny wire house, was up there with such renowned dealmakers as First Boston, Morgan Stanley, and Goldman Sachs -- and beating them. Shazam! But just as Cohen was starting to enjoy his place at the big table -- sipping a little wine, dabbing his lips with a fancy linen napkin -- a few things started to go wrong. Stephen M. Waters, co-head of mergers and acquisitions and one of those responsible for Shearson's M&A surge, quit in March. And a deal that was part of Shearson's accelerated push into ''merchant banking'' -- in which the investment house puts its own money at risk instead of merely playing matchmaker --turned into a major embarrassment. That deal was British industrialist Brian Beazer's surprise tender offer for Pittsburgh's Koppers Co. Beazer has a chance to win if he and Shearson, which put $23 million of its own money into the bid as an equity partner, can overcome legal roadblocks. But meanwhile the stodgy, old-line target company has dragged Shearson's name into the mud in every imaginable way. Koppers executives publicly cut up their American Express cards to hit back at the corporation that owns 62% of Shearson. The state of Pennsylvania, which did $7 billion in commercial paper and other financing last year with Shearson, dropped it as an adviser and underwriter. The deal also attracted the attention of Congressman John Dingell, who is examining whether Shearson and other Wall Street firms improperly put the targets of hostile takeovers into play. It's as if Shearson, now supping with the grownups, was dribbling pea soup all over its tie. Those who knew Peter Anthony Cohen in his youth would hardly have expected all this striving. He grew up in an upper-middle-class family on New York's Long Island, the son of a manufacturer of children's clothing. Cohen majored in business administration at Ohio State, but floated through school with the expectation that a comfortable berth would be waiting at the family company. At his father's prodding, Cohen pulled up his mediocre college grades and went on to business school at Columbia University. There he met Jeffrey Lane, now 45, and his No. 2 man as president of Shearson. Initially the two disliked each other. Lane says Cohen showed up at class ''unshaven, unprepared, and uninterested.'' Cohen says Lane was overly serious: ''You know the guy with the plastic thing in his pocket to hold his pens? That was Jeff. He'd show up in sports jackets, his arm raised as he went through the door so the professor would call on him.'' COHEN got his MBA in 1969, but never went to work at his father's company. Older brother William, who now runs the family business, was already employed there when Cohen and papa sat down to discuss Peter's future. Cohen was dismayed to learn that his dad would pay him only $100 a week. He demanded $12,000 a year, then the going rate for new MBAs, to no avail. So he set out for Wall Street. After working for a year as an analyst for Reynolds Securities, a small brokerage firm, Cohen applied for a similar job at CBWL-Hayden Stone, a brokerage house that had begun to grow rapidly through mergers. The ''W'' in those initials stood for Sanford Weill, the legendary Wall Streeter who masterminded the string of deals that would ultimately turn CBWL-Hayden Stone into a major firm called Shearson. Lane was already working as an analyst at CBWL-Hayden Stone, whose president, Marshall Cogan, asked him what he thought of the job applicant. Lane's response: ''I wouldn't hire him. He's a wiseass.'' Cogan ignored the advice, and soon Cohen and Lane were sharing an office. Mutual antipathy gradually dissolved into mutual respect. ''Peter was an amazingly quick study and could learn anything,'' Lane says. Before long, Cohen caught the eye of Weill, who in 1973 became chief executive of the firm -- soon to change its name to Shearson Hayden Stone -- after Cogan left. The young MBA whose father wouldn't offer him a decent salary was soon hammering out the details on Weill's empire-building deals, firing people when necessary, and earning a reputation as a tough guy. Cohen, whom a colleague remembers as ''petulant,'' thought Weill was slow to recognize his contributions. In 1978 Cohen left to work for Edmond Safra, the Lebanese-born banking genius who was building New York's Republic National Bank into a major financial institution.
A year later Cohen was back at Shearson Hayden Stone with the title of senior executive vice president. He says now that the defection showed he was not ''a Sandy Weill creation,'' a perception on Wall Street that gnawed at him. But people who have worked with Cohen say that he was still unsure of himself. That was true, a former associate says, even after Weill sold Shearson to American Express in 1981 and Cohen became Shearson's chief executive two years later: ''There was a lot of 'I did this, I did that.' '' Over time the constant breast-beating apparently alienated Weill, who stayed on at American Express until 1985. After he left, the relationship cooled. Cohen won't say much about Weill, although he likens his feelings for him to those of a son toward his father. ''Father-son relationships can be complicated,'' he says. Weill won't comment. Cohen's image has been that of an unpolished boss -- good at negotiating deals and keeping a lid on costs but otherwise narrow in experience. Press clips, he complains, make it sound as if ''I eat nails for breakfast.'' (In fact, he prefers coffee, period.) He can be volatile, impatient, and occasionally arrogant. Yet Cohen can be charming when relaxed. The arrogance he exhibits, says a friend, is a defense built up during those years under Weill, when he was the young whiz kid among more experienced managers. Reaching the age of 40, Cohen says, was a relief: ''I had always been confronted with the attitude, 'You're so young you can't possibly know what you're doing.' '' Over the past year Cohen has begun to breathe easier for other reasons. The first big acquisition he could call his own was Shearson's 1984 takeover of Lehman Brothers Kuhn Loeb, which suddenly turned the upstart retail brokerage house into an investment banking player. For the next few years Cohen labored to meld the disparate cultures of Shearson and Lehman. He was so busy jetting around the U.S. and Europe, introducing himself to clients, that he saw relatively little of his family. Lately he has found time for weekend gardening on his Long Island estate and afternoons off to watch his 16-year- old daughter play softball. He is rarely too busy to interrupt a meeting for a phone call from son Andrew, 10, who has inherited Cohen's interest in the stock market. Wall Street gossips like to talk of Cohen's incompatibility with the man who runs Shearson's biggest shareholder, James D. Robinson III, chairman of American Express and a cool, polished Southerner. Six years after buying Shearson, American Express sold off a major chunk -- 18% to the public, 13% to Nippon Life, Japan's largest insurance company, and the rest to employees. Robinson says he may reduce American Express's stake to less than 50% over the next several years. But that's not because, as rumors have it, he wants Cohen out of his hair, says Robinson. One purpose, he says, would be to reduce his company's exposure to the ups and downs of Shearson's earnings, which plunged following the October stock market crash and a $77 million pretax underwriting bath on British Petroleum as a result of Black Monday. If Robinson dislikes Cohen, he does a splendid job of hiding it. In fact, the two grew closer as Cohen's relationship with Weill waned. Robinson, 52, roped the Cohens into going along with him on double dates after he was divorced from his first wife in 1983. ''It was like my boss was my kid brother,'' Cohen recalls with a grin. Now the Cohens socialize with Robinson and his second wife, Linda Gosden. Last summer they spent a rainy weekend cooped up in a lakeside cabin in the Adirondacks. COHEN'S STRATEGY has been to make Shearson a major player in world financial markets, diversifying beyond its roots in the low-margin brokerage business. He and other top executives talk about ''the five legs'' of the company -- retail brokerage, money management and real estate, trading, investment banking, and administrative operations. Cohen also has big hopes for merchant banking, whose profits can dwarf those of conventional dealmaking. Shearson has already invested over $500 million to become part owner in mostly medium- size companies, and plans to raise $1 billion from institutional investors for future merchant banking deals. Security analysts have hailed the Hutton takeover as a brilliant match. Though Hutton had suffered from problems galore, from a check-kiting scandal to mismanagement, it had an extensive brokerage network. The merger will enable Shearson to achieve economies of scale in the retail brokerage business. The savings will come mainly from eliminating Hutton's back office order-processing and record-keeping operations, which can be handled by Shearson's computer center. Already Shearson has fired 5,000 to 6,000 Huttonites, out of 18,000. Unfortunately for Cohen, some Hutton brokers Shearson wanted to hang on to have departed. The acquisition set off probably the fiercest bidding war ever to break out over securities salesmen. To persuade Hutton's best brokers to jump ship, competitors offered them huge bounties, sometimes in the form of bonuses or ''up-front money,'' more often in interest-free loans that will be forgiven in a few years. In the end, Cohen figures, Shearson kept four-fifths of Hutton's ablest -- not bad considering the temptations to leave. They will continue to work in 300 separate offices that will eventually take the Shearson Lehman Hutton name. Shearson's investment banking department, spurred on by its co-heads, Sherman Lewis and Peter Solomon, has been running hard. But until recently the gains were less than dazzling. The firm has made it into the ''bulge bracket'' of firms that act as lead underwriters on securities offerings, but at the end of last year ranked well down the list as No. 7. As for M&A, Shearson was a sort of deal factory prior to its stellar showing in the first quarter of this year, completing more transactions than any other firm on the Street, but small deals on average. As recently as 1987, according to Investment Dealers' Digest, Shearson ranked only fifth in dollar volume. Under Cohen's regime, investment bankers who had come with the Lehman merger -- most of whom relied on clubby old relationships with corporate clients -- had to get out and hustle for new business. Many of the megadeals that put Shearson on top, however, stem from old relationships. Shearson advised * Federated Department Stores, which was the subject of heated bidding between Macy's and Canadian real estate developer Robert Campeau, who emerged victorious. Shearson snared Stop & Shop, which was taken private in a $1.2 billion leveraged buyout by Kohlberg Kravis Roberts, through Peter Solomon. His mother's family was a major stockholder in Stop & Shop. The push for new clients has also helped. Shearson represented Eastman Kodak, for example, in its $5.1 billion acquisition of Sterling Drug. Another big client catch was E-II Holdings, the company spun out of the Beatrice Cos. empire by Chicago financier Donald Kelly. Shearson represented E-II in a convoluted $2.7 billion ''Pac-Man'' maneuver in which American Brands, much to Kelly's benefit, wound up acquiring E-II. That client could soon be up for grabs. It may be a bad portent that the Shearson banker who wooed Kelly was Stephen Waters, an M&A heavy-hitter who has now departed. The former co-head of mergers and acquisitions has not yet landed at another firm. When he does, he will doubtless go after Kelly and other Shearson clients. Wall Streeters say that J. Tomilson Hill, Waters's former cohort who now runs M&A, may be maturing into a major dealmaker. Nevertheless, says a major competitor, ''the loss of Waters will hurt them.'' Waters will not publicly discuss the differences that prompted his exit. But some recently departed Shearsonites say that he felt threatened by the growing influence of Hill and by the arrival of Daniel J. Good, whom Cohen hired away from E.F. Hutton in 1986 to help the merchant banking drive. Waters is also known to have opposed what he saw as Shearson's ''let's make a deal'' eagerness to do transactions. He didn't like Good's clients, who included raiders Paul Bilzerian and Asher Edelman, and argued that representing them would tarnish Shearson's image with the large corporations it hoped to represent. HE LOST the argument. Last year Shearson represented Edelman in his abortive attempt to buy Telex Corp. It also helped finance Bilzerian's $1 billion acquisition of Singer Co. -- though T. Boone Pickens's Mesa Partners had to come to the rescue with a last-minute financing fillip for Bilzerian. The Koppers deal also seems to suggest that Shearson is an overeager dealmaker. In its apparent haste, Shearson crossed a line that has been carefully respected by other investment banking firms. The practice of supplying temporary ''bridge loans'' and other financing aid to help clients finance hostile takeover attempts has become commonplace -- and lucrative. (On the Bilzerian deal, for example, Shearson stands to earn about $100 million in fees.) But in the Koppers deal Shearson did more. In addition to supplying $570 million in temporary financing, Shearson contributed that $23 million in equity as partner in a shell company that would take over Koppers. Although most investment bankers would probably like to follow Shearson's example, participating as a partner in a hostile takeover is a dangerous game. It can alienate corporate clients, causing them to worry that their investment bankers may next turn on them. Under the terms of its agreement with Beazer, Shearson will remain an equity partner in the company that acquires Koppers for one year after the completion of the deal. If Beazer does not buy Shearson out at that time, he must pay Shearson penalties that could add up to millions. Cohen says that Shearson has ''no interest in owning or running Koppers'' and put up the equity stake so that Beazer PLC would not exceed acceptable levels of corporate debt in the United Kingdom. But Shearson's partnership in the deal has left it vulnerable to all those reprisals by Koppers, which has been astutely advised by First Boston and the Hill & Knowlton public relations firm. The fees Shearson will lose from Pennsylvania's financing business are negligible compared with what it stands to make on the Koppers deal -- at least $30 million. But the firm has suffered serious PR damage, particularly as a result of Koppers's cries that Beazer's plans could eliminate jobs in the Pittsburgh area. According to one report, sales in Shearson's brokerage office dropped after Koppers executives made a great display of slicing up their American Express cards. One Shearson broker quit, claiming that the Koppers deal had cost his office more business than the crash. Robinson was furious when he first heard the furor. As the head of a major corporation, Shearson sources say, Robinson does not want to be a party to the hostile raid on another company. Cohen says he had to ''explain'' to Robinson that Shearson intended to be a partner in the deal only temporarily. Robinson now says, ''I have a lot of confidence in Peter,'' and that Koppers's behavior is ''totally misguided, misdirected, and ridiculous.'' Cohen agrees and adds, ''They've got a lot of nerve anyway. We have more employees in Pennsylvania than they do.'' COHEN IS NOW trying to put the best face on the whole affair. He says he has received only a few letters from chief executives who worry that his firm might become a partner in a run at them, and he is trying to trumpet the Beazer deal as the ultimate in customer service. ''We put together a deal to serve our client,'' he says, ''and we will stick with Brian Beazer to the end.'' Privately, Wall Streeters defend Shearson's role in the Koppers takeover, decrying Koppers defense tactics as ''totally inappropriate.'' Shearson, they say, has not been inept, naive, or unprofessional. Perhaps the worst that can be said is that Shearson was in too big a hurry. That's the way you get soup on your tie.
CHART: INVESTOR'S SNAPSHOT SHEARSON LEHMAN HUTTON
SALES (latest four quarters) $7.5 BILLION CHANGE FROM YEAR EARLIER UP 10% NET PROFIT $103.5 MILLION CHANGE DOWN 68% RETURN ON COMMON STOCKHOLDER'S EQUITY 6% FIVE-YEAR AVERAGE 16% STOCK PRICE RANGE (last 12 months) $12.50-$34.13 RECENT SHARE PRICE $18 PRICE/EARNINGS MULTIPLE 21 TOTAL RETURN TO INVESTOR'S (5/7/87* to 4/25) -45%
*Initial public offering.