Salomon Mulls Purchase of a Smaller Securities Firm

The July 12 deal that delivered PaineWebber (PWJ) into the hands of giant Swiss bank UBS (UBS) confirmed a rekindled affection for companies that have armies of stockbrokers.

Now, the Salomon Smith Barney unit of Citigroup (C) is informally considering acquiring a smaller securities firm to bolster its roughly 12,000-broker sales force, according to two people close to the firm. The move could put firms like Legg Mason (LM) in its sights.

Sources close to the firm say a combination of factors, not the least of which is the heightened effort and expense required to recruit individual brokers from competitors, is contributing to Solly's curiosity about another brokerage acquisition. Bonuses for recruiting seasoned brokers from competitors now routinely equal 100% of the commissions the broker has generated in the previous year, according to industry recruiters.

A Salomon Smith Barney spokesman says the firm doesn't comment on rumors.

While the first wave of securities industry consolidation saw small but influential investment banks -- Montgomery Securities, Alex. Brown, Robertson Stephens and Hambrecht & Quist -- swallowed up by banks hungry for underwriting fees, the 40% premium over the market price fetched by PaineWebber awakened players to the value of big broker forces focused on individual investors because they generate recurring fees by managing money.

And still, investment banking-oriented firms (which focus on more cyclical business, such as taking companies public), including Lehman Brothers (LEH), Bear Stearns (BSC) and Donaldson Lufkin & Jenrette (DLJ), have found themselves dutifully taking their turns in the rumor mill of potential deals.

But in the wake of PaineWebber's agreement to acquire Nashville, Tenn.-based J.C. Bradford in April, Solly executives began considering ways to add brokers to the ranks, says one person close to the firm. Among the Solly executives involved in evaluating the possibilities of such a deal is Doug Van Scoy, a highly regarded regional manager in the firm's branch system.

"We probably need to add another 3,000 brokers, because like everyone else, we're under siege from competitors," says one veteran Smith Barney branch manager, who wasn't familiar with the firm's efforts. Solly's broker head count trails only Merrill Lynch (MER) and Morgan Stanley Dean Witter(MWD).

Of course, acquiring a retail brokerage won't have a significant impact on the bottom line at a company as large as Citigroup, which posted revenue of $16 billion in the second quarter.

That simple fact, however, likely won't deter co-chairman Sandy Weill, says David Berry, head of research at Keefe Bruyette & Woods, a New York-based financial services brokerage. "Citi's enormous, so a deal like this wouldn't move the dial corporatewide. But small acquisitions are additive to individual businesses," Berry says.

In the past year, Citi has made a smattering of small- to medium-sized purchases, including Poland's Bank Handlowy and the investment banking unit of the U.K.'s Schroders.

Salomon has performed impressively since the end of 1998, but more brokers could be an asset for two reasons. First, they help the bank gain customer money to manage, which earns the sort of steady fee revenue shareholders love. Second, brokers distribute Salomon's own investment banking issues. Says Berry: "Citi has a lot of product to push through its distribution system."

For sure, buying a retail brokerage is something that Weill can do with his eyes closed, having executed such acquisitions many times over during his career. "This is very familiar territory" for Weill, remarks Berry, who rates Citi an outperform. His firm has done no underwriting for Citigroup.

Citigroup was built by an amalgamation of Citibank, Travelers, Smith Barney and Salomon Brothers, cobbled together primarily by Weill.

There are many targets for Solly, although a lot of the larger regional brokerage firms have publicly stated their desire to stay independent. St. Louis-based A.G. Edwards (AGE) and Edward Jones have large brokerage forces around the U.S., without the huge overhead costs of New York securities firms. A.G. Edwards has more than 6,000 brokers, while Jones' sales force is around 4,000.

Baltimore-based Legg Mason is another company frequently mentioned as a target of firms seeking a high-quality acquisition. Legg has just 1,000 brokers but is known for having excellent management, and it has a sterling reputation.

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