PaineWebber Group Inc.

1880–1942

PaineWebber Group Inc. is one of the largest full-service securities and commodities companies in the industry, offering asset management, investment banking, brokerage activities, and other related services to both institutional and individual investors. PaineWebber runs the country's fourth largest brokerage, although it lags far behind the top three industry giants, Merrill Lynch & Co., Solomon Smith Barney Inc., and Morgan Stanley, Dean Witter, Discover & Co. Nevertheless, from a tiny partnership founded more than 115 years ago, PaineWebber has grown into a major international presence.

Early History

Paine & Webber was founded in 1880 by William A. Paine and Wallace Webber, formerly clerks at Boston's Blackstone National Bank, who set up shop on Congress Street in Boston. The next year, Webber acquired a seat on the Boston Stock Exchange. The firm admitted Charles Paine as a partner in 1881 and changed its name to PaineWebber & Company.

From there, PaineWebber embarked on a steady course of expansion that would last well into the next century. In 1890 the firm joined the New York Stock Exchange. It purchased seats on the Chicago Board of Trade in 1909 and the Chicago Stock Exchange in 1916. PaineWebber opened its first branch office in 1899 in the copper mining town of Houghton, Michigan. Nine branches sprang into existence during World War I, including PaineWebber's first in New York City in 1916. Before this office opened, business in New York had been conducted by wire and through New York brokerage houses. During the feverish years of the late 1920s, five more offices opened and six moved to larger quarters. By its 50th anniversary, in 1930, the firm could boast of 25 branch offices in 22 cities spread throughout the northeast and upper midwest and a position as one of the largest firms on Wall Street.

But the bull market that had fueled this growth came to a shattering end in October 1929, and the Great Depression that followed brought lean times to the brokerage industry. PaineWebber maintained its standing as a leading Wall Street firm, but did not emerge from the Depression unscathed. By the late 1930s, its presence had shrunk to 19 cities. Not only did the Depression mark the end of PaineWebber's steady growth, but it had to face this period of crisis without the guidance of its founders. Wallace Webber had retired in 1894, and William A. Paine, who had continued to head the firm, died in September 1929.

Paine's son Stephen was a partner in the firm by this time, but it was through him that PaineWebber found itself embroiled in one of the major securities fraud cases of the decade. In the Continental Securities Corporation scandal of 1938-1939, a group of American and Canadian financiers gained control of six different investment trusts, sold off their portfolios, and filled them up again with unmarketable securities of dubious value, including shares in dummy companies owned by the conspirators themselves. Creditors of these trusts found themselves defrauded of more than $6 million. PaineWebber, through Stephen Paine, loaned the money used in four of the takeovers and sold off the portfolios for the conspirators. The firm itself was ultimately cleared of all wrongdoing and ended its role in the case with damage payments to some of the creditors. But the New York Stock Exchange suspended Stephen Paine and Frank Hope, a fellow partner and former governor of the New York Stock Exchange, for ignoring evidence of the fraudulent nature of these transactions. Paine was also convicted in federal court of mail fraud and served four months in prison.

World War II finally ended America's economic slump, and in 1942 PaineWebber merged with Jackson & Curtis, a fellow old-line Boston house. The resulting conglomeration of Paine, Webber, Jackson & Curtis listed 23 branch offices. For two decades after the merger, PaineWebber remained essentially the same kind of establishment it had been for the first 60 years of its existence: a privately-owned brokerage house that made most of its money in the retail trade, buying and selling securities for private customers. Although it had long been one of the largest firms on Wall Street, it was still tiny by the standards of the late 20th century.

Creditors of these trusts found themselves defrauded of more than $6 million.

1963–1980

James W. Davant Era, 1964--80

In the late 1960s and the 1970s, lower stock market volume combined with two important legislative changes to radically alter the brokerage industry. The first of these, the Employee Retirement Income Security Act of 1974, increased the importance of institutional investors as a revenue source. The second, the abolition of the brokers' fixed-rate commission structure in May 1975, slashed profit margins by allowing fierce price competition among houses. Together, these factors forced brokerage houses to merge and expand to increase their working capital and compensate for reduced profit margins. Conservative companies whose mainstay had always been the retail trade were forced to enter new markets. PaineWebber, although it was often slow to innovate and continued to rely heavily on retail sales, was caught up just like its competitors in the changes in the brokerage industry during these years.

Much of this change broke upon the firm during the watch of a single CEO, James W. Davant. When Davant assumed the post in 1964, PaineWebber had fewer than 40 branch offices, annual revenues of $30 million, and $1 million in capital. When he retired in 1980, PaineWebber's 229 branches earned revenues of $900 million and capital had reached $240 million.

As if to usher in this new era of change and expansion, PaineWebber moved its headquarters in 1963 from genteel Boston to New York City. In 1967 it made the first acquisition in its history. An industrywide trend had developed in which large, New York-based houses were acquiring regional securities firms to increase their presence nationwide, and PaineWebber joined it by buying the brokerage house of Barret Fitch North, based in Kansas City, Missouri. The acquisition also marked a break from the northeast/upper midwest area of operation to which PaineWebber had confined itself since the turn of the century.

In 1970 PaineWebber moved into the mid-Atlantic region by acquiring the principal offices of the securities firm Abbott, Proctor & Paine, based in Richmond, Virginia. It also conducted unsuccessful merger talks with Dean Witter & Company, the first of several efforts on its part to merge with another major house to form a brokerage juggernaut.

The firm underwent a major reorganization that year, incorporating and changing its name to Paine, Webber, Jackson & Curtis Inc. This decision was taken for the sake of tax benefits and greater operating flexibility. Once again, PaineWebber was joining a trend rather than starting one. In breaking the news of the pending incorporation, the New York Times described the company as "one of the last major brokerage-house partnerships." The transformation of the old New York houses from private partnerships to publicly held corporations began as a result of the financial setbacks suffered by the securities industry during 1969 and 1970, when lower stock market volume showed up the fragility of the retail trade and forced companies to search for more dependable sources of capital. PaineWebber finally went public in 1972 when it absorbed Abacus Fund, Inc., an investment company, and paid Abacus stockholders with PaineWebber shares.

The firm took a great leap in 1973 when it opened its first overseas offices, in London and Tokyo. But the other significant events of the remainder of Davant's stewardship have a more familiar ring to them. In 1973 PaineWebber acquired two more firms: F.S. Smithers and Mitchum, Jones & Templeton. The firm underwent another reorganization in 1974, forming a holding company for PaineWebber called PaineWebber Incorporated. Two more proposed mergers with major houses fell through: the first, with Shearson Hammill & Company in 1972, drew a Justice Department antitrust inquiry and would have formed the nation's second largest brokerage house behind Merrill Lynch Pierce Fenner & Smith; the second, with Oppenheimer & Company, fell through in 1976. The company also completed more acquisitions, buying four offices from duPont Walston in 1974 to bolster its retail capacity; acquiring the securities research firm of Mitchell Hutchins, Inc. in 1977; and merging with Blyth Eastman Dillon & Company in 1979.

1965–1990

The merger with Blyth Eastman Dillon nearly proved ruinous, however. PaineWebber, caught up in the intricacies of assimilating the investment banking firm, was blind-sided by the explosion in stock market volume that presaged the bull market of the 1980s. The company's operating systems were overloaded and many customer orders were left unprocessed or even lost. These orders then had to be tracked down manually, at great expense of time and money, and created further order backlogs. Eventually PaineWebber was forced to suspend some of its businesses, including bond and over-the-counter stock trading. For fiscal year 1980, the firm reported a $6.9 million loss on revenues of $896 million in what should have been an exceptional money-making year.

Davant waited until the Blyth Eastman Dillon crisis had simmered down before passing the baton to Donald Marron in May 1980. The two men offered something of a contrast with each other. Davant, described by the Wall Street Journal as "courtly" and "low-key," spent virtually all of his adult life with PaineWebber, rising through the ranks to CEO. When asked at the press conference announcing his retirement if he would consider returning to the securities industry, he quoted Oscar Wilde in reply: "To win back my youth ... there is nothing I wouldn't do--except take exercise, get up early or be a useful member of the community."

Donald Marron Era Began in 1980

Marron, on the other hand, charted a more aggressive and entrepreneurial career on Wall Street. He came to PaineWebber through Mitchell Hutchins, an acquisition he had brought about as president of the smaller firm. He had a reputation as a prodigy and a forceful self-promoter--at the age of 25, he was running D.B. Marron & Company, his own investment banking firm, which merged with Mitchell Hutchins in 1965.

Under Marron, PaineWebber continued to diversify. In 1983 it acquired two strong regional securities companies: Rotan Mosle Financial Corporation, based in the southwest, and First Mid America, headquartered in Nebraska. In 1984 the firm acquired Becker Paribas Futures, a commodity-futures trading firm, to expand its presence in that market and moved into mortgage banking with the purchase of Rouse Real Estate Finance. Also in 1984, a reorganization of the company combined the three subsidiaries, Paine, Webber, Jackson & Curtis; Blyth Eastman Paine Webber; and PaineWebber Mitchell Hutchins, under one name, PaineWebber Incorporated. PaineWebber Group Inc. was established as the parent holding company. In 1985 the company moved its headquarters to 1285 Avenue of the Americas, renamed "The PaineWebber Building." That same year, Marron declared in Fortune that he intended to make PaineWebber one of Wall Street's top five investment bankers within four years (it was generally ranked ninth at the time). Pursuing its new goals in investment banking, PaineWebber participated in the leveraged buyouts of National Car Rental in 1986 and Greyhound in 1987 and brokered the purchase of Braniff in 1988 by a group of East Coast investors.

In the wake of the October 1987 stock market crash, most major brokerage houses reported tiny profits or even losses for the fourth quarter of the year. PaineWebber was no exception, citing pretax earnings of $35,000, versus figures in the tens of millions for the previous three quarters. The firm streamlined by selling its commercial paper operations to Citicorp in November 1987 and its venture capital unit to the unit's managers in January 1988. Also in 1987, the company began to move some of its operations to a new, multimillion technology complex in Lincoln Harbor, New Jersey. PaineWebber also moved to bolster its capital, selling an 18 percent equity interest to the Japanese insurance giant Yasuda Mutual Life Insurance Company in November 1987 (the proceeds were earmarked for its merchant banking unit, which had been somewhat belatedly launched in 1986) and acquiring Manufacturers Hanover Investment Corporation in early 1988.

The October 1987 collapse in stock prices frightened away many small investors and few of them returned to the market over the next year. This lack of interest proved damaging to PaineWebber, reliant as it is on its retail operation, which posted a huge loss in 1988. By the following year, however, retail returned to profitability--posting a $100 million turnaround--thanks in large part to an emphasis on noncommission financial instruments, such as certificates of deposit. On the negative side, the funds from Yasuda failed to save the nascent merchant banking operation, which was particularly hurt by one major mistake--its $500 million bridge loan to fund Robert Campeau's buyout of financially troubled Federated Stores. As a result, PaineWebber posted a fourth-quarter 1990 after-tax charge of $71.1 million to increase reserves for merchant banking investments, and Marron decided to pull the plug on merchant banking altogether.

1932–1997

Behind the long bull run of the 1990s, PaineWebber enjoyed relatively steady and healthy growth in the early to mid-1990s, with only the occasional glitch. In 1994 the worst bond market performance since 1932 led to numerous problems industrywide, including a major negative impact on the derivatives market. Derivatives-related losses in one of PaineWebber's bond mutual funds were so large that the company felt obliged to step in and rescue the fund with a $34 million infusion.

Meanwhile, PaineWebber made its first major acquisition in a decade with the late 1994 purchase of the struggling Kidder, Peabody & Co. from General Electric Co. (GE) for $603 million in common and preferred stock, giving GE a stake in PaineWebber of about 25 percent. The deal increased the number of brokers the firm employed to 6,600 from 5,450 and made PaineWebber the nation's fourth largest brokerage, behind Merrill Lynch & Co., Smith Barney Inc. (which had recently bolstered itself through the acquisition of Shearson), and Dean Witter, Discover & Co. Although the addition of Kidder also increased PaineWebber's strength in the investment banking area, this sector remained a poor cousin to the retail operation. In fact, Joseph J. Grano, Jr., the head of the retail unit since early 1988, became heir apparent to Marron in 1994 when he was named president of PaineWebber Group.

In 1995 and 1996 litigation was resolved that accused PaineWebber of underrepresenting the risk of investments in public proprietary limited partnerships, which were sold by the company in the 1980s and early 1990s. PaineWebber took after-tax charges totaling $292 million in 1995 and 1996 to cover the cost of paying fines and restitution.

With mergers in the financial sector becoming increasingly common in the mid-1990s, PaineWebber was often the object of rumored takeovers. The rumors stemmed in part from the company's perceived weakness in comparison with the big three brokerage firms, which were growing even larger from such mergers as that of Dean Witter and Morgan Stanley Group Inc., which formed Morgan Stanley, Dean Witter, Discover & Co. Also fueling the rumor mill were regulatory changes in the United States, which led to speculation that a commercial bank would find PaineWebber an attractive entrée into the securities industry. This speculation was dampened somewhat by the August 1997 announcement that PaineWebber would buy back six million shares of stock from GE for $219 million, reducing GE's stake to about 23 percent (Yasuda's stake, meanwhile, had fallen to about eight percent by this time). This slightly reduced the power that GE would wield in any takeover battle. In any case, PaineWebber was itself looking for takeover targets; Marron hired an investment bank in summer 1997 to search for an asset management firm, a brokerage, or a small investment bank to acquire. Marron was not worried about the company's size. He told Business Week in September 1997: "Size is not the issue. It's momentum&mdashe you growing?" PaineWebber certainly had been growing through most of the 1990s, but it was uncertain whether the company could sustain its momentum since the lengthy bull market itself appeared to be running out of steam.