We all saw how Gerald Levin, Time Warner Inc.’s chief, stood up in front of the cameras without a necktie at the Jan. 10 announcement of the sale of his company to America Online Inc. It was a symbol of his acquiescence to the new economy and the ascendance of the Internet. He’d been taken out. Now he was playing along.
But three days later, on Jan. 13, at another merger announcement between an old-economy company and new-economy buyer, there was a better fashion statement. H. Marshall Schwarz, the chief executive of U.S. Trust Corporation and great-grandson of toy seller F.A.O. Schwarz, appeared before the press to announce the sale of the venerable trust company to Charles Schwab Corporation, and he was wearing an old-school, Ivy League- style crimson tie.
You don’t see that kind of tie anymore–especially in shareholder moments like these.
Yet there he was, the blue-blood boss of a blue-blood bank, sporting his pedigree in the face of the new economy’s increasing indifference to it. The tie was an act of defiance, a little vestige of 19th-century thinking in a very 21st-century deal, between an 147-year-old private bank and a new-era on-line brokerage.
The tie reflected the U.S. Trust image: longtime bastion of old money and, more recently, of big money both old and new. In New York, U.S. Trust is thought of as a club, patronized by the very wealthy and their trustafarian offspring. The average U.S. Trust customer has a $7 million account. The minimum is $2 million. On Wall Street, among those making their first millions, the name is passed along discreetly as a safe, smart place to salt away the money. “They’re good to young professionals,” as one client put it.
In fact, this is how Schwab came around to courting U.S. Trust. Schwab co-chief executive David Pottruck, flush with cash (last year he sold about $100 million in Schwab stock), became a U.S. Trust client two years ago. So pleased was he that, to paraphrase Victor Kiam, he tried to buy the company.
Mr. Schwarz at first rebuffed him, protesting that U.S. Trust was not for sale. But eight months later, he gave in, to the tune of $2.73 billion. The Internet (and Schwab’s Internet valuation) was impossible to ignore, and Schwab, for all its blue-plate beginnings as a discount brokerage, had become the on-line king, with a richly valued stock and $725 billion under management (making it the fourth largest financial institution in the United States, if the measure is value of clients’ assets). U.S. Trust has $86 billion in assets.
As incongruous as these two companies are, they actually complement each other perfectly. Schwab now has a high-net-worth operation, so it can hold onto the hands, and therefore the assets, of its richest clients; and U.S. Trust gets Schwab’s technological and financial resources– “high-touch” meets “high-tech,” as Mr. Schwarz put it in a CNBC interview the day the deal was announced.
But in some ways it was a sale that was not a sale. The old bank serving the let-them-eat-cake class now gets to have its cake and eat it, too. San Francisco-based Schwab is paying a whopping 64 percent premium for the company, yet U.S. Trust is retaining its name, its work force, its board of directors and its New York headquarters. Mr. Schwarz and his lieutenant, president Jeff Maurer, were paid a ton to stay put. He has not been taken out. So he didn’t really have to play along.
Founded in 1853, U.S. Trust is America’s oldest trust company. It managed the fortunes of Astors, Whitneys and Rockefellers. But in the past two decades, it has sought to shed its stodgy image, while simultaneously reaping its benefits. Beneath the veneer, there’s a new-age shrewdness. It has, in those 20 years, learned to sell itself. It knows that assets make the vorld go ’round. Having money under management is both reliable and lucrative, a rare pairing in the world of finance.
When Mr. Schwarz took the helm in 1990, he got U.S. Trust out of the corporate lending business and emphasized its traditional strengths–asset management and back-office securities processing. Once they’re in the door, customers then are sold other fee-based services–private banking, estate planning and so forth.
U.S. Trust began aggressively pursuing new customers; dissipate heirs and little old ladies in tennis dresses were no longer enough. U.S. Trust lowered its minimum account limit, and found itself in the sweet spot of one of the greatest periods of wealth creation in American history.
Its business grew, and it became a good target. “We were too small to be big and too big to be small,” said Mr. Maurer, U.S. Trust’s president. Which means, as the investment bankers like to say, They were big enough to eat, yet small enough to be eaten.
On Wall Street on the day of the announcement, the Schwab-U.S. Trust deal summoned up memories and precipitated comparisons.
When Eric Gleacher sold his boutique investment bank to National Westminster Bank P.L.C. in 1995 for $135 million, his peers on Wall Street were in awe. One hundred thirty-five million was a hell of a lot of money for what was essentially a few guys and their clients. People on the Street came up with a new term: Gleachers. As in, Nat West got taken for 135 Gleachers.
Well, $2.7 billion is a lot of Gleachers. You might even say that Mr. Schwarz has created a new denomination: the Schwarz (not to be confused with the Schwartz, the metaphysical force of Spaceballs origin). As in, Mr. Schwab paid nearly three whole Schwarzes for U.S. Trust (there being 1,000 Gleachers to a Schwarz).
The deal summoned up another eponym from days gone by. Back in 1981, Charles Schwab sold his discount brokerage to Bank of America for $53 million. He was paid in Bank of America stock. Soon after the deal closed, the price of Bank of America’s shares collapsed, and the deal didn’t look so good anymore. Thereafter, many chief executives looking to sell their companies would tell their investment bankers that they wanted the buyer to pay cash. They didn’t want the risk of owning the acquirer’s stock. They didn’t want to “get Schwabbed.”
Eventually, in 1987, Mr. Schwab bought his company back and turned it into an on-line powerhouse, a brokerage for the 21st century. It was Schwab’s turn to do the Schwabbing. Now Mr. Schwarz is getting Schwabbed by Mr. Schwab himself.
But this time, the results should be different. Schwab is a growing business, one whose stock has actually already taken a hit in recent months. Mr. Schwarz and his colleagues have been compensated handsomely. And, in any case, Mr. Schwarz is fairly well insulated against a declining share price.
His great-grandfather founded F.A.O. Schwarz, the famed toy store (the family sold the business in the 60′s). His father F.A.O. Schwarz was a senior partner at Davis, Polk & Wardwell, the white-shoe law firm. His brother Frederick A.O. Schwarz Jr., a litigator at Cravath, Swaine & Moore, served as corporation counsel under Mayor Ed Koch.
Born and raised on the Upper East Side, Mr. Schwarz, 62, went to Milton Academy, a prep school outside Boston (he’s now president of the board of trustees there), then got his undergraduate and business degrees from Harvard, before settling down, as so many Harvard Business School boys do, for a seven-year stint at Morgan Stanley. In 1967, he joined U.S. Trust, where his father was a trustee. In short, he is the very embodiment of an old-world banker: the relationship man with the college ties. As a friend who runs an investment bank put it, “Marshall? He’s a real prince.”
The day after the merger was announced, every U.S. Trust customer received an overnighted “dear client” letter from Mr. Schwarz explaining the deal and promising no lag in services. “I apologize for sacrificing a more personal salutation in the interest of speed,” he wrote. Then near the end of the letter, he summed up the deal’s ramifications: “Our partnership with Schwab is about growth and enhanced opportunities for our clients and employees.”