DON MARRON'S DREAM SLIPS AWAY

DON MARRON'S DREAM SLIPS AWAY
By JAMES STERNGOLD
Published: Sunday, February 8, 1987
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DONALD B. MARRON, chairman of the Paine Webber Group, delighted recently in showing a visitor the playful new David Hockney photo montage hanging on the wall next to his desk. At a glance, it was hard to tell if the jumbled image was falling apart, coming together, or in a state of dynamic equilibrium.
Much the same might be said of Paine Webber itself. Seven years after Mr. Marron took over the top job, it is still not clear what kind of company Paine Webber will turn out to be. The brokerage house nearly collapsed in the wake of an ill-executed merger in 1980 with Blyth Eastman Dillon. Mr. Marron has pulled the firm back together, particularly its core retail business, and put its earnings on a stable upward course. But he has still not succeeded at what he has called his most important objective: to transform Paine Webber into a major investment banking house that would hold its own against the likes of Morgan Stanley and Shearson Lehman Brothers.
As recently as last year, Mr. Marron was saying that by 1989 he wanted to propel Paine Webber into the ''bulge bracket'' - Wall Street argot for the top five or six investment banking houses that garner most of the major deals. (Besides Morgan Stanley and Shearson, they are Merrill Lynch, Salomon Brothers, Goldman Sachs and First Boston.) Investment banking is the most glamorous and profitable - albeit risky - area of the securities business. Nowhere is the competition tougher, or the competitors more determined to hold onto their share of the business. Paine Webber's story, in fact, is a familiar one: it is just one of a handful of mid-sized securities companies, including E.F. Hutton and Prudential-Bache Securities, among others, vying with the industry's giants for a spot in the first ranks.
Recently, for the first time, there have been signs that Mr. Marron is scaling back his vision. In an interview, for example, he spoke of a new set of goals for Paine Webber: ''For us, the two most important things are that we are into quality businesses and that we produce a good return for our shareholders. That's what our strategy is aimed at, not getting into the bulge bracket.''
For Don Marron, Paine Webber's struggle to establish its identity must be particularly vexing. A forceful, entrepreneurial man who stands 6 feet 6, he is used to achieving what he sets out to do. Although he is a thoughtful person whose most impressive quality can be how well he listens, he is also an executive who has shown ''steely determination'' in pursuing power and is comfortable exercising it, according to one of his closest friends, Bill Moyers, the television journalist and commentator.
Throughout his career he has also proved himself unusually creative - and has made his ideas pay off. He built Mitchell Hutchins into one of Wall Street's premier stock research firms and sold it to Paine Webber in 1977.
In 1968, together with Harvard economist Otto Eckstein, he founded Data Resources, the pioneering economic forecasting firm. McGraw-Hill bought Data Resources for $103 million in 1979. His interest in art led him to build a well-regarded collection of 20th century painting and sculpture; in recognition of his discernment - and his fund-raising skills - he was elected president of the board of trustees of the Museum of Modern Art in 1985.
But cracking the investment banking big leagues is proving a far greater challenge.
Paine Webber remains tilted toward its retail, or consumer markets, side. The company has 286 retail offices and about 4,400 brokers, the sixth largest sales force in the industry. Before 1984, Paine Webber earned roughly a quarter of its profits from investment banking, or capital markets, activities, and the remainder from the retail division. Last year, however, the two divisions made nearly equal contributions to the company's operating income.
Mr. Marron has spent most of the last seven years putting the firm back on a solid foundation after the disruptions of the Blyth merger. First, he had to upgrade the firm technologically, spending millions on new computer gear. Mr. Marron folded its different subsidiaries together under one holding company, and reorganized the firm into two divisions, capital and consumer markets. As an important part of this process, he put the company under one roof in new offices in midtown Manhattan. Previously, Blyth had been in midtown Manhattan and Paine Webber had been in the Wall Street district, creating enormous logistical and communications problems.

He also set about recruiting new talent and luring respected professionals from other firms. He installed Donald Nickelson, now president of Paine Webber, to reorganize the retail division and trim the sales force.
Mr. Marron professes satisfaction with Paine Webber's profitability (its net earnings jumped to $71.6 million - up 112 percent in the fiscal year that ended Sept. 30 - from the depressed year before. Revenues rose 27 percent, to $2.38 billion.). But there is a real question whether mid-sized companies built around retail stock brokering can post the same kind of growth and profits as firms with a stronger investment banking presence.
Mr. Marron continues to face several tough questions about Paine Webber's future. Does the company have the capital, and talent, to compete in both the retail and institutional markets? Will it risk losing some top corporate customers if it decides not to participate in some areas of investment banking but to look for specialized niches instead? Might it be forced into merging with a larger financial institution to augment its resources?
In the current order of things, five or six of Wall Street's largest securities houses dominate investment banking and capital markets - the business of underwriting new stock and bond issues, arranging and financing corporate mergers, and trading securities. They are in the enviable position of usually being the first to receive calls from major corporations considering financings or takeovers, and thus get the cream of this lucrative business. In turn this helps create a self-perpetuating flow of new business and profits.
''Don Marron saved that firm, but it's probably harder than ever before to gain entry to the top ranks of this business,'' said Howard G. Berg, a former senior executive at Paine Webber who is now chairman of Moseley Securities. ''The big guys have been making it prohibitive to get back into the top end.''
In addition, the increasingly risky way business is conducted today demands that investment banks have larger and larger pools of capital to commit to the big deals. This clearly favors securities houses with more financial heft. After the Blyth merger, Paine Webber ranked second in capital. But while Mr. Marron was rebuilding the company, other houses were enjoying much greater growth, thanks to one of the most powerful booms Wall Street has known. As a result, Paine Webber now stands 10th in capital - with slightly more than $1 billion - and must compete with investment banks two and three times its size.
The need to increase capital has led to a number of major securities house mergers in the past several years. Last year, for example, Kidder, Peabody & Company sold out to the General Electric Company, which recently provided a huge capital infusion.
Goldman, Sachs & Company sold a 12.5 percent interest to the Sumitomo Bank for $500 million. The ailing E.F. Hutton Group was very nearly forced into the arms of the American Express Company. And late last year Prudential Insurance granted Prudential-Bache Securities, the brokerage subsidiary it acquired in 1981, a $500 million line of credit to give it more financial muscle.
Because of these concerns, Paine Webber's name is occasionally whispered as a takeover candidate, sending the company's stock price bouncing erratically. Mr. Marron flatly rejects the possibility for the time being. To drive the point home, the company's board recently proposed that the company adopt a number of ''shark repellants,'' or measures that would make a takeover extremely difficult.
''We didn't build up the firm to sell,'' said Mr. Marron, who owns about $20 million worth of Paine Webber stock, and was paid $2.75 million last year. ''We intend to remain independent.'' THE alternative to sheer size is finding a niche, becoming the best at it, and using that base to expand into a broader array of businesses. Drexel Burnham Lambert, for example, first built up a formidable presence in the junk bond business, then pioneered the use of junk bonds to finance takeovers, earning itself the huge fees that a company with a dominant market position can command. So far, however, Paine Webber has not found any one thing it can do better than anyone else.

''The thing you have to realize is that your major competitors are never going to let you get a leg up unless you have something really new or different to offer,'' said Samuel L. Hayes 3d, professor of investment banking at the Harvard Business School. ''There is nothing that Paine Webber has that others cannot duplicate.''
Recognizing the difficulties, Paine Webber is trying to concentrate on certain areas rather than trying to compete across the board. ''Who needs to be the biggest and compete for a top spot in every capital markets business?'' said Mr. Nickelson. ''We've made a decision that we'll be more of a niche player now.''
Those niches include mergers and acquisitions, junk bond-financed leveraged buyouts, Government and mortgage-backed bond trading, money management and equity research and sales.
To some extent, analysts prefer this more practical approach. ''Realistically, they don't have the capital or the expertise to go head-to-head with the major players in all of their businesses,'' said Lawrence Eckenfelder, an analyst with Prudential-Bache Securities. ''They'd just be knocking their heads against a wall.'' But a niche firm can be more vulnerable to market cycles if these businesses are not part of a coherent strategy. ''The one concern you have, though, is what happens if the businesses they choose to specialize in slow down?'' said Mr. Eckenfelder. ''That's when greater diversity would help.'' Mr. Eckenfelder and other analysts said they were still trying to see just how Paine Webber's choices fit into a broader strategy.
And they are not alone in asking such questions. Several middle-level professionals at Paine Webber said that, while morale had been improving, they were not certain where Mr. Marron was leading the business. ''We don't really know what the mission is,'' said one.
In the niches where Paine Webber is concentrating its fire, results have been spotty. ''They have demonstrated a stronger presence in many of the capital markets areas,'' said Samuel Liss, an analyst at Salomon Brothers. ''But I don't think their rank has really moved a lot. The whole business is expanding so much.''
Paine Webber, for instance, which ranked 8th in total underwritings in 1981, came in 9th last year, according to the Securities Data Company. Statistics collected by IDD Information Services show that Paine Webber ranked 14th in the dollar volume of mergers on which it acted as an adviser.
And take merchant banking. There is no more fashionable pursuit on Wall Street today than merchant banking, in which investment banks not only help to arrange takeovers or leveraged buyouts, but also invest their own money in the deals.
Merchant banking requires mergers and acquisitions specialists, adept at the mechanics of deal making, to become expert in evaluating credit risks, a somewhat different skill. An investment bank must also develop a strong junk bond department, since these high-yield, low-quality securities are frequently used to finance the transactions. And while merchant banking can produce enormous profits, it also ties up large amounts of capital for years at a time.
Paine Webber pulled off what it considered a merchant banking coup late last year when it arranged the $1.5 billion leveraged buyout of National Car Rental Systems. Paine Webber disclosed that it had invested $127 million in the deal and collected an astounding $40 million in fees. Mr. Marron circulated a confidential memorandum afterward describing the deal as one of the most important ever for the firm, ''both in size and relevance for our strategic direction.''
Not all of its efforts, however, have paid off so handsomely. In 1985, Paine Webber's junk bond department was unable to raise the full $770 million needed to complete the financing for raider Carl C. Icahn's takeover of T.W.A. This allowed Drexel Burnham Lambert to enter the scene and take away some of the fees - as well as the spotlight.
Last year, Paine Webber advised the Campeau Corporation in its bid to acquire Allied Stores. Campeau won the $3.5 billion battle, but Paine Webber balked at providing an $865 million short-term ''bridge'' loan to enable Campeau to complete the transaction. Instead, First Boston stepped in to provide the cash.

John F. Perkowski, head of investment banking at Paine Webber, said the loan was too risky, an opinion shared by others on Wall Street who felt that Campeau had been forced into paying too high a price for the retailer. In fact, the high-priced deal now looks wobbly, and it is uncertain how it will turn out. Nonetheless, even if problems do crop up, First Boston will be able to tell other clients that it did not flinch at making a major commitment in the heat of a battle. ONE bright spot in capital markets has been the fixed-income business, which involves trading and sales of all kinds of corporate and government bonds. Raphael de la Gueronniere, a self-confident 34-year-old recruited in 1985 from the Morgan Gauranty Trust Company to run the department, turned in a $30 million pretax profit in 1986. That represented a solid turnaround from 1984, when the department had a pretax loss of $20 million.
Mr. de la Gueronniere, known as Rafe, said one of his first steps was cutting back on the firm's bond trading, so that it could compete better in the areas it understood best in a more disciplined trading environment.
In addition, the company's institutional stock trading and sales businesses, long one of its strengths, has been a steady source of profits.
For all that, retail stockbrokering remains one of the companies most solid successes. Mr. Marron first brought Mr. Nickelson, an affable former stockbroker from Kansas, to New York in 1980. Mr. Nickelson reorganized the regional divisions, pruned 600 hundred less productive brokers and began Paine Webber's mutual fund operation.
Mutual funds, in fact, have proved a boon. Paine Webber only entered the business in 1984 and already has more than $16 billion under management, a highly profitable and reliable source of income.
More than ever, Mr. Marron will be personally responsible for the success or failure of the capital market activities. Last year, he asked Michael Johnston to step down as head of the capital markets division, which embraces everything other than retail activities. Mr. Johnston had spent much of his career in the stock research side of the business. Many at the company believed that he did not have a strong enough background in investment banking to give Paine Webber the push it needed.
When Mr. Johnston resigned rather than accept a different position, Mr. Marron took the reins himself at capital markets. And he is clearly in no hurry to find a replacement, the better to let the division's aggressive young department heads compete for the mantle. The contenders are Mr. Perkowski in investment banking, Mr. de la Gueronniere in bond trading, and Richard S. Falk Jr., who heads stock trading.
Yet some wonder whether Mr. Marron has the time for the job on top of his duties as chief executive of the entire house. Investment banking is a consuming profession, where deals often require all-night strategy sessions and negotiations. It also requires an enormous devotion to the task of grooming and managing what are some of the most high-powered, and at times difficult, people in the business world. And it often calls for the presence of the top manager in person, who must be smooth and persuasive in wooing and working with clients.
''In investment banking the most important resource is people, and it is a resource that you have to build and nurture all the time,'' said Mr. Hayes of Harvard. ''Managing those kind of fast- track, ambitious individuals, and keeping up the whole range of client contacts, is a full-time job, and then some.''
Mr. Marron's brilliance and intellectual clarity, say many who know him, are matched by his natural reticence. Several professionals at Paine Webber described Mr. Marron as an aloof presence who is commanding when he focuses on a situation, but who does not mix comfortably or regularly with the staff.
Despite those difficulties, Mr. Marron is credited with being a good recruiter. He has brought a far better management team to Paine Webber's capital markets side, and a number of other well-regarded professionals, including a team of merger specialists from Citibank and a bond trading expert from Salomon Brothers.

For all the efforts, Paine Webber is in some ways close to where it was in 1980, when it decided to try and break into the top ranks of investment banking by acquiring the prestigious Blyth Eastman Dillon. Blyth counted some of Wall Street's top professionals in its ranks and some of America's largest corporations among its clients. But the firm never made the transition into the more competitive, technology-oriented and volatile world of the late 1970's, allowing profit levels to slump markedly. Its controlling shareholder, the INA insurance company, now Cigna, finally decided to sell it in 1979 to Paine Webber.
The deal was a disaster. One important problem was that INA never consulted Blyth's management about the sale. When the firm's top executives found out that the company had been sold from under them, they were outraged. An enormous talent drain followed.
Among those who departed were Alvin Shoemaker, now the chairman of the First Boston Corporation; Harold Tanner, until recently the co-head of corporate finance at the giant Salomon Brothers; Howard Clark, the chief financial officer at American Express; John Maher, president of Great Western Financial, and Benjamin Lambert, who bought Blyth's real estate business and built it into Eastdil Realty. Had those executives stayed on, Paine Webber might have been able to achieve its investment banking goals, some analysts believe.
As it turned out, the merger forced Don Marron to spend his time rebuilding Paine Webber rather than moving it forward. The next few years will be Mr. Marron's first real chance to prove what he can do. Because of the time he lost, though, fulfilling his dreams for Paine Webber will be far more difficult that it once appeared. THE FIRM TRAILS MANY OF ITS COMPETITORS Brokerage firms ranked by total capital (latest available 1986 data) in billions of dollars Merrill Lynch $3.1 Salomon Brothers 2.9 Shearson Lehman 2.8 Drexel Burnham 1.8 Goldman, Sachs 1.5 First Boston 1.4 E. F. Hutton 1.3 Prudential-Bache 1.3 Morgan Stanley 1.2 PAINEWEBBER 1.0 Bear Stearns 1.0 (Sources: company reports, New York Times estimates) AT A GLANCE: PAINE WEBBER All dollar amounts in thousands, except per share data Three months ended Dec. 31 1986 1985 Revenues $605,604 $577,886 Net income 17,515 14,162 Earnings per share $0.57 $0.56 Year ended Sept. 30 1986 1985 Revenues $2,384,720 $1,885,076 Net income 71,599 33,824 Earnings per share $2.51 $1.36 Total assets, Sept. 30, 1986 $14,725,750 Debt 403,812 Stockholders' equity 633,365 Total Capital 1,037,177 Book value per share, Sept. 30, 1986 $24.86 Stock price, Feb. 5, 1987 N.Y.S.E. consolidated close 38 Stock price, 52-week range 39 1/8-26 Employees, Dec. 31, 1986 12,500 Headquarters New York
Photo of Donanld B. Marron (NYT/Fred R. Conrad); photo of Donald Nickelson (NYT/Larry C. Morris) (page 8); graphs of Paine Webber's retail commissions revenues vs. number of registered representatives, 1982-86, and total capital, 1982-86 (Source: company reports; NYT estimates) (page 8)