Just days after the merger a woman entered Roger Altman’s office carrying a variety of colored stickers. Scanning the assortment of paintings, furniture and pictures in the neatly appointed office Altman shared with François de Saint Phalle, the woman interrupted his conversation to ask: “Could you tell me which paintings and furniture belong to you personally and which belong to Lehman?” Startled, Altman showed her his personal belongings. The woman quickly affixed yellow stickers to each piece of corporate property and then hurried off to the next office.

Color-coded stickers were but one of many changes introduced by Wall Street’s newest supermarket. Within weeks memoranda addressed “To: All Employees” and sent “From: Communications” were placed on each desk. The subject: “Telephone Deletions.” In alphabetical order there followed row after row of names, with extension numbers. In all, about seven hundred employees were laid off from both firms. Total savings, says Shearson’s Jeffrey Lane, amounted to $75 million.

Parker Prout, Lehman’s director of personnel, was one of those excised, as were fifteen of the thirty-three people in his department. Prout, interviewed on his last day at work and operating from behind a bare desk in an office barren of books, paper or paintings, said he understood. But he thought a way of life, as well as books and people, was on the way out. “Investment banking houses like Lehman reeked of a kind of luxury,” he said. “See the forty-third floor. Impressing clients was part of the firm’s history. The partners’ dining room is particularly opulent. That filters down into the culture of the firm. The offices are done in a lovely wood finish. Typical of what used to be old partnerships. Partners felt independent. On the other hand, the retail houses are very highly structured and highly managed and conscious of cost control. At Shearson, their human resources [personnel] departments’ desks are battleship gray, their floors are covered with linoleum, their phones are black. At Shearson, expenses are on everyone’s lips.”

Ralph Schlosstein, a bright Lehman vice president who was probably close to becoming a partner at the time of the transaction, dissects the different cultures this way: “Both Shearson and Lehman are in the same business in many respects. But Shearson’s business is driven by the sellers of financial products. The key people there are retail brokers and institutional sales people. Investment banking in their organization existed to create a product. Look at their organization: the distributors and the sellers of financial products are in many ways the key people. So they don’t position securities they couldn’t sell. At Lehman, people grew up with a focus primarily on the corporate client. A lot of the distribution and trading system of Lehman was built to serve our corporate finance clients. So at Lehman, until relatively recently, you had an organization dominated by corporate finance.”

As in any merger, there were transitional pains, which Shearson tried to be sensitive to. Deciding that Lehman “good will” was worth something, Shearson lowered, then waived, the net worth test, sticking to their original purchase price of $360 million. They were careful to place Lehman partners in key management positions in the new firm. As Lehman Brothers signaled Kuhn Loeb that it would have a voice in the merged company by appointing its president, Harvey Krueger, to head the banking department, so Shearson sent a reassuring signal to Lehman partners by elevating Sheldon Gordon to direct the joint banking department. They comforted traders by giving Dick Fuld major responsibility for trading operations. Reflecting his senior status and talents, as well as his alliance with Shel Gordon, Peter Solomon was granted the promotion and recognition denied him, and seemed finally at peace.

Nevertheless, from the point of view of Lehman employees, the days after the merger were full of anxiety. There were adjustments to a new management culture. Secretaries complained that employee benefits were not as ample at Shearson as at Lehman. “You’ve got to fill out a form for everything you do,” complained one exasperated secretary. “I know this is sheer snobbery, but the class of people is different. You’re dealing with a lot of polyester here. The morale is very low.” Artie Weigner, who started at Lehman in 1933 as a runner and retired after the merger, says, “Shearson taking over Lehman Brothers is like McDonald’s taking over the ‘21.’” William S. Proops, director of Lehman’s dining facilities, toured his sumptuous dining rooms and wondered aloud whether Shearson would continue those special and expensive flourishes that have distinguished many private banking houses. Proops was trained at the École Hôtellerie in Lausanne, Switzerland, and at the Cordon Bleu in Paris. To him, the Lehman ambience—the Pétrus and Haut-Brion craddled in the wine cellar, the sterling silver cigarette boxes and salt-and-pepper shakers, the fresh flowers, the Impressionist paintings, the tuxedoed waiters—honored the entrepreneurs who dined there and perfumed Lehman with an air of elite first class. Proops worried that Shearson managers would focus on the expense, not on the purpose of the expense. In the first year and a half after the merger, those fears proved groundless. But new uncertainties arose because Lehman’s offices were to be moved in October 1985 to a new American Express complex.

Many talented younger associates—like Steven Rattner—decided to leave partly because they felt the new firm would stifle the entrepreneurial spirit. “I just don’t think Lehman Brothers will be the place to practice the kind of investment banking a lot of us came to practice,” says Rattner, who is thirty-three years-old. “Though Lehman Brothers tried to be a full-service firm, it was like seventy-seven firms run by seventy-seven partners. It was entrepreneurial. The real expertise was selling your brains. I just didn’t think Shearson would be able to foster that kind of activity.” Rattner went to Morgan Stanley, where he is a vice president in charge of their efforts in the communications industry, and where he can still aspire to become a partner.

Anxious to staunch a potential outflow of talented associates, Shearson sweetened the $35 million pot of money set aside for them. Without making a public announcement, the 10-Q form they filed with the Securities & Exchange Commission for the quarter ending June 30, 1984, stated that the “aggregate cost of the acquisition” was “approximately $380 million”—not $360 million. Asked about this discrepancy, Peter Cohen said that a piece of this $20 million went to Salomon Brothers and to the lawyers and accountants who worked on the merger—perhaps $5 million in all. The remaining $15 million or so he said was set aside to reward associates. This plan has suffered a setback, for less than a year later Cohen said they expect to spend far less than the extra $15 million on associates. Clearly, the bleeding of associates was not arrested.

From the Lehman partners’ point of view, the early reviews of the merger were mixed. François de Saint Phalle admits Lehman “has lost some of its investment banking base.” In the year following the marriage, Lehman lost some of its blue-chip clients. The American Broadcasting Company, a longtime client, did not select Shearson/Lehman when it chose an investment banker to engineer its merger with Capital Cities Communications, Inc. Others who took their merger business elsewhere include Chase Manhattan, the Continental Group and Uniroyal. On the other hand, de Saint Phalle says, “We have new products to offer corporations that the old Lehman didn’t have.” Despite slippage in banking, Shel Gordon says he sees nothing but opportunities: “There are things that will make investment banking firms of the future dominant. One is the depth and quality of their distribution system. The second is capital. The third is the investment banking franchise and its history. Only four or five firms have this third factor—Goldman, Morgan Stanley, First Boston, Lehman, and Lazard in some ways. It’s a way of thinking of business as an investment banker—the ability to put yourself in the shoes of a CEO who is thinking strategically, not how to structure the next transaction. Very few firms have that. I would argue that no one else has those three things in place the way Shearson/Lehman Brothers does.”

But Gordon concedes that what looks good on paper might not translate into practice. As the death of the House of Lehman helped demonstrate, inchoate personal feelings, ambitions, anxieties often play pivotal roles. Puffing on a large cigar he brought back from the Lehman dining room, Gordon says, “I was just talking to a major client at lunch. The client’s main concern, and the reassurance he wanted, was that we would not just become a mass distribution firm and that we will keep the quality of our relationship and quality of service.” That elusive word—quality—is implicit in the words of the chairman of a blue-chip company that has relied on Lehman for many years: “I don’t want to talk to Sears & Roebuck about my business. I always knew my investment bankers felt a stake in my company. My embarrassment would be theirs. There was a tie. Now I worry we will lose that tie.”

This concern is echoed by some partners. They are not embarrassed to say they are elitist, fearing that size squelches talent, that an entrepreneurial attitude will be the first victim of the merger. “Big institutions cater to unexceptional people,” says one Lehman partner who signed the noncompete contract. “Imagine Ivan Boesky, the great arbitrageur, working at a big commercial bank!” After the noncompete clause lapses, this partner predicts: “The journeymen Shearson will keep. The talented people will redistribute.” In two years, Lehman lost the acknowledged banking talents of Pete Peterson, Bob Rubin, Lew Glucksman, Eric Gleacher, Yves-André Istel, Steve Schwarzman, William Morris, Henry Breck, Alan Finkelson, George Wiegers and Steven Fenster, who decided to extend a sabbatical and to continue on the faculty at the Harvard Business School.* Will prospective clients focus on the talent that has left or the pool of talent that remains, including low-profile partners like Frederick Frank, the banking division’s single largest revenue producer? In the wake of the merger, will the new firm lose Lehman’s special cachet? “There was a great distinction in being a partner at Lehman Brothers,” partner Henry Breck said soon after the merger. “It gave you pride. You were known as a smart, tough guy who lived by his intelligence and integrity. What a passport to carry. There wasn’t a person in the world I couldn’t call.”

From the point of view of top Shearson executives, the merger made a lot of sense. As Schwarzman had suggested to Cohen in their first meeting, Shearson’s proven ability to pare costs would permit them to save, over five years, half the cost of the purchase price. Shearson also had transferred to their books a number of Lehman hard assets worth between $108 and $118 million, not including the overfunded pension and tax reserves, and real estate. In addition, Shearson received a tax refund of $95 million on past federal taxes paid by Lehman. Soon after the sale, Shearson also sold one of Lehman’s assets—Lehman’s lease at 55 Water Street—for $25 million pre-tax. The merged firm, it was announced, would eventually move into the new downtown Manhattan American Express complex. In all, these cost savings and assets add up to more than $400 million, exceeding the purchase price. And this sum does not include the income-generating value of such Lehman businesses as commercial paper, investment banking or investment management. From a cost point of view, the merger made great sense for Shearson/American Express, for the future income-generating value of Lehman’s business was acquired for free.

From a customer point of view it made great sense, says Jeffrey Lane: “We’re a wholesaler and a retailer. Why shouldn’t you use us as your banker.” Shearson/American Express was able to purchase what it could not easily build, observes former president Sandy Weill. “It’s good for us. It puts us in a very important position in investment banking and some trading areas it would have taken us ten years to build.”

Peter Cohen remains bullish. “The whole firm had a good last six months,” he says. “Look at our results versus the other public firms. We have outperformed this industry.” In the first two full quarters since the firms were married in May 1984 (July through December), Shearson/Lehman Brothers’ net after-tax profits were $62 million in the second and third quarters of 1984, compared to $74 million in a comparable 1983 period, when the market was humming.* Glucksman’s trading operations, in particular, rebounded strongly, again generating the lion’s share of Lehman’s profits. “We have been profitable in trading in every month since the merger,” says Jeffrey Lane. In the January through March quarter of 1985, surging trading and money management business helped drive up Shearson’s net profits by 25 percent, to $31 million.

The other quantitative way to measure the performance of Shearson/Lehman Brothers is with the various rankings issued by those who keep score. Here the scorecard, as compiled by the Securities Data Company, a financial data service, is decidedly mixed. In some areas—like underwriting taxable new issues or initial public offers of common stock, where full credit is given each underwriter—the ranking of the merged firm was about the same as it would have been had the dollar totals of the two firms been combined in 1983. In some key areas the news was gloomy. In mergers and acquisition activity, between January 1983 and May 1984, the date of the merger, Lehman did seventy-nine deals and Shearson twenty-two. From May 1984 to April 1, 1985, the merged firm did sixty deals—a sharp drop. Moreover, the firm completed only a handful of deals over $100 million. Since M. & A. was considered a jewel in the Lehman crown, that is not good initial news for Shearson/Lehman Brothers.

On the other hand, some scores kept by Securities Data paint a brighter picture of the marriage. In 1983, Lehman ranked fifteenth and Shearson fourteenth in issuing new tax-exempt municipals, where full credit is given to each manager. Taken together, their combined dollar totals would have ranked them fourth. At the end of 1984, the combined firm had moved up to third. On taxable new issues underwritten and where the full credit goes to the lead manager, in 1983 Lehman ranked seventh and Shearson eleventh. By the end of 1984, the married firm ranked sixth. In the smaller Eurobond market, in 1983 Lehman managed three Eurobond issues totaling $375 million, ranking them thirty-second; Shearson/American Express ranked fifty-eighth. By 1984, although the indicators were new, Shearson/Lehman Brothers moved up to rank sixteenth, managing eleven issues worth $1.3 billion. And in initial public offerings of common stock, where full credit is given to the lead manager, in 1983 Shearson ranked seventh and Lehman twelfth. Taken together, their dollar volume would have placed them fourth. By the end of 1984, the merged firm ranked third.

“The merger is going very well,” Cohen said in December 1984. “Better at this point than a lot of us thought it would. The transition was easier. The one great challenge has been to take two different cultures and to have a new culture emerge. We’re on our way to doing it.”

Perhaps. But just a few weeks earlier, in late November, Cohen had an experience that might give him pause. Accompanied by Jim Robinson, Cohen came to the meeting room on the forty-second floor of Lehman—the same room in which Peterson announced that he was leaving. Invited to attend were the Lehman partners. Cohen and Robinson wished to discuss how the merger was going, to review compensation and bonus plans and to field questions. In his clipped, efficient way, Cohen began the meeting by announcing that he had five items to cover on his agenda, including the matter of Lew Glucksman, who was then actively involved with American Express. Word had filtered back to some partners that Glucksman was well thought of at American Express, and there was some concern that he would return. Cohen did not get to the Glucksman item on his agenda, talking first and at some length about compensation. Bankers were worried about their bonuses, which would be paid that winter. But some were more worried about Glucksman.

“Let’s get on to Glucksman!” Peter Solomon interrupted.

“Lots of rumors are being spread about Lew Glucksman,” Cohen recalls saying. “He’s not coming back to this company. He’s behaved honorably throughout the negotiations and done an honorable job. Let’s look forward.”

Jim Robinson then took the floor to echo Cohen. He explained, according to several Lehman partners, “what Glucksman was doing, and made it sound like they had rehabilitated Lew Glucksman.”

At this point Harvey Krueger rose to speak. “It is totally out of place in this group to discuss Lew Glucksman, or the ‘rehabilitation’ of Lew Glucksman,” he recalls saying. “If he were to come back, I would be proud to work for him. He made a lot of people in this room wealthier than they thought they’d ever be.”

Was this meeting a Harbinger of divisions that will persist, or the dying gasp of the past? The jury is still out on that question, as it is out on many others. Can the two cultures really blend? Will Shearson be able to impose its rigorous management structure without suffocating Lehman talent? Can they work as a team? Will giants like Shearson/Lehman Brothers be able to recruit first-rate people? Will they be able to convey to corporate clients a sense of individualized, customized service? Robert E. Rubin, a general partner and a member of the management committee at Goldman, Sachs, asks a larger question: “Wall Street has been a highly entrepreneurial arena. Lots of venture dollars are organized here. Leveraged buyouts come out of Wall Street. The merger wave, without regard to the question of whether it is a good thing for society, comes out of Wall Street. Can that entrepreneurial spirit remain alive in units as large as American Express? If not, can Wall Street remain a highly entrepreneurial world? And, if it doesn’t, does it make a difference? Will this source of energy diminish?”

Wall Street and others can debate these questions for years to come. What is clear, however, is that the steady concentration of wealth in fewer and fewer corporate hands on Wall Street—like the corporate concentration of wealth in farming, in Hollywood, in computers, in the media, in financial services, in the automotive and consumer package goods industries—marches on.

*In the fall of 1985, Fenster resigned from Lehman to become a consultant to a former client, Chase Manhattan Bank.

*Shearson’s fiscal year, unlike Lehman’s, coincided with the calendar year.