Capital – 1974

The Concern

The retirements of Roger Brown and Jack Connor, coupled with the earlier departure of John Colman, Don Pearson, Steve Weiss, Dick Gilder, and Dave Heller, and the resulting redemption of their capital interests (which in Roger’s case was substantial), gave the President some real concern. It was all too evident that employee capital was not very permanent - that it could walk out the door at any time, or be in the path of a bus, or in a crashing airplane. Very quickly, there could be less capital than was assumed in the latest annual financial planning.

The author remembers thinking that, in some ways, managing a business in which capital was so vital, but so uncertain and impermanent, was like managing an investment bank for which the capital base was a mutual fund. In addition, the more successful the firm became in building net asset value, the more attractive it became for some shareholders, with the advance of age and the existence of many opportunities, to take one’s capital and retire, or resign to pursue another path particularly entrepreneurial - to own and build your own business.

As an example of the capital outflows that were possible, share redemptions in 1973 were some $4.2 million and in 1974, some $8.7 million.

It was also the opinion of many of the firm’s managers that the industry was steadily moving toward principal vs. agency markets, particularly in the institutional sector. Over time, capital would be increasingly important to positioning, and the affiliated risks which would need to be taken. Finally, the heart of Becker’s strongest business - dealing in a range of fixed income securities - was requiring more and more capital.

IPO Exploration

In light of these considerations, the author, along with a colleague (perhaps Roger Brown) visited Blyth & Co. in New York, to discuss the possibility of a public offering of Becker's shares, to raise capital. Becker’s financial statements and record of growth and profitability were available for discussion. At about this time, Blyth was still one of the top six managing underwriting firms and had withdrawn from the stock exchange in connection with becoming a subsidiary of INA. DLJ had filed for an IPO in 1969, managed by First Boston, and in 1970, DLJ actually completed the offering at one-half ($15) the original filing price ($30). DLJ’s operating results and financial condition were not much different than Becker’s at the time. Earlier, Weeden had raised some $5 million in capital and was clearly smaller than Becker. First Boston itself had been a publicly owned corporation and non-NYSE firm for some years.

If the author remembers correctly, Blyth’s interest in taking Becker public was mild to positive, and the firm’s advice was cautious. This was early in the trend and permission of NYSE firms to be publicly owned. Caution and conservatism were still the mood of the day. Becker’s management was clearly not unified as to a course of action to take with respect to increasing and making more permanent the firm’s capital. There was still a lagging concern as to whether securities firms, with the ups and downs of their profits, were desirable publicly owned companies. Being private permitted Becker to continue to innovate and pursue business development programs that required investment without concern for current earnings per share. If the author remembers correctly, nothing further came of the discussions with Blyth.

Halsey, Stuart Merger Possiblity

As reported in the Chicago newspapers in October, 1972, the author was approached by Ernie Kelly, CEO of Halsey, Stuart, about possibly merging the firms. Halsey was owned at the time by Chicago Title & Trust, an old, large, and respected title insurance and trust company in Chicago. Chicago Title was in turn owned by Lincoln National Life, of Ft. Wayne, IN. Chicago Title had purchased the Halsey firm in 1967 from the estate of Harold Stuart for $11.5 million. Halsey was a leading competitive bid, corporate bond syndication-distribution manager, and also had a strong position in municipal bond underwriting. The possibility of a merger was discussed within Becker with selected colleagues. There was the general opinion that the idea had merit, possibly more than going public, at least at this juncture. However, shortly thereafter, Halsey terminated discussions, and in 1973, Chicago Title sold Halsey to Bache.

International Investor Idea

Members of the Becker Board were involved in the steady, high level discussions about the possibility of adding more permanent capital from some external source. Among other alternatives was the consideration of obtaining an institutional investment, particularly from an overseas source. The President shared with colleagues the thought that, despite Becker's relatively rapid success in building up its domestic corporate finance business, name recognition, the reputation for professionalism and innovation, and its diversified base of business, these strengths didn't mean too much - at this stage of the firm’s growth - in the world of international finance.

The firm's management also felt that finance and investment matters were increasingly going "global," and over the intermediate period, we would need to understand and participate more in international financial markets than to offer U.S. company and markets research, and a high level order executions, in U.S. securities, through our London and Geneva offices. Ideally, we would combine our interest in obtaining institutional capital with our need to "partner with and access," in some way, an organization that had a good position in international finance - some organization that might be interested in investing in a U.S. securities firm with strong existing activities and market positions, and excellent future prospects, in the U.S. financial markets.

Warburg and Paribas Idea

In 1973, Dorman Commons, formerly Chief Financial Officer for Occidental Petroleum, became a consultant, particularly to the Corporate Finance department, recruited and overseen by Dan Good. Dan was then a Becker Director and familiar with the discussions and thinking within Becker's top management about capital and global finance. Dorman had long experience and contacts with the major banking and financing organizations in London, Europe, and the Mid-East. He offered to go to Europe with Dan and make introductions.

Visits were made to various institutions, but in particular visits were held separately with David Scholey, at S.G. Warburg, in London, and with Pierre Haas at the Compagnie Financiere et de Pays Bas, in Paris. During the course of these visits Dan learned about the already established cross-investments of Warburg and Paribas, and their quite small, joint enterprise in New York. Shortly after Dorman's and Dan's visit, Scholey and Haas apparently spoke with each other and then acquainted their respective senior colleagues, including Sir Siegmund Warburg in London and Jacques de Foucier in Paris, with these discussions, and some of the possible implications.

Upon his return, Dan in turn acquainted the President and the Executive Committee with his contacts and findings. Various visits between the top managements of Warburg, Paribas, and Becker then took place over a number of months in late 1973 and 1974, in Chicago, New York, London, and Paris. The purpose of these meetings was to have the managements of Becker, and of Warburg and Paribas, to become generally acquainted, and to size up the possibilities of an affiliation.

Affiliation Considerations

Commencing fairly shortly after various get acquainted sessions, the Becker managment began its internal deliberations about a possible affiliation with these two highly-recognized international financial organizations. Warburg was the leader, or among the leaders, of the London merchant banks, and thus very well positioned in the London international financial markets which at the time were more preeminent than those in New York. Warburg also had a leading investment banking role in Great Britain, and traditional ties in Germany, Switzerland, and some other European nations. Paribas was equally strong in France, both as a holding company and financial intermediary. Paribas also had established a strong position in the Arab countries, and in Japan and Southeast Asia, all regions which in the late 1960s and 1970s were of keen interest to global finance strategists.

One factor which impressed Becker management was that Warburg and Paribas had already worked out a set of cross-investments which would underlay their commitment to coordinate their worldwide businesses. This coordinated effort appeared to include the United States in that the partners had already established a Wall Street presence in Warburg-Paribas ("W-P"), a jointly owned corporation with an office in Wall Street having some 25 employees. However, in Becker's opinion and to its advantage, this small operation had little chance of becoming significant except in a very long time frame and with substantial additional personnel. Being small, there would be little conflict if any with Becker's New York operations.

There was also the possiblity that an external investment transaction might provide sufficient additional capital to make it possible for employee shareholders, if they wished, to redeem some Becker shares as part of the capital reorganization. Later a number of shareholders did take advantage of this partial liquidity opportunity.

Thus, management, with the backing of colleagues on the Board, decided that Becker was interested in principal in obtaining an investment of permanent capital from the Warburg and Paribas interests which investment would support Becker's further growth and profitablity. In parallel, the relationship would provide opportunities to accelerate Becker’s participation - in many dimensions - in the international financial markets with and through its European partners. The relationship was also seen as a path toward providing options for employee shareholder liquidity, both short and longer term. Thus, negotiations were entered into toward these goals.

The Amalgamation Agreement

In summary, the overall financial provisions of the Agreement were as follows.

Employees, before the amalgamation and by share redemptions, would reduce employee book equity in AGB from the approximate $31 million in mid-1974 to not less than $24 million nor more than $26 million, in Class A shares. (In fact, the reduction was to approximately $24 million).
Warburg and Paribas (through W-P) would invest $24 million in Becker, in the form of an $18 million Capital (Subordinated) Note and the purchase of $6 million in Class B common stock, thus matching employee's stock ownership of $24 million. Thus, W-P would own $6 of $30 million stockholders' book equity - thus an initial 20% common stock interest.
W-P would then have the requirement at the end of six years (October, 1980), or earlier if The Becker and Warburg-Paribas Grou;p (“BWP”) (new name) met a cumulative earnings test (up to $20 million), to tender for more employee shares per a formula and otherwise purchase shares from BWP to bring their interest equal to the employee shareholders, thus to a 50-50 ownership of shares.
W-P would thereafter have an ongoing option to make, per a formula, a further tender for employee shares, this time at a premium over net asset value, the premium depending upon the level of cumulative earnings achieved in the second period above. Then, depending on the outcome of that tender, W-P would purchase shares from BWP to the extent of non-acceptance of the tender (but at no premium).
Employees would in the future purchase Class C shares from BWP. The amount of such share availability would be restricted for each year to the amount of Class A or B shares redeemed in the prior year, plus a 2%/annum growth allowance. The net asset value of the Class C shares would be calculated somewhat differently than that of the Class A and B shares, by reason of the interest on the Capital Note taken back by W-P (in order to equalize the W-P and employee capital funds ownership). The result of this different calculation would be that net asset value per share of the Class C would steadily be less that for the Class A and B shares. (See the later comment for the exchange of Class C for Class A shares in 1979).

Other reasonably significant provisions of the Agreement included:

The name of A.G. Becker & Co. would be changed to The Becker and Warburg-Paribas Group, and the business reorganized into three primary subsidiaries, A.G. Becker & Co., Inc; Warburg Paribas Becker Inc; and Becker Securities Corporation, each with specified operations and initial capital.
BWP would obtain $10 million in subordinated debt from third party banks.
BWP would place the ownership of BSC in a voting trust to meet a requirement of the NYSE.
The amount of cash to be used in employee shareholder redemptions would be restricted, subject to the dollar amounts involved, with the balance payable in junior subordinated debentures retired in three annual installments with a formula for the interest rate.
The issuance of management shares would be restricted as to amount per future time period.
The composition of Board and advisory committee memberships before and after the amalgamation was specified.

The balance of the Agreement included provisions customary for such transactions, and various forms of documents that would be used to complete the affiliation.

The terms of the Amalgamation Agreement were negotiated in various sessions involving key management of Becker (Paul Judy, Jack Wing, Fred Moss, and Jack Donahue) and a range of representatives of Warburg and Paribas, including Sir Siegmund and de Foucier in some sessions.

Lighter Side

On the lighter side, in mid-afternoon of April 8, 1974, a bargaining session in New York reached a stalemate. The suggestion was made to reconvene the next morning at 9 am. Everyone agreed. The author announced, much to everyone’s doubtful expression, that he was heading to Atlanta to see Hank Aaron hit his 715th home run, and in doing so, to break Babe Ruth’s record. Becker, through John Jachym a few years earlier, had negotiated the sale of the Milwaukee Braves to a group of Chicagoans who moved the team to Atlanta. Through participants in the ownership group, the author was promised a good seat if he showed up for the April 8 opening day of the Brave’s schedule.

Given the stalemate, the author promptly left the meeting, haled a cab to LaGuardia, just made the plane to Atlanta. He arrived in Atlanta 30 minutes before game time, haled a cab to the stadium, picked up his ticket at will call, and took his seat along the first base line just as the game started, having missed the 30 minute pregame extravaganza. Aaron came to bat leading off the second inning and was walked. Boo hiss. But then, on his second time at bat, in the fourth inning, on the second pitch, Aaron sent a high fastball in a beautiful arc right into the center field bleachers, for a new home run record. Some 57,000 fans went berserk. The author can still envision that trajectory and the frenzy.

After the game, the author went to the locker room, shook Aaron’s hand, thanked the owners, headed for the airport, slept for a few hours in an airport chair, caught an early plane to La Guardia, and was at the 9 am session, a little groggy, but over coffee and doughnuts, happy to share with everyone the exciting venture of the prior 18 hours.

Negotiations Completed/Agreement Signed

When negotiations of the main points were completed, leadership in the central drafting and fine tuning of the Agreement was put in the very able hands of Edwin Goldberger, of Dancona, Pflaum et al., now external counsel to Becker.

The agreement was signed on July 4, 1974 and operationally went into effect on October 25, 1974, the fiscal year end of the predecessor corporation, with final monetary settlements in the January, 1975, upon the completion of, and based on the number in, the October 25, 1974 audit.

New Boards of Directors

Becker and Warburg-Paribas Group

As noted earlier in the summary of the Agreement, Becker was to be divided into three operating parts working under a central Group ("BWP") administration and Board. The Board of Directors of BWP consisted of Pierre Moussa and Geoffrey Seligman, as Co-Chairs; Paul Judy as President and CEO; along with Bill Cockrum, Peter Darling, Jack Donahue, Pierre Haas, Fred Moss, Herve Pinet, Burt Weiss, Ira Wender, and Jack Wing.

Warburg Paribas Becker

The Board of Warburg Paribas Becker Inc. ("WPB"), the investment banking subsidiary of the Group, was assembled (in advance) in September, 1974, and consisted of seven overseas residents - Peter Darling, Pierre Haas, Francois Morin, Pierre Moussa, Herve Pinet (Vice Chairman), Geoffrey Seligman, and Hans Wuttke, along with Jean Barbat and David Mitchell (from the NYC W-P Board), and Ira Wender (Vice Chairman, and counsel to W-P, Paribas and Warburg). From former Becker management came Paul Judy (Chairman), Dan Good, Barry Friedburg, Jack Donahue, and Jack Wing.

A.G. Becker

The Board of A.G. Becker & Co. Inc.("AGB") consisted of Jack Donahue as President and Chief Operating Officer, along with Paul Judy (Chairman), Bill Cockrum, Barry Friedberg, Dan Good, Jack Wing, and Fred Moss, and from Warburg and Paribas, Geoffrey Elliott, Marcel Reinische, Herve Pinet, and Ira Wender.

Becker Securities Corporation

The Board of Becker Securities Corp. ("BSC") consisted of Jack Wing, as President and Chief Operating Officer, along with Fred Moss (Chairman), Stu Gassel, Ray Holland, John Levy, Burt Weiss, Bob Vance, Nancy Osterberg, and Paul Judy; and from Warburg and Paribas, Nick McAndrew and Serge Varangot.

The announcement of the Amalgamation listed the various corporate components and the Directorships of each.

Some Group Officers

Also, as of 1974 year end, Bill Cockrum and Mac Skall were elected BWP Senior Vice Presidents; Al Kopin, BWP Treasurer; Phil Alexander, BWP Controller; and Barry Haase, General Counsel and Secretary of BWP.

Senior Counselors 1970-1974

Commencing with the death of James Becker in 1970 and carried forward through the completion of Warburg-Paribas affiliation in 1974, the President, and indirectly through him, the management group, had the benefit of the counsel of two nationally known and effective senior business executives. John Lebor, a very old and respected friend of Jim Becker and for many years the Chief Financial Officer of Federated Department Stores, and the architect of that company’s well-admired financial structure and policies, was a particularly helpful and wise advisor to the President and management. The other advisor was Edward Blettner, formerly Vice-Chairman of the First National Bank of Chicago, and a broadly admired banking official and civic-minded Chicagoan. Both men were important, wise, behind-the-scenes counselors to a relatively young management group.

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