Throughout the Chronicle, the word "author” was used as an aid to achieving objectivity. Since this Epilogue reflects the author's personal views of the historical developments within A.G. Becker & Co., I, Paul Judy, will now switch to a personal tense.
As noted in the Chronicle Introduction, I intended the work to be a true “chronicle” of the Becker history – an objective, substantially chronological description of the development of the Becker organization and business as it evolved from its founding through to its death, without any evaluation and interpretation. Hopefully this intention was achieved.
Now, however, in this Epilogue, as I look back over the Becker history, I will evaluate and offer a critique. Let me, however, precede my commentary by noting that I have had the enormous benefit of hindsight. As has been said, “Hindsight (is) such a wonderful thing, though never around when you actually need it.”
Also there probably is some bias in my comments about the years 1965-78, when I was President and had a major influence on Becker's evolution.
So, as you read this Epilogue, consider yourself forewarned!
A.G. Becker's Historical Development 1893 through 1973
Looking back over these many years of the A.G. Becker & Co. history, it strikes me how significant one person can be in the life of a business organization. Some keynotes of A. G. Becker's business philosophy – high moral responsibility, clients first, honest dealing, employee career opportunity, conservative investing, thoughtful risk taking, and diversification - were put in place before his death in 1925 – and were carried forward by his missionaries in future years.
The application of these principles, of course, had to be adapted to the times and the environments in which the business operated. Over the life of the firm, over short terms, the business experienced a number of periods of growth punctuated by brief panics and setbacks. For instance, a world war followed in due course by major speculation, which then lead to a panic of major proportions, and a serious multi-year depression. Incomplete recovery was then followed by another world war which was followed by extensive reconstruction. Then, after all that, years on-end were marked by wide interest rate fluctuations superimposed on an underlying long term growth in businesses and national productivity, supplemented by substantial technological changes, increasing equity values, and the burden of a cold war. Each stage required different managerial guidance for the business to be successful, and to be able to move progressively forward into the next period.
The degree and character of the success of the business (including, to the contrary, its tragic demise) realized in each period of its some eighty-five years of existence, depended on the leadership the business received during that period.
So, why is it -- given how significant it was that A.G. Becker & Co. survived all the ups and downs taking place in the U.S. and the world economy from the firm's humble establishment in 1893, well into the 1980s -- so, to repeat, why is it that the business had such extensive problems during its very latest period of life, such that, in fact, it went into liquidation and out of business?
Fundamental Error #1
Looking back into the early 1970s, it was a fundamental error to seek and then complete an amalgamation with the Warburg and Paribas interests.
Why do I say that was our primary Fundamental Error?
By 1973, we had arrived in a thoughtful manner at the conclusion that employee capital had many motivational attributes, but it was not adequately permanent. Also, by that time, we concluded that we needed to increase our capital as well as achieve more capital permanency, we could see that in the future we would need to build our capital base more rapidly than employees could provide. We could see that transactions in the securities business would become increasingly principal vs. agency in nature, and more capital would be required to engage in such businesses on a sound but competitive basis. We knew that we had experience in dealing as principal, and could increasingly, successfully, and advantageously compete on that basis. So, aside from training more associates to operate in a principal trading environment, our shortfall was in capital area and not in the know how which would required to take and control risks, and compete profitably in the new world.
We also concluded that the world of finance was becoming more institutionalized, more professionally managed and serviced, and more global in character. We believed that we were equipped to deal with the former two changes, but that we needed to accelerate our experience and capabilities in addressing the latter, with respect to which, in the early 1970s, we had only put a toe in the water.
Like some other firms in the early 1970s, we gave thought, and took some steps, to exploring public ownership as a route to raising capital, both in the near and longer term, and for it to be permanent in nature. As noted in the Chronicle, we had exploratory discussions with Blyth & Co. (although I cannot remember specifically why we chose Blyth for such a discussion, although they were a well regarded managing underwriter). It would have been quite normal to have had similar exploratory discussions with a few other possible IPO managers. It is also possible we could have considered a self-managed deal; we probably had sufficient clientele for such an offering. It is my recollection that we did not consider that alternative, relying instead on the traditional idea and advantage of having an external manager, a good selling syndicate, and a firm price with fixed proceeds. We recognized that we could be a participating underwriter and distributor in such a traditional offering, and that it would raise questions if we were not.
We could also see the value of a public market for the firm's shares as providing growing liquidity to employee shareholders in due course.
One reason I think we failed to pursue the public financing and ownership path beyond discussions with Blyth was that public ownership of securities firms was at the time still not widely accepted as appropriate. Why? It was held that securities firms profits were cyclical, or too dependent on stock market values, or interest rate fluctuations, all of which meant greater uncertainty, less earnings predictability, and more risk. In early 1970 there were only a few publicly owned and traded stocks of securities firms.
But, at the same time, an alternative conclusion at which we arrived during the Board and Executive Committee deliberations at that time, was that it might be desirable, if possible, to obtain capital from some suitable foreign entity. Such an entity, by its investment in us and its role in global financial markets, would open to us access to those markets, directly and/or through our affiliation, and would enable us, with some experience, to better serve, depending on the business of our investor/partner, the international financial needs of US corporations and investors. The relationship would also provide, through us, special access by our investor to the US financial markets and related services. Various of our services also had international business potential, and we hoped such an affiliation with the right entity would help in their global expansion. For instance, we were already the leading US securities firm handling the NYSE securities transactions generated by clients of the leading Japanese securities firms. These relationships were established on our own, but assistance would have been welcomed.
When the idea of a possible affiliation with the Warburg and Paribas interests arose, it was immediately and enthusiastically greeted. Why? As summarized in the Chronicle, both institutions were preeminent in their local and regional financial markets; both had impressive connections in other parts of the financial world; the two organizations had already created various joint associations including in NYC, presumably targeting the US; and the two organizations had already established a number of US corporate clients. However, with respect to the latter, there was much greater potential available for their developing relationships with US businesses, as the world of finance was swiftly becoming more global. So, in many ways, the possible affiliation with Warburg and Paribas appeared to meet our primary goals rather squarely.
However, relatively late in the discussion and negotiation processes, we began to understand the vision which our European investors (particularly Warburg) held for a US operation with which they would have a close affiliation, if not, over time, control. That vision increasingly had the character of a mixture of the Kuhn Loeb and Lazard Freres organizations as they existed even into the 1950s. Old established clients would come or look to New York for their financing needs; there would be no need for anything that might be called “corporate development” or “active field calling and cultivation” or “professionally prepared proposals.” Relationships would be personal, maintained or built with the CEO; the CFO and his staff would be just that - “staff.” Corporate strategic actions would normally be led by the CEO, and that is the person with whom a relationship needed to be established. Merger and acquisition services, especially when the client was initiating a move, would be foremost at the strategic level with services to the CEO. The imagined firm might have a commission business serving a small number of wealthy clients, as an accommodation; a small research department, a small investment management business, some institutional trading and servicing, especially in bonds; but all this would be modest in terms of the people and profits of, and very subservient to, the investment banking activity and services. Affairs with clients would be conducted on a high level and in a mannerly way.
After a year or so of affiliation and working together as best possible – and giving favorable consideration to some transactions that clearly were a result of collaboration - it was nonetheless manifest that Warburg and Paribas, and especially the former, had little understanding, and were just not attuned, to the US financial markets in which Becker was deeply enmeshed. In our experience, most financing decisions affecting a corporation, were made by the CFO, as advised by staff, and not the CEO. In addition, with respect to strategic transactions, in which a large amount of staff work on the part of the investment banker and the finance staff itself is required, the work was carried out under the CFO's management and he or she had a large say as to which investment banker would be selected for a project. Firms coming in with an idea had a traditional advantage of being selected. The role of the CFO as a very sharp “purchasing agent” for financial services, was something that London (particularly) and Paris (to some degree) people could not understand. But as Professor Ferguson said: nobody at or connected with Warburg understood “the fundamental difference between the American and the European markets.” (Niall Ferguson, High Financier: The Lives and Times of Siegmund Warburg, The Penguin Press, NY, 2010, p 378). And, I might add, “they didn't understand how most financial decisions are made within the modern American corporation.”
Generally, the financial management tasks for medium-to-large sized corporations had become more and more professional, rational, fact-based, and analytical. Investment bankers with reputable firms who came in with good ideas, the capacity to execute, and clearly knew what they were talking about, could quite often earn the assignment never mind any traditional relationships. That's among the reasons that Becker was able to compete and obtain business, and did in fact have a long record of success in doing so.
Quite consistently, more and more major businesses were utilizing more than one firm to carry out financing projects, and to recognize and award expertise where it was proven to exist and be available in a proposing organization. Back then, too, public offerings were being co-managed by two or three vs. one managing underwriter; the traditional “lock” by a single, long-standing firm on a client's investment banking business was being broken.
Unfortunately, whether blinded by the preeminence of the two firms, or plain naivety, we didn't pick up on the clues which were being offered as to how the objectives and expectations, and the perceptions and assumptions as to US financial markets, held by Warburg and Paribas, were so much different from our own. There was a tremendous push by Warburg – the man as much as the firm -- to have the Warburg name forefront in the investment banking entity that was established. Even the pressure to have such a separate entity for investment banking, separating it from the commercial paper and other strong fixed income capabilities of Becker, should have garnered more concern and resistance on our part.
As summarized in the Chronicle, the corporate finance business of Becker was growing substantially each year before the amalgamation, including “stealing” some competitive and noteworthy relationships and assignments. It would take time, but Becker was headed for major underwriter status, if not increasing special bracket and co-manager roles along the way. These achievements were attained by very hard work; market knowledge, excellent, professionally delivered, analytical proposals; specializations; verifiable distribution and placement capabilities, and a service-based relationship orientation. For the most part, these achievements were not reached by close relationship with the CEO, although in many cases, our services did lead to his or her recognition and admiration. But these achievements and their upward trend were never acknowledged by Sir Siegmund, and very little by others at Warburg or Paribas.
I think Warburg and Paribas did later begin to appreciate how strong our credit securities activities were (especially as to pricing expertise and distributing power), and how much this capability contributed to our growing investment banking business. However, as to our dealer services business, well regarded investment research, top group institutional trading and execution abilities, pioneering and unique investment performance measurement services and expertise, and a high quality individual account business, neither Warburg nor Paribas showed any regard for these activities. Nor did they appreciate how they contributed to the firm's balance, profits and reputation, and their potential for further development and extension.
Coupled with the initiation of the affiliation, we also provided Warburg and Paribas an option arrangement by which they could take control of the firm. My memory fails me as to the background for agreeing on this option except that it probably was put forth initially by the Europeans as a condition of their interest, and we probably, for various reasons, found it acceptable, given the time and hurdles that would be involved. However, looking back, I don't think we gave sufficient consideration to the fact that we were giving an option to acquire control of the firm on a deferred, future book value basis, without any consideration of goodwill. Although at the same time, we were retaining a substantial minority interest for employee shareholders to participate in equity growth, on a book value basis, the same basis of older, long standing shareholders.
Did We Have Alternatives?
Sometimes, when faced with a decision, there are no real alternatives. That was not the case here.
First, we presumably could have “gotten along” with the capital we had. Even so, as they say, our capital could walk out any time. Given that possibility, after some redemptions for cash, we began to require a terminating shareholder, at the firm's option, to take a modest amount of cash and the balance in a market rate, junior subordinated note, payable in installments, thus deferring over time the reduction in capital.
More fundamentally, as noted in the Chronicle, we very tentatively explored the idea of going public n 1973. We could have pursued that track more extensively and, in retrospect, we should have. Every since 1970, when Donaldson, Lufkin went public, changes were taking place steadily in the corporate structures of Wall Street firms permitting greater diversification and increasingly moving toward public ownership and permanent capital. We had a business that had intentional diversification, a number of earnings streams, a wide mix in clientele, a good planning and risk control system, and a management system with a young team that was effective and would have gained the interest and support of both individual and institutional shareholders.
Alternatively, or in parallel, we could in all likelihood have obtained a private subordinated term loan from one or more insurance companies, or even have sold it publicly in conjunction with an equity offering, as above described. Such a loan might have had various restrictions that the firm would have needed to meet, but typically they were not onerous.
Had the firm pursued public ownership, we would have established a market for our common shares and put in place the opportunity for future liquidity for those shareholders wishing to have such availability. Such liquidity would likely only have been available in small amounts over periods of time, but that modest level would probably have been adequate for most shareholders. The firm would no longer be disrupted by redemptions; the market would become the source of funds for the terminating shareholder, probably with some firm-enforced controls. There would need to have been many details worked out for such a plan, but the basic feasibility was there.
Also, with a marketable security, acquisitions would have been available to Becker. We already had a favorable record of small acquisitions, and with the industry becoming more and more competitive, and as we grew, there would have been smaller businesses that would have wanted to affiliate with us. Our diversified operations would have permitted various extensions if not innovative additions.
By going public in the mid 1970s, we would have retained our independence and continued to grow steadily and profitably. What did we have to offer to investors?
- A growing investment banking business with attractive specializations.
- A leading money market and bond operation with a long tradition and large market share in commercial paper, and the support these capabilities gave to the investment banking business.
- An institutional brokerage business involving excellent order handling and executions, block servicing, and a well regarded investment research department, in total providing an overall services mix ranked among the top fifteen in the industry by various measures, along with international US equity business out of London and Geneva with a market share in the top five, according to a leading consulting firm.
- An individual account business of high quality.
- A unique set of investment performance measuring and evaluation services rendered increasingly on a cash fee basis with great potential (as pursued by others) for extension into investment manager search and institutional investment management.
- A wholesale order execution and clearance business servicing a significant segment of the securities industry with relatively limited competition.
- A set of exchange specialist operations, a specialist clearing operation, and a profitable proprietary trading business.
- A highly recognized “brand” among corporate financial officers. (The author remembers vividly a study completed by an outside professional organization surveying a large number of corporate financial officers as to the name recognition and reputation of various Wall Street organizations in the early '70s. A.G. Becker was in the top five. Unfortunately, I cannot locate that study in the archives).
With the advantage of hindsight, looking at our financial statements during the period 1974-1976, it would appear that we could have gone public on a valuation basis in excess of book value. On that basis, we would have been no worse off than the first injection of capital by Warburg-Paribas.
However, it would have been unlikely that an IPO manager, and the market, would have looked favorably, or even permitted, any secondary sales by lead shareholders. Probably, too, future secondary sales by employee/shareholders would have needed to be regulated by the firm. Later stages of capital raising, whether by additional public common stock and/or term indebtedness, would likely have been above a book value basis, upon which basis the Amalgamation Agreement provided for future common stock purchases by Warburg-Paribas.
Had we pursued becoming a publicly owned company, we would have framed ourselves as a “diversified financial services firm.” That characterization of Becker was true to our Mission Statement, and in fact true to our historical development. I think our diversification would have been perceived by investors as a favorable differentiation from many other Wall Street firms.
So Why Did We Pursue the Warburg and Paribas Affiliation?
Looking back, I believe we were too enamored with the possibility of affiliating with two leading investment banking firms in Europe, stationed in London and Paris. They were perhaps the two leading institutions of their kind, and they had already decided to work together on an international basis. Through them, we could envision being able to meet the international needs of US corporate clients with which we already had relationships, or with whom we had the objective of building future relationships. I think we believed that Warburg and Paribas connections would enhance our chances of more rapidly developing such relationships. I think we also assumed that the affiliation would advance our international marketing of securities of U.S. issuers out of London and Geneva, and other cities in which we might establish offices in the future.
These views, per se, were probably reasonable. During the earlier part of the relationship, we were in fact collaborating successfully on various projects, and we were “marketing” our affiliation and our partner's capabilities with good response. Had we stayed independent and met our financial needs as described above, we would not likely have had an overseas affiliation. Perhaps some extensive but not complete discussions with Warburg and Paribas might have resulted in doing later business with each as we had done earlier with N.M. Rothschild in the case of the Mohawk Data Sciences financing. With a singular investment affiliation we more-or-less foreclosed working with other institutions. Had we pursued the same comprehensive affiliation with almost any other European organization one might think of, it might well have resulted in a fundamental error, as compared with the public financing alternative and the maintenance of our independence.
What we didn't adequately pay attention to, investigate, clearly evaluate, and act on, was that Warburg and Paribas had in mind for us to become an organization that was truly incompatible with what we had in mind for our organization. Furthermore, their view was based on an unrealistic understanding of the U.S. financial markets and corporate finance decision making.
Finally it was clear, primarily through communications directly from Sir Siegmund, that he felt the only way to organize and operate an investment firm was the way in which S.G. Warburg was organized and operated. Central to the Warburg system was a procedure by which each partner caused to be prepared a written report of his daily communications and activity, which was submitted to a central secretariat, consolidated, and then widely distributed in time for partnership discussion at the group's meeting the next day. Though admirable for that firm's purposes, and for subtle control by Sir Siegmund, it was not a system that, at the time, had a value, application, or practicality within Becker.
As Prof. Ferguson said:
“. . . Warburg essentially [was] trying to turn a financial factory into a boutique. Wall Street was different, and this Warburg never seemed to grasp. With the hinterland of a vast and homogeneous US economy, American finance was already significantly more commoditized than anything in Europe. Here there really were economies of scale, in the sense that a very wide, very deep capital market allowed all forms of credit and debt to be bought and sold in more standardized forms than Europe. Big institutional investors … played a far more important role in NY than in London . . .” (Ferguson, pp. 375-6.)
I think we assumed that Warburg and Paribas would wish to solidify a possible relationship with Becker through a capital investment which would also meet our objective of obtaining more permanent capital, lay a basis for unique international cooperation, and be a very profitable investment. Because we needed capital rather than having an excess, we did not give serious consideration, or do any analysis, about investing in Warburg and/or Paribas. We made the assumption that we would absorb their joint New York operation into our New York office. We knew this company was owned fifty-fifty and we assumed, correctly, that would be the basis for their investment in Becker.
As I may have mentioned earlier, it is not clear, looking back, when and how the arrangement that Warburg-Paribas, through staged investments, would gain the option for legal control of Becker. I do not remember any key colleagues having a concern about that; I do not remember personally having a concern. It must have been my and others' assumption, and W-P's, that the terminal basis for the investment and extensive collaboration - after an interim period - would likely be that the Becker business would become part of the overall Warburg and Paribas system. Once again, we must have fallen prey to the prestige of these two organizations.
I think we were missing available clues as to their intent to refashion Becker into an S.G. Warburg clone – an haute banque, as Sir Siegmund would say. That, at least, was Sir Siegmund's goal with which Paribas, especially Moussa, must have “gone along”. We certainly didn't quiz them on this topic. And thus, looking back, we were relatively naive about their intentions. With ultimate control - at least on paper -- they could finalize that conversion.
I do think we provided an extra motivation to the Europeans to take control of Becker sometime in the future, by dealing in net asset values. The 1970 Amalgamation Agreement provided that their final purchase, giving control, would be at a premium over net asset value, the amount of the premium depending on the firm's profitability during the interim period. This notion of a premium for control disappeared in the later amendment to the 1970 Agreement. At the time, transactions in securities firms were being based on “market values,” which were generally in excess of book value. It was as if we had no “good will,” of which, in fact, we had an abundance. I think the Europeans must have felt they have a favorable margin in their Becker investment (which of course, in the end, didn't provide any cushion).
Once Underway, Could The Affiliation Have Been Reversed?
Looking back, the answer is “yes.” However, that answer is subject to two basic assumptions:
- My key associates would in due course have had to come to the conclusion that we made a big mistake in making the W-P affiliation. Looking back at the period 1974-1977, there were enough positives taking place in the affiliation that perhaps the fundamental issues might not yet have been sufficiently obvious or objectively evaluated. It might have been difficult to rally support for a concerted and unified reversal effort, although the top management situation being supported especially by Warburg, was becoming intolerable.
- Instead of deciding to retire, in part due to the stresses of the affiliation, I would have had to open my eyes and see that the affiliation was fundamentally flawed, and would very likely not work out favorably. I would therefore have had the responsibility to stay on, and with associates, implement a divorce.
My decision to retire began to form in early 1976 and was announced in April 1977. It was the result of a number of considerations. First, I was physically and mentally tired from the extensive work hours and travel I had been putting in. (I have been shocked by a recent review my daily and weekly calendars in the years 1968 through 1973; I was on the road almost every week.) Of course, commercial travel back then was in fact easier than today. One could call ahead a few hours in almost any major city, obtain a plane to another city, and be on the plane promptly without a lot of hassle. This availability, however, could also lead to intensive travel. A dinner meeting in Chicago, followed overnight by breakfast in Los Angeles, followed by a lunch and dinner in San Francisco, and breakfast the next day in New York. Looking back, I should have slowed down, exercised more discipline, and taken more time off. When my wife and children say that I was never home, they are absolutely correct.
By 1976, the agenda of Warburg-Paribas, and particularly of Warburg, began to be apparent. The nudges and queries began to be wearing, in part because some were surreptitious, never really up front. As Professor Ferguson says in his very telling book - communications from London tended to be of a “pestering” and “sniping” character.
Also, since the death of James Becker in 1970, I hadn't really felt that I had a “boss.” I felt a keen responsibility to share key decision making with close associates – Wing, Donahue, and Moss. That step taken, I felt the final decision was mine, and I would receive support for it. With London and Paris now in the picture, I had the feeling, right or wrong, that we were not any further an independent company, and some of my/our decisions would be second guessed. And they were.
There was also a continuing nagging suggestion that the firm's headquarters be moved to New York, and implicitly, if I was to be head of the firm, I should move there (again). I saw no need for the headquarters to be in New York, having for many years fostered the development of a substantial operation there, with key principals who made decisions suitable to their position and authority throughout the firm, never mind where they worked. I felt that we needed such principals in each main office, including, for instance, Los Angeles and San Francisco. There were good reasons to have a head office in Chicago which among other others, it added to our differentiation and was tied into our history. As far as I could tell, most colleagues were comfortable with our office structure. However, this again was the Wall Street mindset of the Europeans. Somewhat in connection with this matter, I don't remember Sir Siegmund ever visiting Chicago and rubbing elbows with some of the country's leading business people.
My overall feeling soon led to the consideration of personal alternatives, as I mulled them over. It was at this juncture, that a reversal of course might have been initiated, if I had mustered the will and courage to propose and lead it. Harking back to the Ferguson book, it was about this time that some key people at Warburg were wondering what they had gotten into, with me personally, and with Becker as a whole. Messages quite apparently from Sir Siegmund were increasingly being carried by Geoffrey Seligman and David Scholey, and perhaps by Peter Darling. While preparing to succeed de Fouchier, Pierre Moussa steadily conveyed his criticism of our not being as active and successful as we should be in the merger and acquisition area. And again based on some details in the Ferguson book, Paris and London were in communication expressing disappointment with developments in their U.S. affiliate, but also were probably beginning to have second thoughts about their own master affiliation.
A component in implementing a course reversal would have been a public offering primarily of common stock, along possibly with some term debt or preferred stock, sufficient to buy back the Warburg-Paribas interests, or a goodly portion thereof. To show good faith, I think we could have assembled a few million dollars from a key group of officers and employee directors. We might have needed to pursue such a buyback in installments, by contract, and/or through the issuance of fixed income securities to Warburg-Paribas, as well as leaving them with a small minority interest. Obviously our operating results would have to have been reasonably favorable at the time.
I think a reverse course program could have been negotiated with the Europeans. They were not happy with their investment. With the advantages of hindsight, they would likely have been receptive to a redemption. For me, it would also have been reverse course decision. I think such was feasible at the time. I was 45. It would have meant putting my head down for another 5-8 years, and maybe doing a better job of “pacing,” and/or taking other actions as described below. I think Jack Wing, Jack Donahue, Fred Moss, Bill Cockrum, Dan Good, and Barry Friedberg,and then other key managers, would have been ready to assume even more senior roles, and would have valued reversing course, building an independent, publicly owned, diversified financial service organization. It could have been exciting and motivating for everyone.
What in Fact Took Place?
My decision to step down was a disconcerting surprise to my close associates. To the Warburg top management, it was apparently a pleasant and favorable surprise, pretty much as confirmed by Ferguson's account. To some in Paribas, particularly to Fouchier, my decision was apparently authentically disappointing, as it came across in a post-decision lunch I had with him Paris. I always admired, and felt a certain bond, with Fouchier. I was never sure how Moussa felt about the matter.
My senior management associates were taken back by the decision in part because it was not clear who might take over, especially as between Wing and Donahue.
Fairly shortly after my decision, I proposed to Seligman and Moussa, that Wing and Donahue succeed me in a joint Presidency, with specific responsibilities to be worked out. The argument I received back was that joint leadership positions hardly ever worked, that neither man was qualified for the singular role, and that neither was an “investment banker,” nor had the “presence” needed in the CEO role. Further, they felt that two persons, operating in two distant offices, would have to have a very high mutual regard and trust for each other's judgment. Given that, they felt that the odds of such an arrangement working out favorably between these two men was, in their opinion, very low.
There was little discussion or disagreement about promptly setting up a search committee consisting of some key managers including Wing, Donahue, and Moss, if I remember correctly, along with some key overseas persons, and Ira Wender. I was not privy to the Committee's discussions, but from what I learned, Wender and the overseas persons were rather prone to propose people of prominence, who would bring luster to the firm, and high level corporate perception, but who would not likely know very much about the securities business, relying instead on Wing, Donahue, and Moss, and their underlings, for operational management. I believe a search firm was retained but I can't remember the name, and the archives are of no help.
Search Committee Conclusion
Before long, the search, I was told, was clearly becoming unsuccessful, and key managers were getting restless, knowing that none of the existing management personnel had the support of Warburg-Paribas to take over CEO responsibility, singularly or as a team. It was then someone's proposal, presumably from within the management group, that Ira Wender be considered for the job. That idea soon met the approval of all the Committee including the representatives from Warburg and Paribas, and it promptly became the recommendation of the Committee to the Board.
As was known widely, when I heard of the recommendation, I was dismayed, based on what I judged about Ira -- his character, likely management style, and lack of experience. When the matter came before the Board in January, 1978, and with Ira present, I registered my disagreement with the recommendation. But, of course, my view was considered to be biased and a bunch of sour grapes. With my key management colleagues supporting the choice of Ira, I had little chance of reversing the thinking. Not surprisingly, the Board voted unanimously, except for my vote, to elect Ira Wender as President and CEO effective February 1, 1978.
From that day forward, my views about management matters were considered to be “out of touch.” I was “damaged goods.” My questions or concerns were not given any weight, even by some of my old colleagues then on the Board, on which I continued to serve.
Critique of Next and Final Developments
The balance of the story from here forward is reasonably well documented in the Chronicle. During the early and mid-part of 1978, it appeared that Ira was working well with the top operating management group – Wing, Donahue, Moss, Good and Friedberg – supporting, encouraging, and coordinating their activities, getting to know them, and learning more about the operations over which they were in charge. Wender made some changes to reestablish the name A.G. Becker & Co. to more prominence, simplifying various marketing efforts involving entity naming. He moved Jack Donahue and Jack Wing into top titles within the new AGB and organized key managers under them into a Management Committee.. I remember thinking that perhaps Ira was a better manager than I had judged him to be, and that, maybe, everything would work out more favorably than I feared in the prior December.
However, at the end of 1978, Ira hired Bill Kane, as a marketing assistant, and in early 1979 hired Michael Hilton, essentially as a financial planning assistant. Rather promptly, both men were assigned responsibilities for which they had little experience involving tasks carried out by others who did have such experience. Soon, neither man had gained the respect not only of the senior management but also people at the supervisory level; both were elected Senior Vice Presidents. The effect of these two hires on morale was rather promptly very unfavorable.
Toward the end of 1980, probably with the push of the overseas shareholders, Jack Hyland was brought in as a Vice Chairman, apparently as a part of program to help beef up the investment banking business. Hyland was probably a good man, but the accumulation of these personnel moves by Ira, the growing personality clash between Wing and Wender, and probably a continued overseas pestering of Wender about Becker's non-investment banking activities, encouraged Ira to express displeasure with Jack Wing's performance and request his resignation, thus essentially terminating him. My position about this event is covered in the Chronicle, and at the time, as well as by hindsight, this was, in my opinion, the adverse turning point of Ira's leadership within Becker.
The die was cast. Additional key managers would resign; persons hired to replace them would not be sufficiently and rapidly familiar with the operations of which they were put in charge. Internal promotions would in some cases work out but, in other cases, there would not be a readiness for the new position. Control and oversight began to slip.
From about early 1981 forward, through, to, and for a period just after Wender's termination in July, 1982, the firm became unmanaged if not unmanageable. Between the disruptive effects of Kane and Hilton; uncertain decision making authority; my resignation; the financial markets themselves; an unsuccessful merger discussion; Paribas's nationalization; Wender's engrossment with Pargesa and Paribas Suisse; Wender's emotional and mental health; and the resignation of Donahue and Moss, the firm was not being managed. I described these developments in the Chronicle. As I reviewed them, I felt great sympathy for my many former associates who were trying their best to deal with the adverse dynamics that were underway.
The European partners attempted to stabilize the situation with an increased capital investment and by taking a controlling 50% interest. It was hoped, too, that John Heiman, newly recruited, working with Dan Good, would help stabilize the organization. In my opinion, there was too much senior management lost and a significant lack of clarity in authority and decision-making for John and Dan to be very effective in their announced senior positions.
With Wender out, at least Kane and Hilton were terminated. By now, developments in the Becker organization and its financial results had caught the eye of news media. The publicity was adverse. People in any organization read the newspaper and, along with what they see around them, they can tell what's going on, even if formal internal communications are censored or incomplete.
The mess got messier. Holland and Nelson were recruited back to the firm, but their management continuity had been broken. Some new hires filled key roles, but obviously with no Becker experience and unsettled personnel to manage. Harris moved to New York. A surprise capital deficiency was covered by an emergency advance from Warburg. In the midst of all this, Sir Siegmund passed away and Scholey was elected Chairman. Kopin resigned. As 1982 closed, Becker's footings edged up to over $6 billion with 33:1 leverage; the business had taken on substantially more risk.
Developments in 1983 and into 1984 were just as hectic, if not more so. Herve Pinet settled in New York, to help bolster central leadership, but really didn't know the business. John Levy and Bob Karlblom resigned. In part at the request of various key employees, but probably more reflective of a long-standing interest, Warburg sold its Becker investment to Paribas for $33 million (per Ferguson, pp. 391). With this purchase, Paribas took majority control of Becker. Yves Haberer, French government appointee to head the nationalized Paribas, joined the Becker Board – now called Becker Paribas. Haberer began to familiarize himself with the Becker situation.
John Wilson and Leo Hindery were hired into key management positions, but it was late in the game, and their qualifications were not clear. Soon, some key employees began to push Paribas to consider buying out the employee shareholders; it was pointed out that employee capital was now supporting the strategic interests of the French government. Herve Pinet was put fully in charge of Becker Paribas and laid out grand plans for Becker's expansion. In an early executive action, Jack Kugler was hired away from Merrill Lynch to head Becker's fixed income operations, despite very adverse, confidential information about his proclivities. And just at year end, the NYSE fined Becker $300,000 with respect to an unreported capital deficiency. By this time, too, Becker's funds evaluation business and NYSE specialist business had been sold.
In early 1984, in a rift with Pinet, Dan Good left management to return to Chicago and reenter investment banking. In March, with interest rates at record highs and great volatility, Becker, via Kugler, took major positions in the Treasuries market and faced and/or incurred large financial losses. This and other considerations led Paribas to consider more seriously the purchase of employee shares (and, for that matter, the sale of the whole business). Meanwhile, in a further dismantling, a major portion of the dealer services business was sold to DLJ/Pershing. Media rumors were rife.
Employee shares were in fact purchased by Paribas in April, at which time Dan Good resigned. At this time, Jim Wolfensohn was retained to explore the sale of Becker.
The rest of the story is in the Chronicle, although some aspects are not sufficiently emphasized. Kudos go to Dan Good for attempting to provide leadership in such a sustained vacuum, and to Barry Friedberg, for staying the course to the end, bringing some order to the situation, and protecting the interests of a number of colleagues. The same goes for Randy Harris. Kudos also go to Paribas for being willing to take responsibility for the plight and potentially significant losses of employee shareholders when under the control of the French. According to archival papers, employees received for their shares substantially the same value as Warburg received on its earlier sale of Becker shares to Paribas.
However, there was, apparently, little concern by Paribas to assist those employees in the parts of the organization not of interest to Merrill Lynch, toward developing some kind of orderly individual or team out-placement program, and/or some kind of terminal compensation. Such a plan may have in fact been put in place. It is not clear. Even so, such a program may not have been of interest to all employees, such as individual account brokers. But even people in those roles, and particularly people in various operations positions, might have benefited from a more organized and thoughtful job placement and counseling program during what was a period of liquidation. Overall, the final demise of Becker did not have an ending about which one can be very proud.
Summary: Fundamental Error #1
As just reviewed, the consequences of the amalgamation with Warburg and Paribas were extensive and in the end, tragic. These results could have been avoided by more front-end diligence and less mesmerization on the part of those of us making the decision to affiliate. What appeared on the surface to be a good idea should have been more deeply investigated and more thoroughly evaluated. We should have compared our goals, and our knowledge of the US financial markets, with those of Warburg and Paribas, and especially the former. We should have been more conscious of the value of our independence. Alternatives should have been more completely explored. And when it became obvious that the affiliation was clearly a mistake, and the time was ripe, we should have faced up to the evidence, embarrassments aside, and taken steps to reverse course.
Fundamental Error #2
The summary of Fundamental Error #1 segues directly into another major error which was made. In the early 1970s, I should have given more careful thought to the effect of my resigning on the course of events. We were clearly entering a period of change, either becoming a publicly owned company and/or increasing our capital from private sources. And before that, I should have slowed down a bit from my grueling and intensive travel and whirlwind business life, and avoided the sense of “burning out” which took place as we approached 1974.
There was perhaps another facet to this error – inadequate ambition. It is possible that this condition was not remedial. Looking back, by this stage of my career, I perhaps felt that a lot had been achieved, and there were other things in life to be pursued and experienced. In other words, I had lost or used up some of that ambition that had earlier driven me. At any rate, maybe, for whatever reason, some of my ambition was dissipated, and I may have lacked the drive to take Becker to greater heights – heights that clearly the organization had the opportunity to reach. Many people in the organization probably had high level ambitions, larger than mine, and to an extent, I let them down by throwing in the towel at such an early and vibrant stage of Becker's growth.
In the early to mid-1970s, the business needed someone to lead it forward to a new level over a period of probably five or so years, and probably as a public company. I was probably the person best suited and most experienced at that time, for that task, if I could get my energy back up to the level which would be required. Retirement thinking should have been postponed. I should have conjured up that needed energy and fresh motivation, and moved forward with some broad new personal objectives, as next described.
Fundamental Error #3
Seguing once again from a prior error, we (I?) failed, as an organization, to put in place in about 1970, an overall “future management identification and development program.” Some (people at Warburg) severely criticized me for not “having a successor.” Actually, the problem was broader, and existed throughout the organization. We were subject to a broader criticism. We did not have a process of systematically identifying and moving along people with general management talent. There was no question the Becker organization attracted many people with well above average intelligence and competence. We had a personnel department with able leadership and staff, and we could have helped to create a system of identifying and positioning such persons over a five to ten year period, so that in about 1980, as a public company, we would have developed a number of top management candidates.
We did have, favorably, a willingness, when plans or projects indicated a need for central guidance, to put somebody in charge, give them the authority to act, and the resources with which to do the job. However, this was a responsive rather than purposeful organizational attribute. It was better than nothing, but not what we needed. We didn't have any overall approach to management training, and by identification and movement, creating a few broadly experienced younger men and women for senior general management roles. Thus, our development of successors was uneven and hit-or-miss. By the late 1970s, had I stayed on as CEO through that date, we should have had a small high-talent pool from which my successor, or potential successors, could have been drawn. Had we stayed independent, or moved back to that status, it would have been of immense value to have had that pool and identified, selected, and groomed a successor in a thoughtful process.
With such a management development system in place, also, we might also have taken that need more into account in our hiring processes.
Looking back, I have to conclude that, in fact, neither Jack Wing nor Jack Donahue were singularly suited to succeed me (even though Jack Wing went on to achieve great success as a CEO of ChiCorp). A joint assignment would have been difficult for each of them but might have worked out despite the risk. However, by the late 1970s, with a small pool of potential top managers, and with some grooming along the way, at least one of that pool would likely have stood out and have had the makings to be the general manager of a then much larger and even more profitable A.G. Becker & Co. – a large, successful and distinctive diversified financial services organization.
Concluding Thought: Wonderment? Reverence?
I have delved rather deeply into the history of Becker – its founding and founder; the trials, tribulations, and integrity of A.G. Becker; his successors carrying on through thick and thin; the generational transfer; and then on to non-family management. In this process, a business begins to take on a special meaning, and something maybe to preserve, like a historic landmark. One begins to wonder what special duties and responsibilities we all have to keep, protect, and care for such a business vs. it being just a vehicle for gainful employment, and investment risk and gain.
Over the years, well forward of its early days, and into the 1980s, the capital of Becker turned over, perhaps at least three to five times? I estimate that over Becker’s eighty-five year life span perhaps as many as ten thousand employees passed through its portals. Given the special history of Becker, did all those employees treat their employment and employer with sufficient awe? Should employees have some duty to their employer’s longer term existence, such concern being over and above giving a good day's work for a good day's pay?
As a shareholder, is there some obligation, as best possible, to insure the long term survival and preservation of a company in which you are an investor -- to do your best (somehow) to insure the company's longer term well being, sustained good will, and economic life?
What is the obligation of management in such a company? And, in the case of Becker, did those of us in management carry out whatever obligation we had?
Should the leaders of Warburg and Paribas, as investors in Becker, share in such wonderment, or, are they excused, since they had their own concerns about their own long established institutions?
Through the years, employment at, and an investment in, Becker resulted in a good deal of wealth for many persons – as employees, shareholders, and beneficiaries of pension and profit sharing funds. That wealth funded a very good life style for many, and for others, it provided basic family security, generational capital, and, in many cases, a good education for children. In some cases, the creation of a modest amount of wealth funded a stake in an entrepreneurial business which then created quite substantial wealth for the founder.
For all those of us who have benefited from this wealth creation, do we owe something to those in the past who brought Becker into existence and nourished it along for us to then to become employees, managers, and investors? Or was this wealth substantially created by our own efforts. Although we salute those before us, we all worked hard, put our talents and creativity on the line day in and day out, took risks as we invested our savings, and thus earned our cumulative rewards - or was there something else?
Maybe the real value we all gained from our Becker experience had less to do with the wealth creation so many enjoyed, but more to do with the sheer companionship, camaraderie, and excitement to which we looked forward to each day. Becker was really was an astoundingly good place to work. Maybe that is truly something about which we should be very thankful, and cherish the legacy of our predecessors for the culture they initiated.
Paul R. Judy, February, 2018
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