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Phibro-Salomon: A Win-Win Deal

Phibro-Salomon: A Win-Win Deal

October 26, 2016

The seventh exclusive for Dynamic Commodities in my series- becoming a commodities trader

The basis for the marriage of Philipp Brothers and Salomon Brothers was a mutual need. The NY Times story on August 4, 1981, heralding the creation of what would become Phibro-Salomon told a story of two companies. One required capital to expand their business. The other sensed a downturn in its profit margins as the inflation era of the 1970s turned into the Reagan economic expansion era of the 1980s.

David Tendler and Hal Beretz were two of the highest paid executives in the United States in 1980. They earned $1.8 and $1.6 million respectively, which was a lot of money in those days. Philipp Brothers made $466.8 million on revenues of $23.7 billion in that year with the bulk of profits coming from oil and precious metals trading, as inflation pushed prices to highs. However, through the first six months of 1981, the company only experienced profits of $128.8 million on revenues of $12.6 billion. The profit margin in the commodities business had halved.

At the same time, as a privately held company, Salomon had a reputation as the most aggressive bond trading firm on Wall Street. The deal, a $483 million buyout of Salomon’s private partnership, yielded the average partner a cool $7.8 million payout. The managing partner of the company, John Gutfreund, received a lot more for his shares.

Philipp Brothers had made the strategic decision to add financial trading to its portfolio of commodities; the company opened a money and foreign exchange trading desk in 1980. Philipp Brothers was a global business with tentacles all over the globe. Salomon was a U.S. domestic bond and financial trading firm. The marriage between the two companies seemed entirely complimentary; both entities would operate autonomously but would be owned by a holding company. Management at Philipp Brothers sensed that a change was occurring in markets. They felt financial trading was going to be a very profitable venture in the 1980s. However, it seemed commodities’ trading was on the decline. Both Tendler and Beretz believed that the merger would put the two men in the driver’s seat of the combined entity for the future.

Tendler and Gutfreund became Co-Chairmen of the holding company. Furthermore, because Philipp Brothers purchased Salomon, Tendler served as the company’s Chief Executive Officer. At the time of the merger, the firm asked many Salomon partners in their 40’s and 50’s to leave. Consequently, they did not leave empty handed but with a fat check in hand. One of those partners was Michael Bloomberg. He went on the make billions in the data business and become the Mayor of New York City. Salomon cut costs and took the first hit because of the merger with Philipp Brothers. However, it would not be long before the tables turned on the company. The men who ran Philipp Brothers saw the fundamental change in markets coming. They did what was probably the best and most successful transaction they could at the time.

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At the time of the merger, the firm asked many Salomon partners in their 40’s and 50’s to leave.

Post Series: Origin Of A Commodities Trader

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