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Spins Off Lehman Brothers, Fourth Quarter Earnings Nearly Quintuple

January 25, 1994

NEW YORK (AP) _ American Express Co., completing a major restructuring, announced Monday it will spin off the Wall Street investment bank Lehman Brothers. It also said fourth-quarter net earnings nearly quintupled.

The Lehman Brothers spin-off, which was expected, closes the door on American Express’s costly foray into the securities business. Last year, it sold the retail brokerage operations of Shearson Lehman Brothers and its Boston Company division to Primerica Corp.’s Smith Barney, Harris Upham & Co. unit.

The latest move would leave American Express focused on its charge-card, travel and financial planning businesses.

″Our objective has been to bring Lehman Brothers to the point where it could sustain a stand-alone ‘A’ credit rating based on its earnings, capital structure and management strength,″ American Express chairman Harvey Golub said.

Golub said the sale of Shearson and the Boston Company ″helped to build the balance sheet and refocused Lehman Brothers on the corporate and institutional businesses that represent its greatest strength.″

A high-grade credit rating is critical for investment bankings, which need to borrow money frequently to sustain their operations.

American Express will spin off Lehman Brothers by issuing a special dividend to shareholders made up of common stock in Lehman Brothers Holdings, Inc.

Golub, in a telephone news conference, said debt-rating agencies have advised American Express that an independent Lehman Brothers would need about $1.25 billion more in capital, or $3.3 billion, for a solid credit rating.

The $1.25 billion infusion will come from three sources:

-$890 million in new Lehman common stock that American Express will purchase and turn over to shareholders.

-$200 million in new Lehman preferred shares, which American Express will buy and hold as an investment.

-$160 million in new shares that employees of Lehman Brothers will buy.

In exchange for the capital infusion, American Express will receive half of any Lehman Brothers profits over $400 million per year, with a limit of $50 million for each of the next eight years.

The company also said it will receive Lehman’s share of revenue and earnings from The Travelers Corp., the new owner of the Shearson operations. That should yield about $50 million before tax in each of the next three years.

American Express will use cash from its bank accounts for the operation, Golub said.

The new Lehman Brothers is expected to be launched in May or June.

Golub said the company decided against an initial public offering for Lehman because American Express had enough money to add to Lehman’s capital.

″Our approach here was to maximize value to shareholders, not to the company,″ he said. ″Since we don’t need cash or capital, it would not be a prudent thing to do with our shareholders, to raise capital.″

The move must be approved by regulators and the American Express and Lehman Brothers boards.

American Express reported earnings of $399 million, or 78 cents a share, for the three months ended Dec. 31, up from $82 million, or 15 cents a share, in the same period a year earlier. Revenues fell to $5.9 billion from $6.7 billion.

The company attributed the improvement in part to cost-cutting efforts in the Travel Related Services unit, along with higher spending by users of its green, gold and platinum cards.

It also attributed the results to record earnings of $358 million in the quarter by IDS, which sells mutual funds and other products to consumers, which gained from an increase in financial management fees and investment income.

For the year, the company earned $1.48 billion, or $2.92 a share, on revenues of approximately $22.9 billion. The results include a $30 million one-time gain from a change in the U.S. income tax rate.

That compares with profits of $461 million, or 88 cents a share, on revenues of $27 billion in 1992. The 1992 results reflected various charges for restructuring and the reduced value of real estate investments.

If Lehman is treated as a discontinued operation, profits for the fourth quarter would have been $291 million, or 57 cents a share, on revenues of $3.71 billion. For the year, net income would have been $1.6 billion, or $3.17 a share, on revenues of $14.2 billion.

American Express rose 62 1/2 cents to $31.50 on the New York Stock Exchange.

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