NEW YORK — Salomon Inc., buffeted by trading losses and runaway costs, Monday announced a reorganization that will involve the layoff of up to 800 employees from its Salomon Bros. brokerage unit and withdrawal from the municipal bond and commercial paper businesses.
The investment house, Wall Street's largest in total capital, said the layoffs and reorganization will necessitate a fourth-quarter charge of $60 million to $70 million. The firm disclosed that it will be only "marginally" profitable for the third quarter. The reorganization is intended to save as much as $150 million a year for the company, which last year earned $516 million on revenue of $6.79 billion.
In a statement, Salomon Chairman and Chief Executive John H. Gutfreund cited a "major and fundamental change in our strategy and tactics." Salomon, now the third-largest municipal bond underwriter, will phase out that activity as well as the underwriting of commercial paper--short-term corporate IOUs--and short-term bank liabilities such as certificates of deposit.
The company's new emphasis, he said, will be on such potentially high-profit areas as investment banking, including mergers and acquisitions, and on the global stock and bond markets. Salomon intends to be active in developing new forms of securities, Gutfreund said.
As recently as last year, Salomon was hailed as Wall Street's leading firm because of its canny maneuverings in trading and underwriting. But triumph was short-lived.
Heavy Losses Suspected
In its eagerness to exploit the growth of the London and Tokyo markets, Salomon overexpanded. Last year alone, the firm increased its professional staff by 40%.
And as costs soared, the bond market slumped, and competition sharpened.
Salomon is believed to have lost more than $50 million from bond trading in the first half of the year as interest rates edged upward, analysts say.
"The king of the hill is king no longer," said Perrin Long, analyst with Lipper Analytical Securities in Manhattan. "It shows, I suppose, that once you're on top, down is the only place you can go."
Analysts predicted that Salomon's move may prompt other Wall Street firms to reconsider their commitments to less-profitable businesses and overseas operations that have grown in anticipation of the "globalization" of securities trading. Already, Shearson Lehman Bros. has cut 150 people from its London office and a handful of staff members from its municipal bond operations.
"A lot of these businesses are almost loss leaders," Long said. "Now that Salomon has started things rolling, I wouldn't be surprised to see others drop out of them, too."
While many analysts were expecting a retrenchment at Salomon, some expressed surprised at the size of the cuts. The intended annual savings of $150 million "is a lot of dough," said John Keefe, analyst with Drexel Burnham Lambert in New York.
May Slow Salary Rise
Salomon said some of the employees facing termination have already been told, while most of the remainder will be informed before the end of the year. A company spokeswoman said most of the cuts will be made by dismissals rather than attrition.
The cuts represent about 12.5% of the Salomon work force and will be made through all levels of the organization, the company said. Analysts predicted that the employees leaving the firm will include some of Salomon's highest-paid executives, which may tend to slow the recent rapid rise in Wall Street salaries.
Giving added urgency to Salomon's reorganization was pressure from Ronald O. Perelman, chairman of Revlon Group, who last month said he might buy as much as 25% of the company. Before Perelman's announcement, Salomon had repurchased a 14% stake from its largest shareholder, Minerals & Resources, for $800 million and had sold a 12% interest to an apparently friendly investor, Warren E. Buffett of Omaha.
Salomon said Monday that it plans to sell off some assets and may then use the proceeds to repurchase some of its stock. Analysts said the repurchase plan may be motivated in part by a desire to fend off any other would-be acquirers, although Salomon officials denied that the repurchase was intended for that purpose.
A spokeswoman declined to identify the assets that Salomon may sell. But she noted that the company consists not only of the big investment unit, Salomon Bros., but also two small energy and commodities trading units.
Salomon said it named one member of its board, Bruce V. Carp, to have direct responsibility for controlling the company's expenses.
Analysts predicted Salomon would maintain a large presence in the Tokyo market, although it may cut back sharply in London.
Salomon's reorganization may also increase the moves by some firms to shift more of their operations out of high-cost Manhattan. The company said that, as part of its review of costs, it will consider such relocations.
A spokesman said the company has already moved its data-processing operations to Bergen County, N.J.
Analysts noted that the commercial paper market, always a competitive field, has recently become even more so. And the municipal bond business has been severely affected by the federal tax revision of 1986, which reduced incentives for purchase of tax-free bonds, and by increasing competition from commercial banks willing to accept smaller underwriting fees.
Salomon stock, which has slumped in recent quarters, rose 37.5 cents a share Monday to close at $34.875 in composite New York Stock Exchange trading.