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Finance: INVESTMENT BANKING
THE SHOWDOWN IN GLOBAL BANKING
The sound of jackhammers and backhoes intrudes on the daily rituals of the London office of Morgan Grenfell Group PLC, where a gaping hole in the ground outside is hastily being transformed into a new headquarters. But the noise doesn't faze the staff inside. A dozen visitors with bulging briefcases parade through the revolving door in the space of 10 minutes. They are whisked off to private chambers by women in white blouses and gray skirts, who later bring them tea on lacquered trays. The smell of dealmaking permeates the air.
These are heady days for the 152-year-old London merchant bank. After watching American securities firms steal their clients for the past five years, Morgan Grenfell is hitting back. Germany's Deutsche Bank just moved its Frankfurt-based investment banking unit to London to merge with Morgan Grenfell, which Deutsche acquired in 1989. Now, the combined Deutsche Morgan Grenfell (DMG) is adding staff all over the globe, even raiding entire teams of specialists from Merrill Lynch & Co. and other rivals.
DMG is building trading floors the size of football fields in New York and London. And it's competing aggressively for business against Merrill Lynch, Goldman Sachs, and Morgan Stanley, the industry leaders. In a few years, DMG hopes to claim what it believes is its rightful spot as one of the five biggest investment banks in the world, and certainly the biggest in Europe. "I'm afraid the U.S. banks are going to have to get used to seeing Deutsche Morgan Grenfell more often," says Chief Executive Michael W.R. Dobson.
Hubris? Perhaps. But Dobson isn't the only one puffing up his chest these days. Europe's giants of high finance are readying themselves for a slugfest against the titans of Wall Street. The Eurofighters are a dozen deep-pocketed Swiss, British, Dutch, French, and German universal banks--ones that do commercial as well as investment banking. And they have embarked on a do-or-die campaign to buy out rivals, build distribution networks in the U.S., and open new offices in emerging markets around the world. Like DMG, all want a place in the top tier. "There's a determination among European banks to succeed, whatever the cost," says Luqman Arnold, head of global capital markets at France's Banque Paribas.
ELITE CIRCLE. If their strategy works, European banks may win back some of the financial clout and prestige they have given up to Wall Street since the 1980s. But the losers in this high-stakes game could suddenly find themselves in the same position as S.G. Warburg Group PLC, once Britain's most prestigious investment bank. It was subsumed by the far-larger Swiss Bank Corp. this year after an aggressive expansion in the U.S. weakened its financial condition and left it unable to recover from an aborted attempt to merge with Morgan Stanley & Co.
In going global, the Euros are up against formidable competition from the other side of the Atlantic. U.S. investment banks own 70% of the market for all debt and equity underwriting worldwide, acquired largely by managing debt and equity issues for U.S. corporations. European houses, reluctant to commit big bucks to dealmaking, were unable to penetrate this elite circle in past years. With little competition, the U.S. banks could command high fees for handling initial public offerings or big mergers.
The fees subsidized their overseas development at the Europeans' expense. But changes in the structure of the global securities market are every bit as important. Wall Street's oligopoly is breaking up, with large commercial banks moving into investment banks' territory. U.S. issuers want to reach a global investor base, and the appetite for international securities has grown enormously outside the U.S., as well as within. In these changes, the Europeans contend, lies opportunity.
NEW WAVE. Take BZW Ltd., the investment banking arm of Britain's Barclays Bank PLC. Since losing a bundle trying to sell stocks in New York in 1990, BZW has regrouped. It now has 1,500 people in New York trading currencies and derivatives and selling foreign securities to U.S. institutions. It's also making money worldwide, recording $200 million in operating profits in the first half of 1995. "The combat zone is the international issuer and the international investor," says CEO David Band. "We're not looking to go head-to-head with Wall Street."
Well, not on Wall Street's home turf, at least. What Band and other European investment bankers are aiming to catch is the new wave of globe-spanning deals now beginning to build. Over the next five years, the biggest issuers of debt and equity won't be Americans with inbred ties to Wall Street. They will be Eastern and Western European governments privatizing companies, or Asian and Latin American governments building power plants, dams, and roads. A $30 billion flood of telecom privatizations is due out in the next year alone, and the World Bank estimates that East Asia will need $1.5 trillion for infrastructure over the coming decade.
And who will invest in such ventures? U.S. pension and mutual funds will remain heavily involved, and Europe's securities houses will be pursuing them alongside their Wall Street rivals. But a new, global investor base also is forming, and it's entirely up for grabs. All across Asia, middle-class savers are getting into mutual funds. And European and Latin American governments and companies are forming pension funds to supplant state retirement systems. All should become markets for international securities--just what the Europeans love to peddle.
The thousands of European companies with growing U.S. eperations are another market the Euros don't want to lose. When German conglomerate Daimler Benz listed its shares on the New York Stock Exchange in 1993, Deutsche Bank and Goldman, Sachs & Co. led the deal. But the Europeans have U.S. corporations in their sights as well. U.S. companies are increasingly tapping global capital markets to sell stocks and bonds and finance everything from manufacturing plants to sales offices overseas. The Europeans are going after their business. "We get pitches constantly," says AT&T Treasurer Larry Prendergast, who has used Union Bank of Switzerland, Swiss Bank, and Deutsche to lead dollar-denominated bond deals in Europe. Monsanto Co. Treasurer Juanita H. Hinshaw, meanwhile, included UBS as part of a recent bond syndicate, the first time the chemical company chose an overseas bank to market its debt. "We were happy with their aggressive selling capabilities," says Hinshaw. "We had confidence they could sell our bonds."
UPSETS. While the U.S. battle is just beginning, the Euros are scoring some notable upsets in emerging markets. On Sept. 12, the World Bank chose DMG over Morgan Stanley to raise $1.25 billion for a hydroelectric power project serving South Africa and Lesotho. The decision came only two months after the World Bank allowed Deutsche--along with Lehman Brothers Inc.--to lead-manage the sale of $1.5 billion worth of dollar-denominated bonds.
Swiss banks have also been aggressive. UBS bested Goldman Sachs in last year's $600 million convertible-bond deal for Formosa Plastics Corp., a Taiwanese company that UBS previously served as a lender. UBS won the deal, a top executive claims, because his institution isn't "a suitcase investment bank," his term for the Wall Streeters who invade a country to make a pitch and then depart. And the Britons have enjoyed a measure of success. In July, BZW beat out Lehman Brothers, Salomon Brothers, and J.P. Morgan for the much-coveted lead role in the $7 billion privatization of Italian telecom group STET. BZW also was chosen to advise the Australian government in its effort to bring 22 airports to the stock market, and it is managing the flotation of Indonesian tin-mining company Tambang Timah. "They've made headway in Europe and to a lesser degree, Asia," Merrill Lynch Executive Vice-President Jerome P. Kenney says of his newly invigorated European competition. "They clearly have gained."
Still, the challenge for the Euros will be to combine the best of the Old World's client-focused style with the New World's emphasis on transactions. On both sides of the Atlantic, J.P. Morgan & Co. is considered a model. Morgan is one of the few U.S. commercial lenders to move successfully into investment banking. The Mexican government is showing its gratitude to Morgan for not turning tail during the peso panic. The reward: Morgan gets to help Mexico restructure its debt. It will also be exclusive agent in the sale of Pemex' petrochemical units in October. "They're not the kind of bank that does one deal, collects its fees, and is gone. They stay with you," says Ricardo Sada, who is treasurer of Hylsamex, a steel-producing subsidiary of the Monterrey-based Alfa conglomerate.
DEEPER ROOTS. Indeed, Merrill Lynch recognized the growing importance of having a permanent local presence rather than just a handful of people available to parachute into a country. In July, it paid $810 million for Smith New Court Securities Ltd. In addition to being Britain's largest equity brokerage and research house, SNC has developed deep roots in the emerging markets of Russia and Eastern Europe. Now, Merrill is considering further acquisitions in Europe, possibly a fund management group or brokerages in France and Spain.
Of course, Merrill isn't the only Wall Street house intent on maintaining its market share abroad. Goldman Sachs, for one, is sharing the global coordinator role with DMG on what's likely to be the biggest equity flotation in history, next year's $10 billion Deutsche Telekom privatization. Goldman is one of four lead bankers on Indonesia's $3 billion PT Telekom privatization later this year and advised the Dutch on privatizing KPN, the state telecom company.
Indeed, despite the Euros' early victories, the transatlantic battle for market share is likely to be long and bloody. A senior official at Bezeq Telecom, the soon-to-be-privatized Israeli telephone company, says that all the major U.S. and European banks bid for the lead role in handling the partial sale of the government's stake early next year. "But it was clear from the start we would be going with an American bank." Why? In addition to their deep knowledge of the Israeli market and their global skills handling telecom deals, the Americans also surpass the Europeans in distribution of new securities.
Overcoming this handicap will take time and money. Still, if the pace of privatizations and IPOs continues to pick up, there should be plenty of spoils to go around. And the fat fees that go with the coveted "global coordinator" role in global securities sales explain why the Euros are so eager to chase deals--especially equity IPOs. Underwriting syndicates are paid 3.5% of a worldwide issue's face value to cover the costs of managing an equity deal. But the global coordinator keeps half--or more--of the take.
ELUSIVE GOAL. As Wall Street and Europe slug it out, however, the payoff is declining. In some cases, bidders are discounting to win new business or get a foot in the door of a syndicate. The prospect of slimmer profit margins in their lucrative overseas business irks Wall Streeters, who already are angered at the Euros' use of million-dollar bonuses to lure away some of their best performers. "Given the practically unlimited amount of capital the European banks have, they can buy people, buy firms, and create lots of disruption with clients," says Peter Davis, a Booz, Allen & Hamilton Inc. partner. "The [Wall Street] view is, it will screw up a good thing." In fact, John Leonard, a London-based analyst with Salomon Brothers Inc., thinks that globalization will prove an elusive goal for many new players. "When everybody does it," he says, "it's usually a bad sign, that money's being wasted."
Even some top Euro bankers concede that only a few players will be able to assemble the right mix of capital, technology, and distribution to draw alongside Wall Street's heavies. But try to tell the folks at any European investment bank that some will fall behind. "You're going to see increased, fierce competition," says Marcel Ospel, the Swiss Bank investment banker who led the takeover of Warburg. Out of this competition could come the first realignment in international investment banking since Wall Street went global a decade ago. A lot of tears will be shed along the way.
How Europe Is Moving Into Investment Banking
Taking Over Competitors
Germany's Dresdner Bank acquired Britain's Kleinwort Benson for $1.5 billion. Rival Deutsche Bank consolidated global investment banking in London under the Deutsche Morgan Grenfell flag. Swiss Bank Corp. bought Britain's S.G. Warburg and 25% of Perot Systems, while Holland's ING took over Baring Securities.
Barclays de Zoete Wedd will run the $7 billion sale of Italy's state phone company, STET. Swiss Bank handled a $100 million financing for Mexican cement maker Apasco. And Union Bank of Switzerland won a $600 million bond issue for Formosa Plastics.
Seeking New Talent
Deutsche Morgan Grenfell ponied up big bucks to sign up Edson Mitchell, co-head of Merrill Lynch's fixed-income group. Barclays de Zoete Wedd hired Mark Seligman, former head of Warburg's merger advisory team, as co-head of corporate finance.By Paula Dwyer in London, with Bill Javetski in Paris, Leah Nathans Spiro in New York, Pete Engardio in Hong Kong, and Geri Smith in Mexico City