CHASE: BIG BANK, GRAND AMBITION
Why it's taking the plunge into equity underwriting
When buyout specialist Hicks, Muse, Tate & Furst Inc. wanted to purchase a unit of American Home Products Corp. last year, it needed $1.19 billion. It made one stop at Chase Manhattan Corp. for advice, loans, bond financing, and a cash infusion. But should Hicks Muse want to take the unit public, it would have to look elsewhere. That's about to change.
The nation's largest bank is ready to move into equity underwriting. It will be the first major U.S. bank with retail operations to try to go head-to-head with Wall Street in underwriting U.S. equities. Says Chase Vice-Chairman William B. Harrison Jr.: "If you truly want to be a global multiproduct player, public equity is something you have to have." The soft-spoken North Carolinian plans to build from scratch, but he doesn't rule out an acquisition.
For the past three months, from his roomy Park Avenue office, Harrison has been eyeing Wall Street talent to lead his equities charge. The corporate banking chief wants to hire one person from an established equity player such as Goldman Sachs & Co. or Morgan Stanley & Co. to run the whole show, but he'll settle for two co-heads--one to oversee sales, trading, and research and the other to guide underwriting. Then comes a sales team, a trading desk, and a research department, which at first will focus on five to six industry sectors. Probable industries include media, broadcasting, and telecommunications, areas in which Chase is strong and initial public offerings are likely. "In a two- or three-year time period, I hope we will have the beginning foundation of a very good equity business," says Harrison. In three to four years, he says, the business could earn a return on equity of more than 15%.
BIG LENDER. Chase has a number of skills to leverage into success with equities. It leads in syndicated lending and ranks 10th in underwriting high-yield bonds, after only three years of experience. It is a giant in private equity investments, trading, and private placements. It has a long roster of top corporate clients and a huge war chest of capital.
Becoming an equities leader will require a large investment over 5 to 10 years. A major equities house--with 500 or so salesmen, traders, and analysts--costs $200 million to $300 million a year, says Brown Brothers Harriman & Co. analyst Raphael Soifer. "It's not a cheap date," one banker quips. But Harrison says: "We are not going to spend $1 billion in the first two to three years."
Chase also faces growing competition. Dominant U.S. investment banks will not cede share easily. Large European banks such as Deutsche Bank and Union Bank of Switzerland have been spending millions to muscle into the market. Other U.S. banks, such as NationsBank, BankAmerica, and First Union are likely to jump into the fray.
These trends may push Chase to move faster. "It would be better off buying any firm around," says an international rival. Chase President Thomas G. Labrecque concedes that his bank doesn't have the decade it will take J.P. Morgan & Co. to hit the big time in equities. "In a market that is consolidating, we are going to want to get there faster than that," he says. Chase has studied buying big Wall Street firms, boutiques, and equity teams from rivals, but Labrecque says it is hard to integrate the diverse cultures. And Harrison says: "Buying something today does not make sense, because we would be buying at the top of the market."
Managing an equities shop is no easy task. It must be well integrated with other business lines to work. Relationships with issuers center on CEOs, rather than CFOs, who make the high-yield and lending decisions on which Chase has focused. And to get the overbrokered investor's ear, firms must learn to differentiate their product. "You have got to have a major league distribution. And the risk profile of the equity trading desk, these people won't have the stomach for," says Thomas W. Weisel, chief executive of Montgomery Securities.
Take J.P. Morgan. It began overhauling its culture in the early 1980s by turning stodgy bankers into dealmakers. Pay scales were revamped. First Morgan underwrote equities and other securities overseas. Then it struggled to transfer these skills back to the U.S., where it started by underwriting municipal bonds, commercial paper, asset-backed securities and corporate bonds. It was the first commercial bank to get equities powers in 1990 from the Federal Reserve Board as it eased restrictions imposed by the 1933 Glass-Steagall Act and the first to set its sights on becoming a Wall Street titan. Hundreds of millions of dollars later, Morgan still ranks only 16th among U.S. equity lead managers in 1996. It led 18 deals that year, vs. leader Goldman Sachs's 92.
Other bank equities players lag behind Morgan. Bankers Trust New York Corp., like Morgan a purely corporate bank, started in 1995 and has led four deals. Citicorp is focusing on the emerging markets. International participants have yet to make their mark. "No banks have really made it yet," says Soifer.
But that won't be the case forever. Down the road, if Harrison has anything to say about it, Hicks Muse will just as easily be able to issue stock through Chase as through an investment bank.By Alison Rea, with Lisa Sanders, in New YorkReturn to top