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Investment Banking's Big Chill in Europe


On a winter morning at London's Canary Wharf office complex, one of Europe's top investment bankers doesn't bother to hide his frustration at the slow pace of business. "If anyone tells you he is too busy to see you these days, he is kidding," he says.

After a terrible 2001, things were supposed to be picking up in the investment-banking world by now. Few were surprised when the value of European mergers and acquisitions plummeted last year, to $549 billion from $1.012 trillion in 2000 and $1.521 trillion in 1999. But bankers, afraid of missing out if the good times suddenly returned, cut staff by only 10% or less. The resurgence, however, has yet to be sighted: All major lines of business are down this year. Says Jeremy Sigee, a banking analyst at Schroder Salomon Smith Barney in London: "2000 was a boom year for equities, last year was a boom year for fixed income, this year is a boom year for neither."

In fact, many firms are already writing off 2002 as a lost cause. Richard Ramsden, a banking analyst at Goldman, Sachs & Co. in London, thinks that M&A will be off 15% to 20%, equity issuance flat, and fixed income down by about 7%. The major mergers--in the $10 billion-plus range--that generated huge fees for bankers seem gone with the last century. Now, banking executives, nervously ensconced in their newly built London edifices, are trying to work out how many more people to cut. Word is that another 10% or so might be laid off soon. Pay for high-priced bankers has been slashed by even more, with 2001 bonuses, which are being paid now, down 50% from the year before and those for multimillion-dollar rainmakers down 70%.

If the doldrums continue much longer, a number of firms might be forced out of the business, or at least out of Europe. A generation of would-be bankers lured by visions of vast wealth may find they went into the wrong profession. "This year is tough, and European markets have not shown the same degree of resilience as the U.S.," says Peter A. Weinberg, the London-based co-chief executive of Goldman Sachs in Europe. "The ball in Europe bounced higher, now it's bouncing lower."

What a change from a couple of years ago, when Europe vied with Silicon Valley as investment banking's most lucrative frontier. Beginning in 1993, deal volumes grew sevenfold, until by 1999 they matched American levels. Brokers and fund managers got rich, too, as Europeans acquired a taste for stocks. Smelling a golden opportunity, U.S. firms such as Morgan Stanley & Co. (MWD) and Goldman (GS) revved up their European operations, hiring thousands of locals and shipping planeloads of Americans across the Atlantic to educate the Europeans in such black arts as securitization and credit derivatives. Goldman, for example, boosted its staff in Europe by 41%, to 4,838, between November, 1999, and November, 2000.

Then came last year. CEOs got the jitters, markets plunged, investors got scared off. Goldman says its pretax earnings in Europe for the year ended in November, 2001, fell by 60%, to $906 million, on revenues of $3.96 billion. Morgan Stanley saw its 2001 European profits fall by 30%, to $1.1 billion, on revenues of $3.99 billion. A large chunk of those profits likely came from trading, asset management, and other businesses outside investment banking. In their core investment-banking activities, such as merger advice and equity issuance, even the most successful banks are struggling to earn a profit, executives say.

Suddenly, bankers are grousing about how tough it is to make money in Europe. Doing business across a patchwork of countries with different languages and regulations boosts costs. Also, competition is more intense. The U.S. is largely carved up by an oligopoly that includes Goldman, Morgan Stanley, Merrill Lynch (MER), and Citigroup (C). These banks are present in Europe in a big way, but there are also sizable pan-European players such as UBS Warburg and Deutsche Bank, plus big local banks such as France's BNP Paribas. This means that not only are fees for equity raisings, bonds, and M&A lower in Europe than in the U.S., but that the big global banks get their arms twisted by clients to share deals with the locals. European companies are also more likely than their U.S. counterparts to demand that investment banks make loan commitments to qualify for well-paid advisory work.

The good times are unlikely to return soon. Many analysts now think that the 20% annual growth rates that investment banking chalked up in the boom years were an anomaly. Even modest new growth could be many months away.

Some hopeful bankers, citing renewed business confidence and the recent upswing in the equity markets, contend that the worst is over and that dealmaking may soon r?sum?. "There is a lot of dialogue taking place," says Michael D. Uva, head of European investment banking at Morgan Stanley in London. "CEOs are asking whether a target company's stock has stabilized and what theirs will do in the case of a move." He sees more deals in utilities, which is about the only hot sector now, and financial services. Goldman's Ramsden thinks that when industry growth does r?sum?, it will more closely match the long-term trend of about 2.5 times gross-domestic-product growth. At such a pace, it might take European M&A volumes a decade to return to the 1999 peak.

At the big banks, executives hope that tough times will force smaller competitors out of business. Both corporations and asset-management houses are pruning the list of banks that they use for corporate-finance advice or securities trading. Managers at the big banks don't see how medium-size institutions can afford the enormous costs of maintaining full-service businesses if they receive only a fraction of the fees of their larger competitors.

Among the investment-banking operations that look vulnerable are those at Dresdner Bank, ABN Amro, and Commerzbank--smallish players that have failed to crack the big leagues. The banking titans are also hoping that competitive pressures will force a retreat by more formidable opponents such as Credit Suisse First Boston and J.P. Morgan Chase & Co. (JPM) But so far these banks continue to be a factor in the European market. Indeed, J.P. Morgan is second in this year's anemic European M&A league tables, with $16 billion in deals through Mar. 12, and CSFB is third, with $12 billion, according to Dealogic. Morgan Stanley leads with $20 billion. But it is probably too early to draw any conclusions. Last year, the usual suspects--Goldman, Morgan Stanley, and Merrill--took the top three spots in Europe, with CSFB and UBS Warburg rounding out the top five.

For many firms, Europe looks like it has plenty of potential, with lots of banks still focused on their national market, a corporate sector that is just learning to raise money through bonds, and a population that in many countries has only recently discovered stocks. In the next year or two, bankers will find out which era was a blip: the current downturn or the boom years that preceded it. By Stanley Reed in London, with David Fairlamb in Frankfurt


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