Business Week International Finance: BANKS
AN AUDACIOUS ALPINE ASSAULT (int'l edition)
`I consider myself a hard man. Perhaps that's why I drive the people around me so hard," says Swiss Bank Corp. CEO Georges Blum. "I suppose that is why I am occasionally typecast as a tough guy."
"Occasionally" is putting it mildly. Ever since he took over from his reserved predecessor, Walter G. Frehner, in 1993, Blum has been pushing through a cultural revolution that's shaking his $170 billion bank to its core. He is trying to shock the 123-year-old company out of decades of lethargy and build an American-style global trading and investment bank from scratch. With the likes of J.P. Morgan & Co. and Goldman, Sachs & Co. as his models, Blum's audacious goal is to vault Swiss Bank into "the top bracket" of 10 investment banks he thinks will dominate global finance by the decade's end.
With the global bond market ailing, this is hardly the easiest time to try to make a big splash in investment banking. But Blum, 60, is taking a novel tack. He is betting he can leapfrog other big banks, some with more capital and others with decades of close client relationships. To pull this off, Blum is turning to a high-tech SWAT team of American traders, quantitative analysts, and bare-knuckle investment bankers to perform a "radical transformation," says CFO Peter A. Wuffli, a 37-year-old former McKinsey & Co. banking consultant.
To many observers, such a transformation was long overdue. In the 1980s, Swiss Bank seemed to lose its way amid intensifying competition and a slew of bad loans to global real estate developers and takeover artists. Even then, says its 44-year-old international banking chief, Marcel Ospel, it was becoming clear "we wanted to be a different kind of animal."
That realization drove the bank in 1991 to purchase one of the top U.S. options-trading groups, Chicago-based O'Connor Partnerships. Blum built on that when he shelled out $750 million in stock late last year to purchase Brinson Partners Inc., a $36 billion global asset management firm that also hails from Chicago. With staffers from O'Connor and Brinson now assuming responsibility for huge portions of the bank's international business, the acquisitions are quickly making the bank "more American than it is European," says Deputy Chief Executive Johannes A. de Gier.
OLD WORLD GOLD. The Yank presence within the bank has become so pervasive that some have begun referring to it as a reverse takeover by the Chicago traders and money managers whom Blum and Ospel had wooed. The Americans do little to refute that notion. "It hasn't been a takeover," says former O'Connor chief John Dugan. "It's a makeover."
Still, Swiss Bank has managed to retain its foundation of Old World gold. Based in the ancient Rhine River city of Basel, it boasts a rock-solid capital base, a AAA credit rating, steady streams of revenue from as much as $300 billion in private-banking accounts, and a roster of blue-chip commercial banking customers on both sides of the Atlantic.
Many investment bankers believe that if anybody can muscle into the investment-banking turf currently dominated by Americans, it will be the big Swiss banks. But doing so is taking Blum into uncharted waters. For example, British regulators are now considering whether Swiss Bank traders or investment bankers violated insider-trading rules in helping Trafalgar House PLC, a real estate and construction group, mount a $2 billion hostile takeover bid for Northern Electric PLC, a large utility. The bank denies any wrongdoing.
Beyond that, however, Swiss Bank's new emphasis on securities exposes it more than ever to the mood swings of the global money market. Lately, these swings have taken its profits on a wild ride: After a huge surge in profits during 1993's global bull market in bonds and derivatives, earnings collapsed in 1994 when U.S. interest rates soared. Some analysts expect that when the bank releases its results on Mar. 15, profits will be down by 35% or more. Even Blum concedes that they were "very disappointing."
To be sure, such other big players in trading and derivatives as Goldman Sachs, J.P. Morgan, and Bankers Trust also were battered by the tide of higher rates. International banking chief Ospel warns that going head to head with these and other top U.S. competitors will be "a costly, bloody exercise for the next three to five years." And that's making investors nervous.
Swiss Bank's profits are already back to where they were five years ago, and its shares are now trading at only 80% of book value, estimates analyst Hans Kaufmann of Zurich's Bank Julius Baer. Ospel says he is not worried about the bank's stock price as long as the company is profitable and able to finance its investments in new technology. But Swiss analysts and bankers say the bank could now be vulnerable to a takeover by a faster-moving competitor--something that would make mincemeat of Blum's grand design.
Blum, a 34-year veteran at the bank, appears to be unfazed. He pledges to double its anemic return on equity to 15% within four years, period. "Some say we should fix goals of 10 to 20 years," he says during an interview in his office bedecked with Abstract Expressionist art. "But when you do that, you have no action. And I need action."
NEW SPIRIT. And action is what he is getting. As O'Connor's young, blue jeans-clad partners have taken up posts in Swiss Bank's international division in Zurich, London, and Basel, a startling culture change has taken root. Along with fresh trading products--such as certificates of deposit whose return is tied to the performance of stocks or currencies--the Americans have brought new ideas on using derivatives in investment banking. They have also injected a much-needed dose of entrepreneurial spirit into the bank's loan-oriented international division. And they have moved into an unprecedented number of powerful jobs.
All 28 O'Connor partners joined Swiss Bank as managing directors or better. Half of the seats on the board that runs the bank's international division--the focus of Blum's transformation efforts--have gone to Americans. And two of the Windy City imports--Dugan and Brinson Partners founder Gary P. Brinson--were named to Swiss Bank Corp.'s 15-member executive board.
With the American invasion serving as the catalyst for change, Blum and his lieutenants have shaken up the bank in other ways. Several old-line board members have retired, and some veteran traders have departed. Says Blum: "To achieve our ambitious aims, we require that [bank staffers] adapt to new situations. Those who cannot are being replaced by those who are ready to follow the trends." The bank has hired 1,600 new bankers over the past 3 1/2 years and has begun recruiting on campuses in the U.S. and Europe for the first time in anyone's memory. It will probably do the same in Japan before long.
BAGS PACKED. Blum, a native of French-speaking Lausanne who converses in impeccable German and four other languages, also took an important step to globalize the bank's management ranks. He scrapped the 6,500-employee international division's regional fiefdoms in favor of a worldwide management structure organized around product lines. Swiss Bank's head of foreign exchange set up shop in London, for instance. Its global equities boss was posted to Hong Kong--a surprising move that shows Ospel's faith in booming East Asia, where competitors say Swiss Bank's investment bankers have barely any presence. To further the Asian effort, Deputy Chief Executive de Gier moved to Singapore, where he aims to push the equity business and reinforce the company's strong private-banking franchise.
As the reorganization has gained momentum, bank executives from top to bottom have begun following another American management maxim: Offer shareholder value. In the past, admits Wuffli, as at other Swiss banks, "shareholder interests were not a high priority." However, as global investors have begun demanding better performance, things are beginning to change. For starters, Wuffli has launched an investigation to discover how each of Swiss Bank's businesses might be priced by such shareholder value proponents as maverick Zurich financier Martin Ebner, who has tried to force changes at Union Bank of Switzerland by purchasing large blocs of that bank's stock. While Wuffli once advocated breaking up Swiss Bank to make it more efficient, he'll probably use his valuation exercise to see where the bank should deploy its capital for maximum returns.
The makeover of Swiss Bank has clearly boosted its market strength in crucial areas. For example, the bank used its O'Connor ties to move to the top ranks of dealers in foreign exchange options--a mainstay of corporate currency hedging programs. However, it has been in what de Gier calls "the gray area" between traditional equity markets, derivatives, and corporate finance that it has most intently focused its high-tech firepower.
The bank already is one of the leading underwriters in the huge Eurobond market. But rather than compete with other investment banks for privatization and equity issues, de Gier says he's centering on more innovative--and profitable--ways to help companies raise cash. Swiss Bank's London staff of 1,200, for example, has made a big splash trading equity options--and has used this expertise to speed past various British rivals for lucrative deals.
Most recently, the bank muscled its way into the marketing of a rights issue for Eurotunnel Group that was set up by S.G. Warburg Group PLC and Banque Indosuez. "You've got to hand it to them," says Stephen Murphy, head of European mergers and acquisitions at Salomon Brothers Inc. "They've been innovative."
Too innovative, perhaps. As advisers to Trafalgar House in its bid for Northern Electric, the Swiss set competitors buzzing by using derivatives in a way the City had never seen before. Swiss Bank made it easy for Trafalgar to accumulate its initial stake in Northern Electric. It did this last fall by selling call options to Trafalgar on shares of Northern and several other utilities. The options contracts gave Trafalgar the right to buy the utilities' stock at a fixed price. The deal also avoided tipping the market that a takeover was on the way.
BRITISH BROUHAHA. When Trafalgar House announced its bid for Northern on Dec. 19, prices of electric utility shares jumped across the board, enabling Trafalgar House to walk away with a $12 million profit as it exercised its options. However, the deal raised howls from other traders. They complained that Swiss Bank's market-makers, who sold the options to Trafalgar House, had also been secretly accumulating tremendous stakes in the utilities for the bank's own account.
Whether these purchases were designed to further Trafalgar's bid is now the subject of controversy. The London Stock Exchange had previously cleared the options contracts. And the bank notes that its traders, as market-makers in active stocks, were not required to publicly disclose their holdings. But the Securities & Futures Authority, which regulates Swiss Bank's securities unit, is now considering whether the bank's traders violated insider-trading rules. In a statement, Swiss Bank notes that its market-makers acted only on their own behalf and "not in the interest of corporate finance clients." Adds the bank: "There is no question of any breach of insider trading legislation."
Whatever the outcome, a willingness to employ novel techniques is destined to become a hallmark of Swiss Bank's approach to corporate finance. Well aware of the roasting Bankers Trust New York Corp. has taken for flogging high-risk derivatives to unwary treasurers, Ospel is pushing his bankers to open their models to chief financial officers in need of sophisticated advice.
HIDDEN RISKS. Every two months, for example, the top financial executive at one American conglomerate runs his roster of $3 billion worth of derivatives contracts through the model Swiss Bank uses to evaluate its own portfolios. The object: to find hidden financial risks that he might not discover on his own. "This is the kind of analysis someone our size just doesn't have access to," says the CFO. "I've asked other banks--even J.P. Morgan--and they couldn't do it."
Despite such plaudits, more widespread gains are proving harder to come by--especially in the U.S. Despite its high-profile Chicago acquisitions, the bank's lack of an investment-banking presence in the U.S. remains its greatest weakness. Not that other foreign players don't face much the same problem. S.G. Warburg's failed bid to merge with Morgan Stanley & Co. recently represented an admission that it couldn't keep up with Merrill Lynch, Goldman Sachs, and other major Wall Street houses even with a New York staff of more than 500.
Swiss Bank's investment banking ambitions in the U.S. had been held back while the Federal Reserve Board spent 17 months reviewing the bank's application for permission to underwrite debt and equities. But the Fed finally approved the application in December. Now, Blum is building. Even before the Fed's approval was announced, Swiss Bank showed off plans to shift most of its American headquarters staff from New York to a 53,000-square-meter complex it plans to construct outside the city, in Stamford, Conn.
AMERICAN INSPIRATION. More big moves are likely as Blum revs up his investment banking push. Indeed, senior Swiss Bank executives, pointing to J.P. Morgan's decade-long successful drive to build a global investment bank, argue that one year of disappointing earnings is hardly enough reason for them to abandon their own quest. They add that for their bank, there no longer is any turning back.
"We have redesigned the bank," says Ospel. What has emerged is a formidable combination of European capital and U.S. technology. Now comes Georges Blum's biggest challenge: making the redesign pay off.
Blum's Achievements, and the Hurdles Ahead
DOMESTIC RETAIL BANKING
ACHIEVEMENTS With the Swiss market stagnating, Blum has slashed costs and introduced products to boost revenues.
CHALLENGES That may not be enough. Some say he'll have to buy a smaller private bank to secure higher returns.
GLOBAL INVESTMENT BANKING
ACHIEVEMENTS The Federal Reserve in December gave Swiss Bank the nod for full-scale debt and equity underwriting in the U.S. Blum hopes this will create a flood of new products--and steady growth.
CHALLENGES Derivatives have gotten a bad name lately, Wall Street is in a severe slump. The bank has drawn allegations of insider trading in London. It denies wrongdoing.
ACHIEVEMENTS Blum bought Chicago's hottest options house, O'Connor Partnerships, and spread its staff around the world--making Swiss Bank one of the world's most technologically savvy traders.
CHALLENGES Even the Chicago PhDs couldn't overcome the weight of last year's bond-market collapse and emerging-market rout. Trading volume and earnings are sagging.
ACHIEVEMENTS Blum wound up 1994 by purchasing Chicago-based Brinson Partners, one of America's most successful global asset managers. Brinson will take over Swiss Bank's own international money management business.
CHALLENGES Critics say Brinson's hefty $750 million price tag means the deal will take several years to pay off.
DATA: BUSINESS WEEKBy Bill Javetski in Basel and William Glasgall in New York, with Paula Dwyer in London, Dave Lindorff in Hong Kong, and bureau reports