Did Warburg Get Greedy?

No one in London's august investment-banking circles was surprised when the government chose S. G. Warburg Group PLC to handle the July sale of its 22% stake in British Telecommunications PLC. An upstart bank for decades after its 1946 founding, Warburg now has impeccable connections with the British Establishment that guarantee it a place among London's dealmaking elite. The $8 billion BT underwriting will rocket Warburg to the top of the 1993 list of Europe's investment banks.

But making it in London doesn't translate into becoming a major competitor in today's global markets. As the biggest British investment-banking house, Warburg is one of the few British firms with a shot at challenging such U. S. powerhouses as Goldman Sachs, Merrill Lynch, and Morgan Stanley in the world capital markets. To enter their ranks, it must first turn itself into a full-service, global securities house, the goal of Warburg CEO Lord Cairns.

Warburg has a ways to go. The huge offer is causing controversy in the European banking community, where there is a chorus of complaints from Warburg's fellow underwriters that Warburg wants to hog the deal. And even if the acrimony subsides, Warburg won't have the British government to lean on. With the BT deal, British privatization programs, which have been a major source of Warburg's global business, are coming to an end. In privatization deals outside Britain, from Spanish energy group Repsol to Singapore Telecom, Warburg has failed to win the lead role. "BT is the last one where they'll have a sugar daddy--the British Treasury," one source says.

To date, Warburg has little to show for its investment in the U. S. In the giant U. S. market for equities, Warburg was the lead manager of only one offering last year, a tiny $45 million deal for Shaman Pharmaceuticals. Recognizing this weakness, Lord Cairns recently tapped board member and former CBS Inc. chief Thomas H. Wyman to head U. S. operations. Wyman's job is to push Warburg's North American profits above 1992's paltry $18 million.

"TABLE SCRAPS." Overall, the picture wasn't much prettier. In results announced on May 27, Warburg's entire pretax profit for the year ended Mar. 31 was $229 million, down 11% from $257 million, while Morgan Stanley & Co.'s profit for just one quarter ended April 30 was $196 million, up 41%. In major new Asian markets, Warburg has managed only slender earnings after it tried to set up an equities group in Tokyo just as prices on the Nikkei were collapsing. Warburg is optimistic its critics will be silenced based on mergers and equity deals it has in the pipeline.

Cairns is betting that the BT deal will go a long way to turning all that around. Already, thanks to this high-profile job, Warburg has a shot to be lead banker for a $2 billion Euro Disney offering. But a mini-revolt ensued among BT syndicate members when Warburg insisted that only it and its 11 partners, including Merrill and Morgan, could market BT stock to institutional investors. And in the first two weeks of marketing, even those 11 firms will be allowed to market BT shares only to institutions in their regions. Warburg alone will not be tied to a region, leading one global manager to grumble privately that Warburg was fixing the deal so that it would get most of the commissions.

Warburg's tactics in the BT privatization could cost the firm dearly. Excluded from the list of 11, France's Banque Indosuez dropped out of the deal once it learned it could not sell stock to the manager of a London fund owned by the bank itself. Four other European banks and brokers dropped out as well, with one complaining they were left with "table scraps." This discord does not bode well for Warburg's plans to win a piece of the huge upcoming privatization offerings in France.

Others complain that Warburg is allowing only its own representatives to attend meetings between BT executives and potential investors. "They want the commission on the BT deal, and they want to cement a relationship with other banks' clients, so they'll get a piece of the next deal as well," says one rival.

Warburg's defenders, however, say the complaints come mainly from investment bankers who didn't get top billing in the BT deal, and they add that the British government is watching closely to make sure the deal is allocated fairly. Warburg officials, citing U. S. securities regulations, refused to comment on the BT offering.

Although the London rumor mill has Warburg merging with J. P. Morgan & Co. one month and Lehman Brothers the next, Warburg for now seems bent on staying independent. Managers have reduced staff and other overhead costs and are turning their attention to beefing up weak areas, including the U. S. and Japanese operations. But even with the BT deal under its belt, many wonder if Warburg has what it takes to become a world-class player.

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