London Banks Are Teaming Up, Teaming Up

It has been nearly a decade since London's Big Bang, when the government at one fell swoop lifted regulations that had kept the investment banking industry a patchwork of specialty brokers, market-makers, and merchant bankers. A handful of mergers later, there's still an informal division of labor between banks that underwrite equity and debt issues and those that sell them. And the securities business remains fragmented, with three dozen major investment banks battling each other for business.

But the crowded field may soon thin out. Investment bankers predict that the City of London could soon resound with an echo of the Big Bang. "There are going to be mergers and takeovers, and I think some may actually happen soon," says Peter Letley, deputy chairman of HSBC Investment Banking Ltd. "A number of players in the London market are not sufficiently global."

POND JUMPERS. A fear of being insufficiently global is precisely what propelled Britain's premier investment bank, S.G. Warburg Group, toward Morgan Stanley & Co. in mid-December. And on Jan. 25, London's Govett & Co. announced plans to merge with Chicago-based Duff & Phelps Corp. in a $250 million deal that creates a global asset management and equity research house with $50 billion under management.

While the marriage of convenience between Warburg and Morgan Stanley fell apart a week later, the logic behind it remains: To be successful, investment banks need to offer corporations a wide range of products in numerous markets outside their home base. Today's most lucrative action is in cross-border deals, and London banks are losing juicy business to players with a longer international reach. U.S. banks are even horning in on strictly domestic deals. In Glaxo Group's surprise $14 billion bid for fellow British drugmaker Wellcome PLC on Jan. 23, Wellcome is being advised not only by Barings PLC, a second-tier London merchant bank, but by Morgan Stanley, too.

The biggest squeeze is coming from the U.S. heavyweights, especially Goldman Sachs, Merrill Lynch, and Morgan Stanley. Merrill Lynch is now widely recognized as the powerhouse in debt securities of all kinds. Goldman Sachs is the worldwide leader in mergers. Morgan Stanley ranks No.3 in worldwide equity issues. Meanwhile, the big Continental banks are also beefing up their London operations.

The stakes are getting higher all the time. With corporate profits recovering in Europe and the U.S., record levels of equity deals, debt issues, and mergers are expected for 1995. However, the problem for London's banks is that more deals are congregating in fewer hands. Of $76 billion in M&A deals in Europe in 1994, for example, five banks acted as advisers for 65% of them, when ranked by dollar value. Of the five banks, three were American.

TRY, TRY AGAIN? No wonder the consolidation rumors are flying. Warburg officials deny that they are looking for another suitor, but with the company's share price rising 15%, to $12, in the past two weeks, the market clearly thinks otherwise. Independent London brokers Smith New Court and Panmure Gordon, owned by NationsBank, also are "obvious takeover targets," says HSBC's Letley. The two banks would not comment. Other prominent British houses considered takeover bait include Robert Fleming, Hambros, and Lazard Brothers--but any overtures would have to be friendly, since each is family owned or controlled.

At the same time, Europe's big banks are plotting to acquire the critical mass and trading expertise to compete with the U.S. powerhouses. Deutsche Bank just moved much of its investment banking operation to London, where it previously had scooped up merchant banker Morgan Grenfell Group. Banking sources say that Deutsche is considering making an offer for Cazenove & Co., a highly secretive broker with a blue-chip client list. Deutsche and Cazenove both declined to comment. Deutsche's German archrival, Dresdner Bank, and Union Bank of Switzerland have both been named as possible suitors for Warburg, although Dresdner officials decline comment and UBS denies any interest.

Some London merchant banks are trying to hang on to their independence by aiming for a niche. Privately owned Barings has a powerful franchise in emerging markets and is targeting smaller institutional investors and private clients. Schroders PLC has built a successful investment arm, with $94 billion in funds under management. Also, instead of chasing big deals, it's going after project finance work in emerging markets.

Nevertheless, in August, Schroders quietly bought the remaining half of its U.S. partner and equity distribution arm, Wertheim Schroder & Co., in a $94 million deal, and plans to use Wertheim to expand into Latin American equities. Clearly, even for London's successes, the siren they hear is far offshore.

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