Warburg Against The Wall

Sir David Scholey, acting CEO ef S.G. Warburg Group PLC, faces an unenviable task as he tries to pull Britain's leading investment bank out of its nosedive. Scholey, who took over after the resignation of the Earl Cairns, must either prune Warburg way back or search for a partner that would provide the kind of clout it hoped to get from its failed merger with Morgan Stanley Group Inc.

Retrenchment will further bruise morale, but that is the course Scholey seems to be steering. Scholey may trim or dump such operations as its U.S. trading and research unit or its European securities distribution arm. Scholey denies he's retrenching: "We will continue to build the business, though on a smaller scale than if the Morgan deal had been completed."

Merging may be a better plan. While Scholey denies he's talking to other potential partners, suitors are circling, including Germany's Dresdner Bank. And American players without a big European presence could be interested.

Scholey faces a tough balancing act: cutting costs without triggering more defections. In early February, Warburg lost its co-heads of equity capital markets to Deutsche Bank's Morgan Grenfell Group PLC. Uncertainty over bonus levels, possible layoffs, and division cuts could accelerate the departures and reduce the price the bank could get for itself. Yet if Scholey doesn't slash away enough, profits will continue to drop. That's why many analysts doubt Warburg can stay independent for long.

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