Why Swiss Bank Lured A Minnow
Entering the Manhattan offices of old-line investment bank Dillon, Read & Co. is like stepping into a time warp. The teacups are china, not styrofoam; the bankers write with fountain pens, not ballpoints; and the desks are graceful old wooden rolltops, not boxy metal rectangles. Time seems to have passed Dillon Read by. Competitors, from Morgan Stanley & Co. to Merrill Lynch & Co., have globalized, diversified, and innovated to stay astride booming global capital markets. Meanwhile, Dillon Read peaked in the 1960s. Though retaining a core of blue-chip clients and its gentlemanly reputation, the firm has faded from view. "It's like a fish at 50,000 fathoms," quips a competitor. "Nobody can explain how they're still there."
On May 15, Dillon Read began its introduction to the fast lane. The firm agreed to be acquired by Swiss Bank Corp. for $600 million, a hefty three times its book value. Under Chief Executive Marcel Ospel, SBC has been buying companies to transform itself into a top 10 global financial powerhouse (table). It bought the British banking house S.G. Warburg & Co. in 1995 to form its investment banking division, SBC Warburg, to be renamed SBC Warburg Dillon Read.
The question is, does buying Dillon Read get SBC where it wants to go? After all, Dillon Read is a minnow. With just 730 employees and $200 million in equity, even a handsome 21% average annual return on equity earns it a mere $42 million a year. In mergers and acquisitions and equities, it's barely on the map. In U.S. M&A in 1996, it was 17th, with a 3.2% market share, says Securities Data Co. In equity underwriting, it was 21st, with less than 1% market share. Further, the rich payout SBC gave Dillon Read could spur some talent to retire early. If the stakes were divided equally among the 52 managing directors who own 75% of Dillon Read, they would each make $8.65 million.
Dillon Read, though, does have some very valuable assets, namely its distinguished name and elite client list. It has had close, long-term relationships with Anheuser-Busch Cos. and General Mills Inc., to name a few. W. Michael Barnes, chief financial officer of Rockwell International Corp., says his main investment banks are Dillon Read and Morgan Stanley. While Dillon Read lacks Morgan's battalions of industry experts, says Barnes, the firm is adept at providing objective, strategic advice: "It has an intimate understanding of Rockwell's history, businesses, competitors, strengths and weaknesses, management, and preferences." And it is customer focused. "They treat us like the only client they've got,"says Barnes.
EYE FOR TALENT. As for SBC, it is skilled at absorbing companies, largely because it utilizes the best talent, even if it must displace its own. When SBC bought the Chicago-based options trading house of O'Connor Partnerships in 1991, SBC exploited the company's risk-management savvy and promoted O'Connor foreign exchange options trader David Solo. At 32, Solo is now SBC's chief operating officer. In 1994, when SBC bought Brinson Partners, a quantitative money management firm, it put Gary Brinson on SBC's board. While Dillon Read Chairman John P. Birkelund's plans are undecided, Franklin W. Hobbs IV, Dillon Read's CEO, will join the board of SBC Warburg Dillon Read. "Over time, these two franchises [SBC Warburg and Dillon Read] will do better," says Hobbs. "With SBC, we have all the ingredients our competitors have," says Birkelund.
Still, questions remain. Dillon Read's civilized pace may clash with SBC's aggressive ambitions. SBC is known for quickly integrating acquisitions. If SBC is serious about rising to 10th in M&A or better, it will have to spend hundreds of millions to hire analysts and bankers or buy yet another firm. "This can't be the endgame," says another competitor. "There is more to come." Either way, it's unlikely the china teacups and rolltop desks will be here for too much longer.