How Many Bankers Can You Squeeze Into Sao Paulo?

With fees tight, a slew of foreigners vie for Latin business

Investment bankers making the 11-hour journey from New York to Sao Paulo used to be able to get some work done on the plane. Not anymore. "The flights are filled with your competition," says Alberto J. Verme, managing director at Salomon Smith Barney. They've all piled into Latin America chasing what they hoped would be a rich lode of new business.

Trouble is, there are too many investment bankers chasing too few Latin deals. Asia's financial crisis and a subsequent slowdown in Latin economic growth is cooling demand for new equity offerings. At the same time, everyone from Wall Street's Merrill Lynch & Co. to Spain's Santander Investment is fighting hard for market share (table).

With trading commissions and advisory fees falling fast, the banks that survive will be the most flexible ones--those able to diversify from equities to debt to corporate finance. "Every time you have a hiccup in the region, you have to shift resources across product areas," says Tim Purcell, co-head of Latin American mergers and acquisitions at J.P. Morgan & Co.

For now, the big money is being made in debt underwriting and trading. In 1997, 75% of the total of $750 million in Latin investment banking fees came from such activities. Foreign lenders also are moving into high-growth areas--asset management, for instance.

Failure to adapt to the changing investment climate is what forced ING Barings Ltd. to retreat from Latin America. The investment bank dumped its Latin equities business and fired 150 in February even though it produced solid research and traded an estimated 10% of the region's American depositary receipts. The bank insists the operation was profitable. Yet some competitors contend that ING Barings' business became publishing its research--not moneymaking.

Still, other banks are in the region for the long haul. They're attracted by the promise of long-term economic growth, $30 billion in Brazilian privatizations this year, and fast-developing capital markets. The big winners are likely to be the U.S. firms. With three-quarters of all foreign investment in the region coming from the U.S., Latin companies are looking for banks with North American distribution.

The Wall Streeters are also moving aggressively to capture key privatization deals and advise on M&A. Total Latin American M&A activity nearly doubled, from $36.5 billion in 1996 to $70.5 billion last year. J.P. Morgan led the region in M&A activity with a total deal volume of $12.8 billion. But the real action is in Brazil, which accounted for 35% of all Latin M&A deals in 1997. In February, Morgan Stanley, Dean Witter, Discover & Co and Salomon Smith Barney won the bidding to advise the government on selling Brazil's $40 billion phone company, Telebras, by charging a commission of just 0.07%. The fees on Telebras, which will begin privatization this year, are more than a full percentage point less than those on last year's $3.1 billion privatization of Brazil's mining giant, Companhia Vale do Rio Doce.

"LESS THAN IDEAL." Competitors are griping, but Corrado Varoli, a managing director at Morgan Stanley, says his Latin team is looking toward the future. Investment banks, he says, "are so profitable in the U.S. that they can accept less than ideal profits in Brazil for now, in hopes that in 10 years we'll see a more developed market."

Such talk isn't daunting several European banks, despite the ING Barings retreat. Take Spain's Banco Santander. It has invested $3.5 billion in banks in eight Latin countries, built up a strong local equity research network, and is leading foreigners in equity trading volume in the key markets of Brazil and Argentina. With a Wall Street unit trading Latin ADRs, Santander Investment's research operation is "paid for, and then some," says Managing Director Jaime de Pinies.

Others are expanding through acquisitions. Salomon Smith Barney has lined up local partners in Brazil, Argentina, and Chile, while SBC Warburg Dillon Read is buying Brazil's Banco Omega Group. And Goldman, Sachs & Co. is negotiating to acquire a stake in Accival, the brokerage arm of Mexico's leading financial group, Banamex-Accival. Now, foreign lenders must make those investments pay off. Their bankers need to hustle up new deals, or some of them may end up on the next flight home.

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