Is John Mack's Knife Sharp Enough for CSFB?

The Wall Street icon has a tall order: Get control of unruly Credit Suisse First Boston

It was a ruthless corporate ambush. On July 11, Credit Suisse Group Chairman and Chief Executive Lukas Mühlemann summoned Allen D. Wheat to London to discuss the Swiss bank's New York investment banking subsidiary Credit Suisse First Boston. Wheat didn't realize he was about to be fired, say friends. But by the time the brief meeting in CSFB's Canary Wharf offices was over, so was Wheat's career as CEO. A Wall Street icon, Morgan Stanley Dean Witter & Co.'s former President John J. Mack, said Mühlemann, would replace Wheat the very next day. "They wanted to shoot Wheat, and John was available," says a senior banker who asks not to be named.

Mühlemann's assault was meticulously planned. Since April, he had been wooing Mack--who left Morgan Stanley on Mar. 21 after losing a power struggle with CEO Philip J. Purcell--to take on one of the toughest jobs on Wall Street. In four years, Wheat had transformed CSFB from a mid-tier securities firm into the world's third-largest debt-and-equity underwriter with $778 million in pretax profits on $4.3 billion in revenues in the first quarter. But the Credit Suisse boss, who says Wheat hinted he wanted to leave near the end of 2002, didn't believe Wheat could consolidate the increasingly unruly investment bank. Its payroll had soared to 28,000, up from 5,000 in 1997, as Wheat eagerly recruited top-dollar bankers and made a string of acquisitions culminating in the $11.5 billion purchase of investment bank Donaldson, Lufkin & Jenrette Inc. in August, 2000. "I felt what was needed after the acquisition of DLJ and all the growth was to bring the parts together as a cohesive whole," says Mühlemann. "Doing that requires different skills from those needed when you are building up a group."

Mühlemann sought out Mack in New York. Initially, they discussed giving Mack a senior job and a board seat. "[But] as our conversations progressed, we focused more on him taking over CSFB as CEO," says Mühlemann. The idea seemed perfect: Mack would get what he always wanted--to run an investment bank as CEO. Mühlemann would get what he needed--a tough executive who built his Morgan Stanley career by crushing fiefdoms there. "Mack embodies the things that we are looking for--team building, a one-firm approach," says Mühlemann.

TARNISHED REPUTATION. Once considered the wunderkind of Swiss finance for reviving Swiss Reinsurance Co., Mühlemann has been losing face with key Credit Suisse shareholders such as Swiss corporate gadfly Martin Ebner, whose BZ Group Holding investment group owns a 10.3% stake. After increasing in value by 25% a year since Mühlemann arrived in 1997, Credit Suisse shares have lost some of their luster during the past year, plummeting to $172 from $234 a year ago. Mühlemann denies he was under the gun to ditch Wheat. "No one put pressure on us to make the changes," he says.

All the same, CSFB has had repeated brushes with regulators--in Bombay, Tokyo, New York, and elsewhere. Investigations by the Securities & Exchange Commission, the National Association of Securities Dealers, and the Justice Dept. into how CSFB's technology group, led by Frank Quattrone, underwrites and distributes shares in initial public offerings have tarnished CSFB. Mühlemann denies he's worried, though he told the June 1 annual shareholders' meeting in Zurich that CSFB needed tighter controls.

Mack the Knife, as John Mack is known on Wall Street, is Mühlemann's best hope to get CSFB back on track. Under his leadership, Morgan Stanley became one of the most tightly run and straitlaced houses on Wall Street. Also at Morgan Stanley, Mack worked with Quattrone, who bolted when Mack and others refused to let him create a tech banking empire in which select bankers and research analysts would report solely to him--a setup Wheat permitted at CSFB. "If Mack can't fix CSFB, no one can," says a banker.

Still, Mack's decision to join CSFB surprised many Wall Street insiders. For one thing, both Mühlemann and Mack have reputations for playing hard ball. Wheat was not the first top aide ousted by Mühlemann. In March, 1998, he booted Klaus Jenny, head of the bank's important private banking business, who beat his earnings goals--but not by as much as Mühlemann thought he could. For his part, Mack, a veteran banker who worked his way up from selling bonds at Morgan Stanley, left the firm after he became increasingly frustrated working for his former boss Purcell who, as an ex-McKinsey & Co. consultant, had a different style of management. As CSFB's chief, Mack answers to Mühlemann--also a McKinsey alum. Mack dismisses speculation on Wall Street that there is an understanding he will some day succeed Mühlemann as head of the Credit Suisse Group, as there was at Morgan Stanley. "My focus is on this job," says Mack. "There is absolutely no agreement this time."

"FREEDOM." The partnership had better work: Mack is CSFB's fifth CEO in the past 12 years. Mack says he likes Mühlemann, whom he first called on in 1997 in Zurich to discuss business and strategy. He regards him as "warm" and a man of integrity. "I think it's going to be a great relationship," says Mack. Even if Mack harbored higher ambitions, it's unlikely that he, 56, and a foreigner in a Swiss company, would be able to challenge Mühlemann, 51, for the top job. "[Mühlemann] obviously didn't want to replace [Wheat] with a potential successor," says a senior exec with an institutional investor that owns stock in the bank.

Mack, who doubles as vice-chairman, will be deeply involved with the group. Unlike Wheat, he'll have control over the group's vast institutional asset-management operations, which has $280 billion in funds under management worldwide. But Thomas Wellauer, 46, another former McKinseyite who was brought in by Mühlemann in 1997 and is now in charge of Credit Suisse's profitable private banking and financial-services businesses, is widely viewed as the heir apparent. Mack insists that's fine by him, adding that he has been given "a tremendous amount of freedom" to run CSFB the way he wants. Besides, to take on rivals Citigroup (C ) and J.P. Morgan Chase & Co (JPM ), Mack needs to harness Credit Suisse's $645 billion balance sheet. "To make this successful, I think it's very important that Lukas and I talk often," says Mack.

The toughest challenge for Mack may be unwinding the lavish multiyear contracts that Wheat used to attract and keep much of CSFB's top talent. Buying them out will cost big: Staffers in the technology group say they keep about 50% of the net fees they generate. CSFB earned $358 million for underwriting $5.4 billion worth of technology IPOs in 2000, according to Thomson Financial Securities Data Corp. Many analysts expect Mack to reel in--if not fire--Quattrone, whose weakened empire has handled only 8.5% of the tech IPOs so far this year, vs. 20% in 2000. Mack says he believes Quattrone agrees with him that CSFB must work more cohesively. "We have to figure out how everyone can work together as a team," adds Mack.

Whatever Mack focuses on first, he needs to move quickly. Leading European shareholders say they would like to see stability imposed on CSFB within two years. That may be a tall order. Mack told investors he may need two to four years to whip CSFB fully into shape. Either way, one thing is sure: Mack is back.

By David Fairlamb in Frankfurt and Emily Thornton in New York

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