It sounds like a tale of woe for Europe's investment banks. One of the biggest takeover attempts in British retail history -- retail tycoon Philip Green's $17 billion bid for iconic Marks & Spencer Group PLC -- came to naught. A much-anticipated boom in initial public offerings has fizzled. And after a drought that started in 2001, merger-and-acquisition activity remains in a funk. But bankers in Europe's financial capital, the City of London, and its auxiliary, Canary Wharf, aren't crying in their pints. Indeed, Europe's leading investment banks, flush with profits from niche businesses, are adding thousands of employees. Payrolls are being expanded across a number of high-growth areas ranging from derivative sales to advising on private-equity deals. It's a sign of a shift in the investment-banking landscape -- and a tribute to the resourcefulness of the bankers.
Overall, investment-banking revenues in Europe for the first seven months of the year were up 8% over last year, to $8.34 billion, according to London research firm Dealogic. That comes even as the level of M&A activity has failed to meet expectations. Although slightly higher than this time last year because of Sanofi-Synthélabo's (SNY ) $63 billion takeover of Aventis (AVE ), the value of deals is still down 49% from what it was during the boom of 2000. But officials at Goldman Sachs (GS ), Lehman Brothers (LEH ), Merrill Lynch, Morgan Stanley (MWD ), and Deutsche Ban say they're increasing their head count in London. Britain's Manpower Employment Outlook Survey, a leading indicator of employment trends, shows that banks and other financial institutions have plans to hire more new staff than they have since the third quarter of 1998.
What's different from previous hiring binges is the type of employee the banks are seeking now: derivatives whizzes, asset-backed-security specialists, and private-equity and corporate-debt experts. And Europe's most profitable banks are willing to pay top dollar for this talent. The size of total compensation packages, including bonuses, for senior bankers has increased by an average of about 25% over last year's levels, according to City insiders. Depending on the level of experience, those at the vice-president level are commanding $300,000 to $400,000 a year. Senior rainmakers with proven client relationships are getting $5 million to $6 million. Some banks are even offering one- and two-year guarantees, though not at the rate that they did in 2000. "It has gone from being a flat market to a very buoyant market," says Tara Ricks, managing director at recruiter Joslin Rowe Associates Ltd. in London.
One of the big new profit centers for Europe's investment banks is private-equity deals. Turnaround specialists in areas such as British retail and European manufacturing are looking to investment banks to raise money from outsiders for their makeovers. Senior bankers say private equity provided about a third of the revenues for the European investment-banking industry last year. One of the biggest deals in Europe so far this year -- Kohlberg Kravis Roberts & Co.'s $2.8 billion buyout of German chemicals concern Dynamit Nobel -- involved financing from Credit Suisse First Boston (CSR ), Goldman Sachs, and UBS (UBS ). In the months to come, bankers expect to see even more private-equity activity. "They've got plenty of cash, and debt is still relatively cheap," says Alex Wilmot-Sitwell, co-head of European investment banking at UBS in London. "Therefore, deals can be made to work."
Another growth area is asset-backed securities. Europe's demand for these instruments, which repackage commercial mortgages and other loans backed by assets into resaleable bundles, totaled $155 billion so far this year. While that's just one-fifth the size of the $798 billion market in the U.S., it's more than a fourfold jump over five years ago in Europe. Investors like these securities because they disperse the risk of default yet offer a relatively high return. CSFB and Lehman Brothers are among the banks that have been quick to leap into the growing market in Europe -- and are hiring more staff to handle the business. Poaching is not unheard of: In June, CSFB hired real estate finance guru Arvind Bajaj from Morgan Stanley to help accelerate its asset-backed mortgage business.
Lehman, meanwhile, served as sole lead manager for the first commercial mortgage-backed transaction in Switzerland last summer. The deal, an $858 million securitization backed by 112 Swiss commercial properties, was done for WTF Holdings, a venture between Lehman and real estate investment firm PSP Swiss Property Group.
That's one trend: manufacturing deals by becoming a full partner in them and taking on some of the risk. Another is to try to get hired as the sole investment banker for particular companies -- managing all their assets, debt, and acquisitions. Earlier this year, Lehman bankers advised Danish beer giant Carlsberg on two separate deals: a $3.3 billion repurchase of Carlsberg's own shares from Orkla, a Norwegian food-and-drink conglomerate, which had a 40% shareholding in Carlsberg, and a $550 million stock issue. "It's no longer just about figuring out whether a company should make a divestiture here or an acquisition there," says Jeremy M. Isaacs, chief executive of Lehman Brothers Europe & Asia in London. "It's also about a company's structure. It's a much more holistic approach."
Lehman's holistic approach is leading to hefty profits. Helped by gains in Europe, the investment bank saw net income jump 73% in the first six months of its fiscal year, to $1.3 billion, on revenues of $6.1 billion. Profits are so strong that even commercial banks that have traditionally been wary of the volatile investment-banking business are staffing up. HSBC (HBC ), Europe's largest bank and once known for its culture of Scottish frugality, has brought on about 110 new investment bankers over the last year, 29 of them as managing directors. Barclays Capital Inc. (BCS ), the investment banking arm of Barclays PLC (BCS ) and a specialist in debt financing, has boosted its staff by 19% since last December, to 6,900.
HSBC's investment-banking division has been building up its convertible-bond and project-finance business after the restructuring of its investment-banking and capital-markets unit. Its share of international-bond issuance rose to 4.5% in the first six months of 2004, up from 3.8%, in the first half of 2003. The market for convertible bonds in particular has picked up steam as companies rush to raise funds while global interest rates remain low.
M&A and IPOs? Who needs them? Europe's investment bankers seem to be doing quite well by cashing in on plenty of other varieties of high finance.
By Laura Cohn, with Kerry Capell, in London