An unlikely partnership reveals depth of crisis

"By turning to SBC, Warburg has signalled that its circumstances are rather worse than most outsiders realise."

Warburg and Swiss Bank Corporation are about as compatible as the cat and the canary, or so it seemed in the City until last night. Few investment banks have fought so publicly, and with such venom, as these two over the past couple of years. If Warburg had really had a choice, it probably would have preferred someone else to break into its cage.

But the shocking truth of yesterday's announcement is that the decline of Britain's leading investment bank has gone so far that it has had to take very seriously an offer that in other, prouder, days would have been rejected out of hand. The story of Warburg of late has been a sorry one of drift and decline from its ambition to become a global investment powerhouse, punching at the same weight as the Americans and the big Continental rivals.

The abortive link-up with Morgan Stanley at the end of last year was a humbling moment, when Warburg admitted to itself and the world it could not live up to its rhetoric. Senior Warburg executives have never ceased to talk ruefully in private of the missed Morgan Stanley opportunity, the clearest sign that their hearts were never in the gung-ho talk, for public consumption, of soldiering on alone. With a stream of defections this year, there was no doubt that Warburg was in crisis. But by turning to SBC, Warburg has signalled that its circumstances are rather worse than most outsiders realise.

All the genteel talk of merger that accompanied the Morgan Stanley approach has disappeared. The Swiss are proposing a straight absorption of investment banking and a break-up of the group, giving the Mercury Asset Management subsidiary its freedom.

SBC is the last of the Swiss giants to be seeking to push its competitive presence in the City by acquisition. UBS bought Phillips & Drew, the broker, while Credit Suisse long ago linked up in London with First Boston. SBC has managed to elbow its way into UK corporate finance, past its Swiss rivals, making enemies of much of the City establishment on the way.

But for all its domination of vital areas such as derivatives, SBC remains an outsider in London, deploying the Swiss parent's vast capital resources aggressively to win market share. From SBC's viewpoint, absorbing a bank at the heart of the City establishment is like marrying into an ancient family, and makes dynastic sense.

The key to understanding yesterday's news is the dowry, in the form of capital, which SBC has in enviable amounts but Warburg does not. And capital has become the sine qua non for any investment bank with serious international aspirations. It is a very expensive business.

Warburg's capitulation before this fact marks the end of an era in the City and British investment banking. Even if this deal breaks down, which after last December's fiasco cannot be ruled out, Warburg's days are numbered.

It would be doubly hard this time round to make a convincing display of independence while yet another search is conducted for a buyer. The biggest threat to this deal is simply a counter-bidder, and the rumours about Smith Barney that emerged yesterday may be more than just coincidental.

Where Warburg has been forced to go, others will follow, pushed by those same relentless competitive pressures bearing down on international investment banks. Kleinwort Benson has already put itself up for sale; Fleming, Schroders, Cazenove and Smith New Court cannot be far behind. After SBC and Warburg, no partnership could be too unlikely.

Murdoch may have the last laugh

Rupert Murdoch is renowned for once saying: "I may not be much good at what I do but I'm the best when it comes to [expletive deleted] the opposition". If that was his purpose in all the hype and pre-publicity that surrounded BSkyB's bid for Channel 5, he seems to have succeeded with a vengeance. All the speculation had him bidding uncommercially high so as to ensure success. In the event his BSkyB-led consortium delivered the lowest of the four bids, a measly £2m. Put that next to CanWest's rich offering of £36m and the pair of £22m offers from Virgin and Pearson and the City's gob-smacked reaction is understandable. If Mr Murdoch, for whom Channel 5 holds special attractions, thinks it worth only £2m, what on earth is CanWest doing? Mr Murdoch seems to have bluffed it into bidding too much.

The real value of Channel 5 is much more likely to be what he and his partners at Granada, along with the US cable giant TCI, music and film company PolyGram, European broadcaster Kinnevik and two investment houses, Goldman Sachs and Hoare Govett, pitched in at. Consider the following. The BSkyB bid envisages about £120m for retuning, £20m more than Virgin, and more than double what Pearson says it would have to spend.

A bid of about £20m, retuning costs of £90m and programming costs of £115m a year, according to one model used in the City, would require that Channel 5 win 4.83 per cent of the national television advertising market in the first year of operation, rising to 7 per cent in 2005, just to break even. A tall order.

The BSkyB bid could get away with a much lower national market share in the early days, and still give its shareholders a return on their investment. CanWest, by contrast, will have to create a runaway success with viewers to break even. In the more likely event that it fails to do this, it will be saddled with impossibly high costs. Mr Murdoch may have the last laugh.

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Compliance Assistant

£13000 per annum: Recruitment Genius: This Pension Specialist was established ...

Ashdown Group: Market Research Executive

£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

Recruitment Genius: Technical Report Writer

£25000 - £35000 per annum: Recruitment Genius: A Technical Report Writer is re...

MBDA UK Ltd: Indirect Procurement Category Manager

Competitive salary & benefits!: MBDA UK Ltd: MBDA UK LTD Indirect Procurement...

Day In a Page

Isis hostage crisis: Militant group stands strong as its numerous enemies fail to find a common plan to defeat it

Isis stands strong as its numerous enemies fail to find a common plan to defeat it

The jihadis are being squeezed militarily and economically, but there is no sign of an implosion, says Patrick Cockburn
Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action

Virtual reality: Seeing is believing

Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action
Homeless Veterans appeal: MP says Coalition ‘not doing enough’

Homeless Veterans appeal

MP says Coalition ‘not doing enough’ to help
Larry David, Steve Coogan and other comedians share stories of depression in new documentary

Comedians share stories of depression

The director of the new documentary, Kevin Pollak, tells Jessica Barrett how he got them to talk
Has The Archers lost the plot with it's spicy storylines?

Has The Archers lost the plot?

A growing number of listeners are voicing their discontent over the rural soap's spicy storylines; so loudly that even the BBC's director-general seems worried, says Simon Kelner
English Heritage adds 14 post-war office buildings to its protected lists

14 office buildings added to protected lists

Christopher Beanland explores the underrated appeal of these palaces of pen-pushing
Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Scientists unearthed the cranial fragments from Manot Cave in West Galilee
World War Z author Max Brooks honours WW1's Harlem Hellfighters in new graphic novel

Max Brooks honours Harlem Hellfighters

The author talks about race, legacy and his Will Smith film option to Tim Walker
Why the league system no longer measures up

League system no longer measures up

Jon Coles, former head of standards at the Department of Education, used to be in charge of school performance rankings. He explains how he would reform the system
Valentine's Day cards: 5 best online card shops

Don't leave it to the petrol station: The best online card shops for Valentine's Day

Can't find a card you like on the high street? Try one of these sites for individual, personalised options, whatever your taste
Diego Costa: Devil in blue who upsets defences is a reminder of what Liverpool have lost

Devil in blue Costa is a reminder of what Liverpool have lost

The Reds are desperately missing Luis Suarez, says Ian Herbert
Ashley Giles: 'I'll watch England – but not as a fan'

Ashley Giles: 'I'll watch England – but not as a fan'

Former one-day coach says he will ‘observe’ their World Cup games – but ‘won’t be jumping up and down’
Greece elections: In times like these, the EU has far more dangerous adversaries than Syriza

Greece elections

In times like these, the EU has far more dangerous adversaries than Syriza, says Patrick Cockburn
Holocaust Memorial Day: Nazi victims remembered as spectre of prejudice reappears

Holocaust Memorial Day

Nazi victims remembered as spectre of prejudice reappears over Europe
Fortitude and the Arctic attraction: Our fascination with the last great wilderness

Magnetic north

The Arctic has always exerted a pull, from Greek myth to new thriller Fortitude. Gerard Gilbert considers what's behind our fascination with the last great wilderness