Book Of The Week: Insider's tale of how the City Cinderella had a ball
City Cinderella: The Life and Times of Mercury Asset Management By Peter Stormonth Darling (Weidenfeld and Nicolson, pounds 20)
Wednesday 01 December 1999
Over the past few years most of the merchant banks, traditionally regarded as the elite of the City, have passed into foreign hands. Morgan Grenfell was bought by Deutsche Bank, Kleinwort Benson by Dresdner Bank. Most surprising was the demise of SG Warburg, which had seemed well placed to become one of the world's leading investment banks. Warburg was bought by Swiss Bank Corporation in 1995, and two years later its investment management arm, Mercury Asset Management (MAM), was sold to Merrill Lynch.
A full explanation of how this happened has yet to be written, but Peter Stormonth Darling's account of his years with MAM - of which he was chairman from 1979 to 1992 - sheds useful and often entertaining light on the Warburg story.
Like most people who worked there in the 1960s and 1970s, Stormonth Darling has a huge admiration for Siegmund Warburg, who built up the firm and was widely regarded as the outstanding banker of his generation; he died in 1982. Stormonth Darling attributes the subsequent decline of the bank at least partly to the failure of the successors to abide by the founder's precepts. He also suggests that Warburg's response to Big Bang - the deregulation of the Stock Exchange in 1986 - may have been over-ambitious.
The takeover of two stockbroking firms and a leading jobber was designed to convert Warburg into a world player, but the acquisitions posed difficult management problems, and did not address Warburg's most serious weakness, its lack of a significant presence in the US. There were obvious attractions in a link with an American bank, and talks about possible cooperation with Morgan Stanley began in September, 1994.
These discussions led to agreement on a full merger; for some Warburg directors it seemed an ideal marriage between two houses of the highest quality. But there were complications, arising in part from objections to the terms from MAM, which had become a separately quoted company, though still majority-owned by Warburg.
The MAM issue was the reason given by Morgan Stanley for pulling out, although Stormonth Darling believes this was no more than an excuse for the American firm to abandon "an audacious and inadequately prepared transaction, which it increasingly realised would involve huge job losses in its own organisation and some severe clashes of business methods and styles".
The collapse of the merger brought about a loss of confidence in Warburg's management, and the view in the City was that another acquirer would have to be found. Stormonth Darling favoured National Westminster Bank - it would have been "a strong British combination with synergy to be gained in several business areas" - but the idea of working for a clearing bank did not appeal to the Warburg directors.
Snobbery, the author writes, is "an occupational hazard among bankers, and it can be seriously damaging to good commercial judgement". Other candidates fell by the wayside, and Warburg was left with only Swiss Bank Corporation, which bought it for what Stormonth Darling describes as a rock-bottom price.
Thanks largely to a new clientele from pension funds, MAM had risen from being an unprofitable appendage to where, in 1995, it accounted for more than 60 per cent of Warburg's market capitalisation.
Having achieved full independence after the Swiss takeover, by 1997 funds under management had climbed to pounds 100bn, against a capital base of only pounds 300m, and there was a growing sense, as Stormonth Darling puts it, that "our retail clients, if not we ourselves, might feel more secure if we had a parent with deep pockets". Merrill Lynch paid pounds 3.1bn for the business, almost four times what the Swiss had paid for the rest of Warburg two years earlier.
Would the story have been different if the founder had still been at the helm at the time of Big Bang? The problem was that a firm run along the lines of a Continental-style haute banque, relying on a small staff of Siegmund's intimates and close personal contacts with key clients, was trying to reinvent itself as a much larger and more broadly based concern.
Stormonth Darling does not pretend to complete objectivity in these matters. This is a personal memoir, not a history, and much of its interest lies in its lively descriptions of many colourful personalities. But the book also conveys the flavour of City life when old values and management styles faced pressure from structural changes in the world's capital markets. The outcome appears to be an increasingly dominant role for giant multinational banks. One can only hope this new City establishment will come under attack from innovative newcomers, just as Siegmund Warburg challenged the old establishment in the 1950s.
The reviewer, formerly editor of the `Financial Times', is a senior fellow at the Institute of Management, London School of Economics, and author of `From Empire to Europe'
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