Jeremy Warner's Outlook: Eloquent solution for marginalised Cazenove

Nats' German threat; FSA Abbey blunder
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The Independent Online

A new beginning, or the humiliating end to a proud, near 200 year history of independence? Cazenove's decision to sell half the firm - minus its fund management operation - to the American investment bank JP Morgan Chase, is both these things. The Queen's stockbroker wouldn't have gone this route had it been possible credibly to float, as originally planned, and continue along its chosen path of independence, yet at the same time, the deal provides some sort of a way forward for the firm, which in recent years has begun to look stranded on the shores of a bygone age.

A new beginning, or the humiliating end to a proud, near 200 year history of independence? Cazenove's decision to sell half the firm - minus its fund management operation - to the American investment bank JP Morgan Chase, is both these things. The Queen's stockbroker wouldn't have gone this route had it been possible credibly to float, as originally planned, and continue along its chosen path of independence, yet at the same time, the deal provides some sort of a way forward for the firm, which in recent years has begun to look stranded on the shores of a bygone age.

Cazenove's iconic City brand belies the fact that these days it is actually quite a small business. Tiny compared with the bulge bracket investment banks of Wall Street, it has also been outgrown by more aggressive City upstarts, such as Terry Smith's Collins Stewart Tullett. The City networks and power structures on which Cazenove's success was built have changed out of all recognition, and so too has the nature and make-up of financial markets.

Determined to defend its unique culture and independence to the last, Cazenove has failed to move with the times, and although the firm does what it does incredibly well, these days it is just too small and British equity market-orientated to fight with the big boys in fast globalising capital markets. The statistic that rather gives the game away is that though JP Morgan and Cazenove are contributing roughly equally to the new venture's pro-forma profits, JP Morgan is transferring only 70 of its staff, against Cazenove's 800. Plainly, Cazenove isn't in the right line of business.

So where did it all go wrong? The thing Cazenove does best is corporate stockbroking, or stock market advice and transactions for big corporate clients. The firm's post-war success was derived from its ability to leverage these clients among the once relatively small group of British-based institutional shareholders who controlled corporate Britain. The companies thanked Caz for the power, influence and knowledge it was able to exercise among the big institutions and the institutions thanked Caz for cutting them in on the best new issues.

All this broke down after Big Bang, which prompted a huge influx of foreign capital into the City and a consequent explosion in the size and variety of financial markets which it housed. Virtually all the stockbroking, jobbing and merchant banking partnerships that ruled the City prior to Big Bang sold up to more capital rich interlopers, who set about introducing new ways, new securities, new markets and new structures. Perhaps as important, they also introduced Wall Street-style remuneration, which the British- owned refuseniks found it impossible to compete with. Top talent moved seamlessly to where the money was.

Stubbornly, Cazenove chose to remain independent, a move which looked all the more foolhardy when the firm became caught up in the Guinness affair in the late 1980s, a financial scandal which threatened such devastating reputational damage that at one stage the firm's very survival looked in doubt. To their credit, the partners stuck by their man, against whom the evidence was never more than circumstantial, and eventually the charges were dropped.

His name was David Mayhew. Today he's chairman of Cazenove and one of the most sought after corporate advisers in the City. Mr Mayhew has since repaid the loyalty Cazenove showed him at that time with dogged devotion to his firm. He could have earned far more elsewhere, but loyalty and duty has always come first.

Of course, the decline of Cazenove wasn't anything to do with Guinness. Much more powerful forces were at work. By sticking to its knitting, Cazenove simply got left behind. Paradoxically, Mr Mayhew's strengths as an adviser, and his seemingly magical ability to make the City do his bidding, has come to be seen as one of Cazenove's key weaknesses. It's too much of a one-man band, critics say. Once he's gone what will be left? Yet though Guinness wasn't the cause of Cazenove's marginalisation, I've often thought the trauma of the affair may have been at least a part of its undoing, causing the firm to lose focus and become stuck in time.

While Cazenove was busy fighting the Serious Fraud Office, the world changed, and by the time the senior partners noticed, it may already have been too late. Crucially, the firm failed to develop any significant capabilities outside the UK and none at all in fast-growing debt markets. It also largely stuck to the business of traditional equity stockbroking. The big investment banks these days make most of their money from proprietary trading, and by designing complex financial instruments to sell to big global clients. These developments largely bypassed Cazenove. Today's multinationals require ever more sophisticated financial advice and products. Caz can provide it only for the UK equity market.

Still, the firm has at least kept an element of its much cherished independence. The structure of the deal hatched with JP Morgan ensures this is partially maintained, at least for the next five years. For the first time ever, Cazenove will also have a decent balance sheet to play with. And finally the price wasn't too bad either, though plainly it could have been a whole lot better had Cazenove swallowed its pride and sold out four years ago. This was a deal driven primarily by worry about what the future holds. Given how few cards it had left, Cazenove has played them eloquently and well.

Nats' German threat

The Luftwaffe couldn't manage it but now German air traffic controllers are threatening to take over our skies. This blood-curdling warning comes from Paul Barron, the new chief executive of National Air Traffic Services. Far-fetched as the prospect may be, it is designed to rally support behind his new three-year plan, the gist of which is that unless Nats gets its act together, then someone else may do the job instead as air traffic control moves into the era of a "single European sky".

Nats was one of the less successful of Tony Blair's public-private partnerships. In the process of selling the company to a group of UK airlines - the only buyers who were acceptable to the unions - it was saddled with a mountain of debt which it always would have struggled to service. Barely six months after its creation, along came September 11, rendering an already incredible business plan completely meaningless.

Mr Barron, who took over in June, says he found an organisation stuffed full of very bright and technically adept people, but one whose staff did not think much of the management and whose airline customers found it "expensive, inflexible and arrogant". His task is to get costs down to the level charged by the Germans and Spanish while at the same time eliminating near misses and halving delays in what is the busiest airspace in Europe. There is ample evidence of the stick in Mr Barron's approach, but he may need a little more carrot if he is to get anywhere.

FSA Abbey blunder

No wonder so many private shareholders in Abbey National have determined to sell their shares in the market, rather than accept the largely share swap terms of Banco Santander. In approving the deal yesterday, the Financial Services Authority managed to get Santander's name wrong, labelling it Banco Central Hispano SA. There is no company of that name listed anywhere. Banco Santander would have done, or Santander Central Hispano. In fact, almost anything would have done but the name the FSA inexplicably chose to use. An honest mistake, I guess, but it doesn't give much faith in the FSA's prowess as a prudential regulator, or indeed the diligence with which it conducted its investigation of whether Santander is a fit and proper owner for Abbey National. All very worrying.

jeremy.warner@independent.co.uk

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