Continentals move in on the Square Mile

A deal between Swiss Bank and Warburg could be clinched as early as this week

CITY analysts were putting the finishing touches yesterday to their predictions of the next phase in the struggle for the future of the SG Warburg merchant banking group.

Many Warburg and Swiss Bank Corporation executives will be forgoing tomorrow's VE Day celebrations to hammer out a deal that they can present to an intrigued City, possibly as soon as the London stock market reopens on Tuesday.

The merchant banking community is united in the belief that Warburg's days as an independent entity are effectively at an end. The collapse in February of the attempted merger with the US-based Morgan Stanley was only a temporary reprieve.

That in turn has revived all the fears of three months ago, that London's bid to join the global premier league of investment banks was at an end. All that remained was to calculate how much the corpse was worth and set about carving it up.

The range of expectation is that Warburg's investment banking operations could be valued at anywhere between 350p and 525p per share, equivalent to between one and one-and-a-half times net asset value (NAV). Chris Smith, banking researcher for the stockbrokers James Capel, ventured an agreed deal at about a 15 per cent premium to the investment banking division's NAV.

If that is the case, Warburg shareholders could expect a payment of 860p a share, including their portion of Warburg's 75 per cent stake in Mercury Asset Management. Each Warburg shareholder is effectively entitled to 0.62 per cent of a Mercury Asset Management share, currently trading at 893p.

The Credit Lyonnais Laing analyst, Neil Baker, was more bullish, predicting a successful deal at about £11 a share, which he calculated to be a 50 per cent premium on the investment banking operations' NAV. Mr Baker added that SBC would be getting "a good deal" if the package Warburg shareholders received equated to 950p per share.

But Mr Smith believes that unless the bid is generous enough, others could be tempted to join the fray in the knowledge that until now there has been no love lost between the two sides to the negotiation. "Assuming there was no huge hole in the accounts," he said, "a deal at book value would attract other players."

A queue of counter-bidders might be the final crumb of consolation for Sir David Scholey, 31 years with Warburg, 28 years a director and 14 years a director of the Court of the Bank of England.

Six months ago he was looking forward to handing over the chairmanship next month to Lord Cairns, his loyal but ineffectual chief executive. Instead, as the Morgan deal fell apart, Scholey was forced to postpone his retirement to return as executive chairman. As he did so, he accepted Cairns's resignation and was publicly all for continuing Warburg's independence. But, in his heart of hearts, he knew the game was up.

This was possibly one of his final pieces of merchant banking bluff. One disastrous year, involving losses on bond trading and advising on a poorly conducted and ultimately abortive bid by Enterprise Oil for Lasmo, changed all that.

The very fact that Warburg was talking to Morgan Stanley as the probable junior partner suddenly made everyone in the City realise just how vulnerable Warburg - and therefore the rest of the independent merchant banks - had become.

While the giant Japanese securities houses have trodden very cautiously since Big Bang, the London stock market's deregulatory orgy nine years ago, the London firms steeled themselves for wholesale takeover by Americans waving their cheque books.

To some extent that happened. Citicorp bought Scrimgeour Vickers, one of the biggest London brokers. Chase Manhattan, another big US bank, bought two brokers - Simon & Coates and Laurie Milbank. Lehman Brothers bought Messel. Security Pacific bought Hoare Govett.

But the Americans found that it was not so simple. The assets and many of the customers walked out of the door. Disillusioned, Chase, Citicorp and SecPac sold. Others retrenched.

Meanwhile, the initially timid European banks began to move in. Union Bank of Switzerland was one of the few continentals to move in before Big Bang, buying the respected broking house of Phillips & Drew. Others took up positions and watched.

Last year Hoare Govett came on the market again and the Dutch bank, ABN Amro, bought it. Louis de Bievre, ABN's head of investment banking, said: "We feel that the importance of the London market is not diminishing. On the contrary, if you want to be a part of investment banking you have to be in London. More important than its geography or history is the importance of UK investors, and the access it gives us to them." Mr de Bievre was at pains to stress that ABN does not want to buy a merchant bank - for now. But it is keeping its options open.

From that point of view, SBC is a maverick, as the firms who have crossed swords with it in a corporate finance duel know to their cost. In April last year bruised competitors asked the Bank of England, the London Stock Exchange and the Securities & Investments Board to investigate overly aggressive tactics and alleged infringements of the rules by SBC.

Whether or not Warburg was one of the complainants is unclear, but it was certainly unhappy at SBC's conduct with regard to a Eurotunnel financing exercise. Nothing came of the plea to the regulators, but it made plain that the Swiss were not messing about. Now, after establishing itself as a ruthless innovator, SBC is bidding for the big time.

One of the big American firms in London admitted: "We made mistakes. We came in too quickly, before we knew enough about the London market and how it operates. Now we know better - and we are taking our time."

The conventional view is that Warburg's surrender signals the victory of the big battalions - that, of the Brits, only clearers like Barclays and National Westminster will make it on the global stage. Mid-sized independents such as Hambros, Rothschild, Schroder and Kleinwort Benson will eventually get picked off, runs this argument.

Last week most of that group were keeping quiet. But Anthony Fry of Rothschild argued that there would still be room for the nimble niche player: "We have a firm view here that the world is dividing into those with capital and those without. It means that if you don't have capital, you have to tailor the business you do to take that into account."

Mr Fry's thesis is that capital markets will soon go the way of commercial banking - a commodity business where margins will eventually be squeezed to near-invisibility. But advice will always be valuable, and corporate clients will always want a niche merchant bank's wisdom to balance the views they are receiving from their big capital markets bank. "We feel we have every reason to be confident," he said.

The snag with that blueprint is that it will display to the world at large what mid-sized merchant banks strove for years to conceal: their lack of financial reserves. They will, like those flash advertising agencies at the other end of town, be worth only as much as the talent they can hang on to. And, as Warburg has found to its chagrin this year, that talent can easily be bid away by precisely those big capital markets players the niche banks want to outfox. In the end, in the City more than anywhere else, money talks.

Life and Style

Sales of the tablet are set to fall again say analysts

A Brazilian wandering spider

World's most lethal spider found under a bunch of bananas

Life and Style

British supermodel and hitmaker join forces to launch a 'huge song'

Life and Style

I Am Bread could actually a challenging and nuanced title

Mario Balotelli pictured in the win over QPR
footballInternet reacts to miss shocker for Liverpool striker
Sol Campbell near his home in Chelsea
Kimi the fox cub
newsBurberry under fire from animal rights group - and their star, Kimi
Fans of Palmeiras looks dejected during the match between Palmeiras and Santos
footballPalmeiras fan killed trying to 'ambush' bus full of opposition supporters
ebooksAn unforgettable anthology of contemporary reportage
Arts and Entertainment
filmsIt's nearly a wrap on Star Wars: Episode 7, producer reveals
Life and Style
<p>Jonathan Ross</p>
<p>Jonathan Ross (or Wossy, as he’s affectionately known) has been on television and radio for an extraordinarily long time, working on a seat in the pantheon of British presenters. Hosting Friday Night with Jonathan Ross for nine years, Ross has been in everything from the video game Fable to Phineas and Ferb. So it’s probably not so surprising that Ross studied at Southampton College of Art (since rebranded Southampton Solent), a university known nowadays for its media production courses.</p>
<p>However, after leaving Solent, Ross studied History at the School of Slavonic and East European Studies, now part of the UCL, a move that was somewhat out of keeping with the rest of his career. Ross was made a fellow of the school in 2006 in recognition of his services to broadcasting.</p>

Rumours that the star wants to move on to pastures new

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

iJobs Job Widget
iJobs Money & Business

ASP.NET Web Developer / .NET Developer

£60 - 65k + Benefits: Guru Careers: We are seeking a ASP.NET Web Developer / ....

Operational Risk Manager - Asset Management

£60,000 - £80,000: Saxton Leigh: Our client is an leading Asset Manager based...

Project Coordinator - 12 month contract

£27000 - £32000 Per Annum: Clearwater People Solutions Ltd: Our large charity ...

IT Operations Manager - London - £55,000

£50000 - £55000 per annum + bonus + benefits: Ashdown Group: IT Relationship M...

Day In a Page

Oscar Pistorius sentencing: The athlete's wealth and notoriety have provoked a long overdue debate on South African prisons

'They poured water on, then electrified me...'

If Oscar Pistorius is sent to jail, his experience will not be that of other inmates
James Wharton: The former Guard now fighting discrimination against gay soldiers

The former Guard now fighting discrimination against gay soldiers

Life after the Army has brought new battles for the LGBT activist James Wharton
Ebola in the US: Panic over the virus threatens to infect President Obama's midterms

Panic over Ebola threatens to infect the midterms

Just one person has died, yet November's elections may be affected by what Republicans call 'Obama's Katrina', says Rupert Cornwell
Premier League coaches join the RSC to swap the tricks of their trades

Darling, you were fabulous! But offside...

Premier League coaches are joining the RSC to learn acting skills, and in turn they will teach its actors to play football. Nick Clark finds out why
How to dress with authority: Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear

How to dress with authority

Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear
New book on Joy Division's Ian Curtis sheds new light on the life of the late singer

New book on Ian Curtis sheds fresh light on the life of the late singer

'Joy Division were making art... Ian was for real' says author Jon Savage
Sean Harris: A rare interview with British acting's secret weapon

Sean Harris: A rare interview with British acting's secret weapon

The Bafta-winner talks Hollywood, being branded a psycho, and how Barbra Streisand is his true inspiration
Tim Minchin, interview: The musician, comedian and world's favourite ginger is on scorching form

Tim Minchin interview

For a no-holds-barred comedian who is scathing about woolly thinking and oppressive religiosity, he is surprisingly gentle in person
Boris Johnson's boozing won't win the puritan vote

Boris's boozing won't win the puritan vote

Many of us Brits still disapprove of conspicuous consumption – it's the way we were raised, says DJ Taylor
Ash frontman Tim Wheeler reveals how he came to terms with his father's dementia

Tim Wheeler: Alzheimer's, memories and my dad

Wheeler's dad suffered from Alzheimer's for three years. When he died, there was only one way the Ash frontman knew how to respond: with a heartfelt solo album
Hugh Bonneville & Peter James: 'Peter loves his classic cars; I've always pootled along fine with a Mini Metro. I think I lack his panache'

How We Met: Hugh Bonneville & Peter James

'Peter loves his classic cars; I've always pootled along fine with a Mini Metro. I think I lack his panache'
Bill Granger recipes: Our chef's heavenly crab dishes don't need hours of preparation

Bill Granger's heavenly crab recipes

Scared off by the strain of shelling a crab? Let a fishmonger do the hard work so you can focus on getting the flavours right
Radamel Falcao: How faith and love drive the Colombian to glory

Radamel Falcao: How faith and love drive the Colombian to glory

After a remarkable conversion from reckless defender to prolific striker, Monaco's ace says he wants to make his loan deal at Old Trafford permanent
Terry Venables: Premier League managers must not be allowed to dictate who plays and who does not play for England

Terry Venables column

Premier League managers must not be allowed to dictate who plays and who does not play for England
The Inside Word: Brendan Rodgers looks to the future while Roy Hodgson is ghost of seasons past

Michael Calvin's Inside Word

Brendan Rodgers looks to the future while Roy Hodgson is ghost of seasons past