Continentals move in on the Square Mile

A deal between Swiss Bank and Warburg could be clinched as early as this week
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The Independent Online
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.