Foreign invasion has shifted into different gear

"In some respects the takeover represents a further tribute to the City, confirming its reputation as the undisputed hub of investment banking in Europe."
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Kleinwort Benson's now public talks with Dresdner Bank of Germany sound the death knell of the independent British investment bank. The takeovers in short order of Barings and Warburg were important harbingers but both of these were to a greater or lesser extent forced sales; until yesterday, it was just about possible to believe that more conservatively run and focused houses might continue to enjoy a viable independent future. The Kleinwort talks shift the foreign invasion into an an altogether different gear. Barings was a firesale; Warburg had something of a shop-soiled goods disposal about it. Kleinwort, by contrast, has got its business back in shape after some difficult years, and is dealing from a position of some strength. This seems to be sufficient for it to pick its partner and dictate some of the terms, but it is not enough to keep Kleinwort independent.

Kleinwort sees in Dresdner a parent that will give room to breathe, something that is much more akin to Deutsche Bank's takeover of Morgan Grenfell than SBC's acquisition of SG Warburg. The latter takeover requires painful surgery as Warburg is merged into SBC's existing investment banking business. Most of the alternative partners for Kleinwort - including potential British suitors like NatWest Group - would have involved the same thing. A bloodbath would have occurred as overlapping staff in the securities businesses were weeded out. The beauty of Dresdner is that it has no investment banking side to overlap with.

The fact that Kleinwort is prepared to forgo its independence when it is not under duress suggests that it shares the doubts about the long- term future of the middle-sized City merchant banks. They are too big to cut down to niche size, but not big enough in capital terms to sustain global ambitions in this increasingly cut-throat business.

The Dresdner/Kleinwort deal looks like making it to the finishing line, even though haggling over price may take a week or two. Dresdner has put 725p a share on the table. Kleinwort should be able to hold out for a little more than that; twice net asset value looks about right. That would be in stark contrast to Warburg, which went for a little below net asset value. The fit is good - Kleinwort's main business sectors, corporate finance, securities and asset management, are largely add-ons to Dresdner. The amount on offer, near Kleinwort's market value of pounds 980m, is hardly a knock-out, but Dresdner is clearly confident that risks of an upset are slight.

To see this deal as signalling the end of the independent British investment bank is not the only way of looking at it, however. In some respects, the takeover represents a further tribute to the City, confirming its reputation as the undisputed hub of investment banking in Europe. The fact that it seems to be Continental banks, rather than British ones, that are leading the charge conjuring up images of invasion is legitimate ground for concern, but the reality is that there are few home-grown big balance sheet businesses ready to rush down the aisle with marriageable blue-blood merchant banks.

NatWest Group is the only one to have trumpeted its desire to expand its investment banking activities, but it tried and failed to make a match with either Barings or Warburg. There is nothing to suggest it would fare any better with Kleinwort. Barclays appears satisfied in London with the strength of BZW; HSBC does not appear to have ambitions beyond James Capel and Samuel Montagu, and Lloyd's believes investment banking to be such an alien and evil thing that it wouldn't touch it with a barge pole. The only other domestic players with big money, the insurers, have been conspicuous by their absence. That leaves the field clear for the big Continental and American houses.

Whether these takeovers will live up to the hopes of their exponents is another thing. Some will almost certainly end in tears as so many of the stock market takeovers that occurred at the time of Big Bang did. Banks like Dresdner are piling into an area where returns on equity are thin and additional capacity is needed like a hole in the head. The culture clash between clearing banks and investment banks is bad enough; goodness knows what a respectable and staid German bank like Dresdner is going to make of the City's free wheeling, easy money ways. In 10 years, we could all be witnessing a new wave of management buyouts and what is happening now will look like a monumental squandering of money by the big Continental banks. But all that is in the future and for the moment, Britain's investment bankers should sit back and enjoy their new found attractions.