Go-it-alone Schroders battles on
Sunday 28 December 1997
Shares in the 179-year-old company, which has clung to independence through two world wars, the big bang of 1986, and the last round of investment banking takeovers two years ago, have gained 15 per cent in the last month on speculation that this time it might sell.
But while other financial companies, like Deutsche Bank and Swiss Bank Corp race to create global securities operations, Schroders is confident its focus on fund management and corporate finance will continue to hold a profitable niche for it in the market.
"We don't see all the business in the world going to the big six banks," said Peter Sedgwick, deputy chairman. "The management and the principal shareholders are wholly committed to the continuing independence of Schroders."
Schroders is digging in just as other UK firms are selling out. Both National Westminster Bank and Barclays sold the bulk of their investment banking operations in the last month after a decade of trying to build global businesses. Hambros last week sold its banking unit to France's Societe Generale for pounds 300m. Mercury Asset Management, the largest UK fund manager, sold itself to Merrill Lynch three weeks ago for pounds 3bn to create the world's fourth-largest fund manager.
With more than pounds 100bn in assets under management, Schroders' fund management arm equals the size of Mercury. Along with its investment banking business, which boasts the most extensive list of FT-SE 100 companies as clients in the UK, Schroders could command even more than Mercury.
Schroders shares are trading at pounds 18.70, giving it a market capitalisation of pounds 3.6bn. Analysts estimate the company could sell for up to pounds 4bn, which is four times more than Dresdner Bank paid for Kleinwort Benson two years ago in the largest purchase of a UK securities company.
Investors believe the Schroder family, which owns 48.1 per cent of the company's shares, and the management of the company will some day sell to a big securities firm like Morgan Stanley, Dean Witter, Discover or Credit Suisse. They are not sure when though.
"Long term, Schroders can't survive alone," said Alan Harris, a fund manager at Burrough Asset Management. "I don't see any takeover coming immediately. Schroders has a strong family shareholding and it would be difficult to go against their wishes."
The Schroder family is led by Bruno, who is the only family member to sit on the company's board of directors. The family has held back from selling in the last 11 years. Since the big bang, Schroders has focused on two main businesses - fund management and corporate finance, both of which have grown in the past 11 years to dominant positions in the market. Net profit at Schroders was pounds 179m last year, up from pounds 72m in 1996.
Profit has grown steadily every year, which Sedgwick said is what the company strives for. He said the fund business in particular is of a size where it can compete with any fund manager in the world.
"While scale is becoming the word at the moment, in this particular area we have the scale and we are not disadvantaged," he said.
Sedgwick said Schroders' fund business is especially focused on growth in Japan, where foreign fund managers are trying to take advantage of the opening of the Japanese market.
Sedgwick said Schroders is also confident in the ability of its investment bank to continue making money. It was the most successful merger adviser on UK transactions in the first half of 1997 and has been building its franchise in Europe and in the UK, where it owns Schroder, formerly Schroder Wertheim.
Analysts are divided about the future for Schroders in the rapidly consolidating securities industry. They all agree, though, that Schroders is at the moment dealing from a position of strength, which would make a takeover possible only with an enormous premium to the current share price.
"They control their own destiny," said Martin Cross, a banking and securities analyst at UBS. "It's an excellent company and if it's within their power they will stay independent."
Cross has a hold on the shares because he thinks the company's potential to succeed will continue even if it stays independent. "But if you take the view that Schroders will sell out then it's a screaming buy."
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