Hold the champers till after the honeymoon : CITY AND BUSINESS

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The Independent Online
EVERYTHING seems right about the proposed combining of SG Warburg and Morgan Stanley. And yet I can't quite rid myself of the suspicion that it could end up being a marriage made in hell.

The logic to the tie-up is sound. I can believe the central premise that within a few years the world's capital markets will be dominated by a few - a very few - massive investment banks. There will always be niche players. But to handle large primary issues of debt and equity requires a distribution network across the globe. And to take big and potentially profitable punts in the derivatives market requires a cast-iron balance sheet.

Size and reach matter. As Nick Verey, the head of Warburg's securities side, put it to me: "Anyone who doesn't say: `Wow, this is exciting', doesn't understand the investment banking business." The merger (as Warburgers are very anxious to call it) wouldcatapult the bank into the ranks of the so-called "bulge bracket" of investment giants such as Goldman Sachs and Salomon Brothers.

Warburg's choice of Morgan Stanley seems equally reasonable. The fit is attractive: Warburg desperately needs more credibility in the United States, where its progress has been tortoise-like despite spending millions. Morgan Stanley has had the same trouble making inroads in London. And there is sufficient duplication to yield useful cost savings, though the two fiances stress this is not the main aim.

The fund management arms are complementary, too. Warburg's 75 per cent-owned Mercury Asset Management is strong in European equities and international fixed income investment. Morgan Stanley Asset Management is well regarded for US investment and emerging markets.

So in theory the merger has lots going for it. And yet, and yet. Successful mergers are all about compatible personalities. Mergers of businesses such as investment banks are doubly so.

Combining these two firms will require brilliant management, diplomacy, and occasional ruthlessness. It's hard to see how the combined group will need many more than 10,000 of its 14,000 employees. A lot of people this weekend will be figuring out how best to protect their jobs.

The cultures are very different. Warburg's chief executive, Lord Cairns, is urbane and patrician. His opposite number at Morgan Stanley, John Mack, a former bond salesman nicknamed Mack the Knife, is aggressive and highly political. Warburg believes in relationship banking; Morgan Stanley is more deal-driven. Warburg is paternalistic; Morgan Stanley is more hire-and-fire. Warburg is understated British; Morgan Stanley upbeat, uptight American.

Welding these two organisations together will require very different skills from the visionary talent needed to come up with the idea in the first place. It will take uncompromising leadership and a willingness to make tough decisions. Warburg talks confidently about an international matrix style of management, whatever that may be. Unless clear lines of authority are in place, the scope for fudge, delay and confusion is almost unlimited.

Of course the merger may never get that far. Two things can still sink it. One is the attitude of MAM, which is taking independent financial advice. MAM is undoubtedly the jewel in the Warburg crown, responsible for the bulk of Warburg's profits in the last six months. It's easy to see the attraction of MAM for Morgan Stanley. It's harder to see what's in the deal for the 25 per cent of MAM shareholders who are not Warburg.

The other potential problem is price. Rather strangely this has already been agreed and set in stone. By announcing that shares in the merged group will be held in the ratio of two to one between Morgan and Warburg shareholders respectively, the architects of the deal have, in effect, decided that Warburg is worth precisely 50 per cent of Morgan. And this is before taking any independent corporate finance advice. Outside advisers have yet to be appointed.

I've been assured by Warburg that the price is sacrosanct regardless of any changes in the relative fortunes of the two sides between now and the planned consummation in four or five months.

On Wall Street the view seems to be that this is a takeover, not a merger, and that Morgan Stanley has taken control of Warburg for a song. If that view gains currency on this side of the Atlantic, Warburg's outside directors will need to take some independent advice, and quickly.

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