Piling up misfortune

Things suddenly seem to be going wrong at the bluest of our blue chip banks. It bungled a takeover and the shares are falling faster than staff morale. Should it muscle onto Wall Street to survive? Andrew Garfield reports
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IS THE game up for Schroder after more than 181 years as an independently owned British merchant bank? That is fast becoming the conventional wisdom in the notoriously catty Square Mile after the bungled attempt a fortnight ago to plug Schroder's weakness in the American merger and acquisitions advisory business with the $400m (£250m) purchase of Beacon, a small Wall Street M&A boutique run by an ex-Goldman Sachs rainmaker, Geoffrey Boisi.

IS THE game up for Schroder after more than 181 years as an independently owned British merchant bank? That is fast becoming the conventional wisdom in the notoriously catty Square Mile after the bungled attempt a fortnight ago to plug Schroder's weakness in the American merger and acquisitions advisory business with the $400m (£250m) purchase of Beacon, a small Wall Street M&A boutique run by an ex-Goldman Sachs rainmaker, Geoffrey Boisi.

The negotiations could have been better handled. The first senior staff heard about the talks was from the press. Particularly hard to take for many of them was that Mr Boisi, a flamboyant character often compared to Gordon Gekko, was reportedly being lined up as successor to Win Bischoff, chairman of Schroder.

For others on the board, such as Will Samuel and David Salisbury, the heads respectively of corporate finance and investment management, with ambitions of their own, the thought of Mr Boisi, lording over them was too much to bear. The contrast with Mr Bischoff, a man of unquestioned decency and integrity straight out of the City old school, could hardly have seemed greater. At a heated meeting at Schroder's City headquarters, they made their views known. The next day, in characteristically telegraphic style, the firm issued a two-line statement saying talks with Beacon had been terminated by "mutual agreement". A City banker said: "What does it say about your own senior management when you are prepared to bring in a complete outsider to put over them?" Another said: "It also wasn't clear this was the right firm for them. Beacon makes its money by taking a slice of the deal. That isn't Schroder's way."

City rivals, quick as ever to pounce on a perceived weakness, are drawing parallels with SG Warburg's abortive attempt to merge with Morgan Stanley in 1995. Six months later, the City's pre-eminent merchant bank was in obvious financial difficulties and offering itself on a plate to Swiss Bank Corporation, then an upstart in the galaxy of global finance.

So far, the founding Schroder clan who, through various trusts, own 48 per cent of the firm have stood steadfastly behind Mr Bischoff and the board. For a firm that prides itself on its ability to execute deals for clients, having one's own deal blow up in one's face has to be a huge embarrassment. It has also highlighted what a thorny issue the US has become for the firm.

In May, less than two weeks after Steven Kotler, veteran head of the New York operations, announced he was taking retirement after 25 years at Schroder, Richard Broadbent, a UK stalwart who had been dispatched to sort out the US business suddenly quit "to pursue other interests". There was clearly a personality clash. Mr Broadbent, it is believed, thought Schroder was wasting its time trying to compete on its own in the US and ought to think seriously about selling up.

To traditionalists in the firm for whom flying the flag as the last British-owned full-service investment bank is a matter of honour, such views are heresy. Nearly two centuries of history is not something a family which prides itself on having the world's biggest private collection of German renaissance silver lightly tosses aside.

Mr Bischoff, a patrician German-born South African who commands immense loyalty in the firm, has promised a review of the firm's options for the US. He must be aware that the failure of SG Warburg to resolve how to compete with the big American firms without a sizeable US presence cost the firm's independence.

It is hard to see what he can do. Schroder has a reasonable presence in securities broking and investment management on Wall Street, but in the headline-grabbing merger and acquisition business, it is nowhere. Buying a Goldman Sachs or even a Lehman is a non-starter. Paying $500m for a niche US boutique may not get Schroder out of its strategic bind either. Many in the firm believe Schroder should leave the US alone. It has been the graveyard of so many UK banks.

The latest jitters come at a time when Schroder appears to be losing ground on several fronts at once, but particularly in its UK domestic market. Although performance on the investment management side, which accounts for two-thirds of revenues, has picked up, the firm is still losing UK business. That is despite a reorganisation last year which led to Nicola Ralston taking over as full-time head from the popular and iconoclastic Jim Cox who retired last Friday.

On the advisory side, most of the big deals seem to be going the way of Goldman Sachs, Morgan Stanley and CSFB. Insiders admit the collapse of NatWest's £10.5bn bid for Legal & General, where Schroder was advising, was a serious blow and will show up in an inferior performance in the industry league tables this year. The loss to Goldman Sachs in September of Karen Cook, the co-head of UK investment banking, was also keenly felt. Insiders say focusing on global merger and acquisition league tables misses the point. Panfilo Tarentelli, the head of European investment banking, said: "You are comparing General Motors and BMW on how many cars they sell." He said Schroder has been making big inroads in continental European countries and sectors at the expense of the big American firms, thanks to a strategy of deliberately targeting sectors such as finance, telecoms and power, and countries where the firm believes it has an edge, rather than going head to head against the "financial supermarkets" on every deal.

Among big deals Schroder has won in the teeth of fierce competition, are the 4bn euro (£2.6bn) privatisation of Credit Lyonnais, the 22bn euro third tranche of the Deutsche Telekom privatisation, and the 10bn euro issue in the Nordic telecom giant TeliaTelenord, which is being sold off next year. It is also acting for the Italian Government in the 9bn euro sale of Autostrade, the motorway network.

In the past three years, Schroder has seen its European revenues rise to 50 per cent of the total, though UK revenues doubled in that period. "This is a business we started from scratch in 1996," Mr Tarentelli adds. "It is the envy of our competitors. But it is not the Schroder people outside the business often recognise."

Schroder loyalists also argue that, unlike the Wall Street firms who have unashamedly brought their "if you don't kill, you don't eat" philosophy to Europe, clients here appreciate having an adviser who can still afford to tell people when not to do a deal. One said: "When the Americans arrived, they talked about relationships. Now they have become arrogant and openly boast about being hired guns. Clients definitely see us as a real adviser."

But admirable as such scruples are, does it really cut much ice in a dog-eat-dog world where there are so many chief executives in a hurry itching to do the next mega-deal? The big American houses also make much of being truly global firms. Without the US, many inside and outside the firm fret that Schroder risks being outpaced by its clients.

One senior banker who quit the firm for an American house said: "It is true that Schroder are winning some of the battles, but it is becoming increasingly hard. The larger FTSE companies are doing more and more of their business in the US. That is where Schroder will fall down." Schroder, he says, will find itself fishing in the FTSE 250 and lower for more business. "It is a viable strategy. But it means going downmarket. That is not what many people join Schroder for. People join Schroder to do the big deals." Although dwarfed by the likes of Morgan Stanley and Merrill Lynch, Schroder is a formidable company, and its core UK investment banking business is extremely profitable. Its people are regarded as being among the best in the business. They are better-paid than colleagues at Rothschild and Lazard, though those at the big US houses are better-paid. The culture prides itself on teamwork and collegiality. Yet there is no doubt confidence among staff is no longer rock-solid.

Schroder is comfortably in the FTSE-100, although with the founding family holding such a large slice of the business, it is run more like a private partnership. Staff feel this style enables the firm to take longer-term decisions, and ride out the troughs in an inevitably volatile business other quoted UK merchant banks like Morgan Grenfell, Kleinwort Benson and SG Warburg were never allowed to do. If there are misgivings in the family about Mr Bischoff's stewardship, they have been kept private.

One member of the family works in the bank, Philip Mallinckrodt. His father, George, "Gowi", Mr Bischoff's predecessor as chairman, and now president, married a Schroder. But the main spokesman for the family is Bruno Schroder, 66, a direct descendant of Johann Heinrich Schröder, the German from Hamburg who founded the firm in 1818. A secretive man, who lists his interests as flying, stalking and continental silver, Bruno sits on the board in a non-executive capacity. He is not a professional banker. How much of the business he truly understands, is hard for an outsider to tell. Few, would these days regard locking a family's entire wealth in one bank as a sound investment strategy, but for him that is clearly not an issue.

But the underlying message is clear: "The Schroders believe what they have inherited they hold in trust for the next generation," says one of the firm's outside shareholders. "Their job is to look after it and preferably hand it on in better shape than it was when they inherited it from the previous generation."

If selling the firm was really what the Schroders wanted to do, they have left it late. In 18 months Schroder's share price has tumbled from a high of £20 to just over £12. At the peak, the firm could have fetched up to £7bn. If they were to sell now they would be lucky to get more than £4bn.

It is also not obvious who would buy. Goldman Sachs or Morgan Stanley have critical mass in UK corporate finance. They would love to buy the asset management side, but it is doubtful whether Schroder would oblige and split itself up. Salomon Smith Barney, now owned by Citigroup, the giant American financial services supermarket, would also love the business, but again it is hard to see that being a berth of choice for a still very proud firm.

Schroder: a potted history

1804: Johann Heinrich Schröder leaves Hamburg to work in his brother's firm in London

1818: Leaves to found his own banking firm Johann Heinrich Schroder & Co - later anglicised to J Henry Schroder & Co

1849: His eldest son John Henry takes the reins

1850: The Schroder charitable trust is formed

1853: First capital-raising exercise: a bond issue for Matanzas and Savanilla railway in Cuba

1863: During the American civil war raises a £3m bond issue for the Confederacy

1870: First Japanese loan for Toyko to Yokohama railway

1910: Firm passes to John Henry's nephew Bruno Schroder

1914: Outbreak of First World War forces Bruno to pull strings in order to be naturalised as British

1923: Schroder opens on Wall Street

1926: Sets up investment management business.

1931: Aftermath of Wall Street crash and worldwide depression hits firm

1940: Bruno Schroder dies

1957: Schroder changes from partnership to private limited company. Gordon Richardson, later to be Governor of the Bank of England, joins the firm.

1959: Floats on the London Stock Exchange

1962: Firm merges with Helbert Wagg

1986: Buys 50 per cent of US firm Wertheim

1994: Buys out Wertheim

1995: Adviser on Kleinwort Benson sale to Deutsche Bank and SG Warburg to Swiss Banking Corp

1996: The bank's president George Mallinckrodt knighted. Schroder Japan became largest foreign- owned active investment advisory company in Japan

1998: Advised Commercial Union on merger with General Accident

1999: Advised Credit Lyonnais on initial public offering