The Americans are coming: US investment banks and securities houses are optimistic about their future in London and Europe. John Willcock reports

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The Independent Online
OVERSEXED, overpaid and over here. Or so they used to say about the GIs who swamped the UK in the months leading up to D Day.

This time the numbers are smaller. The most powerful US securities firms - such as Goldman Sachs, Salomon Bros, Lehman Bros and Morgan Stanley - each have no more than one or two thousand staff in London. Nevertheless their impact on corporate finance and securities dealing in Europe may be soon be comparable to their war effort.

Or so they would have you believe. As the head of one leading US institution in London recently claimed: 'We don't just mean to be the leading investment bank in Europe. We mean to be the best investment bank in the world.' Securities market-making in London would be dominated by the Americans 'within 10 years' forcing many undercapitalised UK houses to drop out.

He cited his bank's sheer size, its capital backing, stemming from the scale of its operations in the home US market, and its technological expertise and global integration, and then compared this with the fragmented and backward-looking British merchant banks.

Is this sheer bravado from a banker whose compatriots have had a less than brilliant record in some parts of the London markets? After all, Citicorp invested pounds 250m in London's securities industry Big Bang in 1986, but ended by pulling out, and so did a number of other American banks.

Nevertheless, the American firms have learnt lessons in the past six years. There are a number of reasons for American investment banks and securities houses to be optimistic about their future position in London.

In the short term, the US economy is recovering at a time when Europe and Japan are still grappling with deep problems, while in the longer term there appears to have been a structural shift in the way Americans invest, which will see the US increase equity holdings abroad.

Doug Atkin, managing director of Instinet UK, an American on- line broking service, observed: 'The US pension managers I speak to are planning to increase their asset allocation to non-US investments from 5 per cent to 15 per cent of their portfolio. Ten per cent of several trillion dollars is a lot of money.'

From now on US fund managers will look at investment on a global basis. As far as they are concerned, Mr Atkin said, 'Peugeot is no different to General Motors plus some currency risk.'

As this transatlantic flow of equity gathers pace, Americans expect to get the lion's share of the work of finding a home for it, through the US investment banks operating in London. And because their expertise is often greatest in cross-border deals, they believe the integration of Europe and the continuing move to privatisation in large economies such as Italy and France will aid their cause.

The British-owned houses' best card is their mergers and acquisitions advisory work, which relies on long-standing relationships rather than capital strength. Foremost among them is SG Warburg. It is striking how Americans, when the subject of a British contender for world class status comes up, only ever mention Warburg.

For its part Warburg dismisses suggestions that it is talking to JP Morgan about forming a strategic alliance to make up for its lack of global capital clout.

The idea, which has been denied with equal vehemence by JP Morgan, is that Warburg would pool its strengths in UK and international M&A with JP Morgan's global position in securities.

Yet Warburg might not be the only UK contender for global status. BZW and NatWest Securities both have what other UK merchant banks lack - capital.

Americans also concede that Cazenove will continue to be pre-eminent in its ability to place big lines of UK stocks with customers.

But even here they think Cazenove's unrivalled contacts in the UK will be progressively less of an advantage, as the securities business becomes more cross-border-oriented.

Given the problems of the UK economy, why do the US banks want to be here in the first place? They would argue it is because they want to dominate Europe.

In the words of John McFarlane of Citicorp: 'It's a hub and spoke operation,' the hub being London and the spokes the rest of Europe.

The British merchant banks greet with hilarity American claims that they will be 'running London in 10 years' time'.

'They haven't really competed that much with the British houses,' said one. 'Goldman has been a good co-adviser on M&A. But in all but one of the deals last year, UK banks were lead advisers. It's the same with rights issues. It's unknown for a US house to be a lead underwriter on a rights.'

As a result, he said, even if they have done an excellent job in Continental Europe - though the UK is beginning to catch up in places like Italy - their penetration of the UK in general is poor.

Moreover, he added: 'How profitable are their operations outside the US? If, as I suspect, they are not profitable, then you should look out. The Americans don't tend to stick with things once they're losing money.'

Guy Dawson, head of corporate finance at Morgan Grenfell, itself owned by Deutsche Bank, said: 'The American investment banks have to take a pan-European attitude because of their relative failure in the UK M&A market.

'M&A in the UK is still dominated by the same cast of characters, mainly the traditional UK merchant banks.

'But the Americans have undoubtedly done well in Europe. They have generally gone into it in a larger way and more efficiently than the UK banks.'

The general view is that while Europe is a big market, it is immature compared with the US or UK. Goldman is frequently cited as the closest to a pan-European investment bank, while Morgan Stanley and Lehman are seen as contenders, albeit some way behind. However, no bank has yet created a pan-European franchise.

In France Lazard is pre-eminent, while Credit Lyonnais and Banque Paribas are also powerful. In Italy Mediobanca maintains a dominant position. So the market for a pan-European player is still wide open.

Morgan Grenfell has taken advantage of its ownership by Deutsche Bank to expand business in Germany and the Continent generally.

Some observers of Schroder, on the other hand, suggest that it is perfectly happy with its UK presence and eschews a more general European strategy.

US houses with traditional strengths in retail in the US, such as Merrill Lynch, have not had such a big impact in the UK as wholesalers like Goldman because share ownership is still far less widely spread amongst private investors in the UK than it is across the Atlantic. But Merrill still employs 1,300 people in London.

In the securities dealing area Goldman and Morgan Stanley are viewed as the best performers in London since Big Bang, dealing big lists of stocks for institutional customers.

Morgan Stanley and Salomon in particular are seen as big players on Seaq International, the London Stock Exchange's international equity market.

Lehman Brothers, Goldman and Salomon are also in the gilts market's top half dozen, a business that will be increasingly important in funding the British deficit.

In practice UK corporate finance and mergers and acquisitions markets, and areas such as equity market-making in the FT- SE 100 stocks, will probably continue to be dominated by UK houses.

But on its own this is not enough. If we are not careful, Britain's representation in the world's financial markets may begin to resemble its cricket team.

(Photograph and chart omitted)

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