The Brothers go to meet their Big Daddy

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The Independent Online
The Brothers are about to acquire a Big Daddy. The City has barely had time to catch breath following Kleinwort Benson's rush into Dresdner Bank's embrace, and already the next big investment banking deal is imminent.

Smith New Court has finally confirmed what the market has been speculating about for months, that it is in advanced talks with several interested purchasers. Merrill Lynch of the US, one of the world's biggest securities houses, appears to be slogging it out with Commerzbank, one of Germany's retail banking giants, for the privilege of owning one of Britain's premier market-making operations, with superb equity distribution expertise. Once a firm offer is on the table, and that is not expected to take long, we could well see others entering the fray. There are not many available brides with Smith's strengths and ability left.

In the present wave of transactions, Smith New Court falls into the same category as Kleinwort Benson. This is not a distress sale as was Barings or SG Warburg, but a considered response to the realisation that to survive in today's ferociously competitive global investment banking environment, you need the capital clout to mix it with the big boys.

Despite being good at what they do, the Brothers have clearly come to the conclusion that they are too big to survive as a niche player, but too small to tough it out internationally on their own. Whether NM Rothschild, Smith's 26 per cent shareholder, agrees remains to be seen. Smith New Court is different from the previous takeovers in that it does not offer a full investment banking service. With its origins in pre-Big Bang jobbing, it has stuck to its guns, although it has managed recently to build up a small corporate advice business. Along with Warburg and BZW, Smith New Court is one of the really powerful market-makers in the UK. For both Merrill and Commerzbank, it is an attractive proposition. They will have to pay a full price, for Smiths is heaving with goodwill, but then neither of the prospective bidders is short of cash. Although a colossus at home, with an unrivalled retail network, the Thundering Herd, as Merrill is known, still has gaps overseas which Smith would help fill. For Commerzbank, by contrast, there are unnerving signs of me-tooism as, lacking any proper international investment banking business, it tries to keep up with its domestic rivals. Whether they can all succeed in a business already suffering from overcapacity must be extremely doubtful.