Warburg is walking tall

The investment bank is back from the brink, its cultured style intact. Now it is taking the fight to Wall Street, says Peter Koenig
Cool, meticulous, objective, calculating self-interest over the long term - for 30 years a banker different from all other bankers bestrode the City and financial centres beyond. Then five years ago Warburg man disappeared.

In February 1994 the US Federal Reserve raised interest rates, killing off the first emerging markets boom. Money men scurried for the safety of the dollar. Warburg, the one City merchant bank left competing toe-to-toe against the bigger Wall Street houses, suffered a liquidity crisis.

It sought to merge with Morgan Stanley. But the deal fell down when Mercury, Warburg's autonomous fund-management affiliate, balked. In the end, the proudest British merchant bank of the post-war era was forced to sell itself to Swiss Bank Corp at virtually book value, pounds 687m - less than half the sum commanded by the lesser asset Mercury when it sold out to Merrill Lynch just three years later.

Warburg's fate seemed a preview of the disaster set to overtake Hambros. The bank which had invented the eurobond market - and so set the City fair to become the European capital of global finance - seemed destined to become a historical footnote, or a marketing tool for the gnomes of Zurich.

Instead, two things happened. First, the brand name proved resilient. "What none of us fully understood at the time was the power of the Warburg name," says Robert Gillespie, head of European corporate finance. "All over the world."

The Warburg brand of investment banking was developed by the late Sir Siegmund Warburg, a German Jewish banker in flight from the Nazis who started a small, outsider firm in the City after the Second World War. A quirky but brilliant bully, he had by the late 1950s established an ethos of perfectionism which clients found authentic.

Second, after Warburg's humiliating 1994 sale to SBC, a core of young bankers raised to Warburg specifications but who believed at the same time that the bank's older generation had gone stale, survived. "A large peer group of us decided we wanted to stay, hold together and make the whole thing work," says Rory Tapner, global head of equity capital markets.

"We got killed daily in the press. But against all that, all the upheaval, we kept doing business. Did other banks get the opportunity to see our clients? Yes. Did they steal some of our best people? Yes, they did. But we thought: if we can keep going under these conditions, imagine what we can do when things stabilise."

But things did not stabilise. At the end of 1997 the biggest of the big three Swiss banks, Union Bank of Switzerland, suffered big losses in Hong Kong when its futures and options book went awry. UBS was forced into a $29.3bn (pounds 18.3bn) shotgun marriage to SBC. Another round of turmoil at Warburg ensued as it merged with UBS's investment bank.

Employee numbers went from 2,000 to 3,800 and back to 2,800 in just months. To complicate matters further, Warburg had acquired Dillon Read, a small US investment bank. Then last autumn UBS (as the merged SBC and UBS was renamed) and Warburg Dillon Read (as it was renamed) got caught with their pants down in Russia. To make matters worse, the old UBS had a big exposure to LTCM, the US hedge fund that nearly went to the wall during the global financial crisis.

By the end of last year rumours suggested that UBS would sell Warburg. In March Warburg reported a 1998 loss of $484m, much more than analysts expected. UBS swore it was not selling Warburg. But it replaced top management.

The new chief executive was a young Swiss banker with an academic and central banking background named Marcus Granziol. His lieutenants were drawn from the core of English bankers who in 1994 decided not to jump ship.

"Warburg has done badly and its [old] managers are paying the price," it was said at the time by Christopher Streit, a fund manager at Bank Leu, which holds shares in UBS. "If the new team doesn't do better, UBS may well get out of investment banking."

The new team has done better. On 24 August Warburg reported pre-tax profits of $1bn for the first half of this year, a jump of 37 per cent jump on the same period last year. Leading the bank was its booming equity trading business. "We're the leaders in the pan-European network, based on size, breadth of network and coverage," says Colin Buchan, global head of equities. A US analyst reports that a recent survey by the US market research firm McLagan established that Warburg is now the world's third-largest recipient of commissions.

The bank's European mergers and acquisitions business has yet to recover from the turmoil of the past five years. Despite an increase in revenues on the back of the roaring European M&A trade - plus high-profile deals like advising Ford on its acquisition of Volvo - Warburg fell from fifth to ninth place in the league table of top M&A houses by volume of deals.

Warburg recognises there are no quick fixes, but sees itself as on course to repair damaged relationships with M&A clients while developing new ones. "Of the top seven or eight banks we are the only one with a headquarters in Europe, which gives us a unique opportunity," says Mr Gillespie.

US investment banks are known as good but aggressively self-interested. Warburg wants to become known as good, but more restrained. "Wall Street M&A bankers have to meet revenue targets," says Mr Gillespie. "I tell my bankers to do their jobs, sometimes advising clients not to do deals, and leave me to worry about the revenue targets."

Mr Gillespie strikes the theme that emerges from the bank overall: Warburg Man is back, under Swiss ownership perhaps, but once again a champion of the City. He is different from US investment bankers. Watch him fly going forward.

Not everyone accepts this proposition at face value. Keith Baird, analyst at Enskilda Securities, says Europe has become the investment bank market of choice. "Competitive pressures are growing. Shareholder value is taking hold. There's tremendous restructuring."

Wall Street, consequently, has targeted Europe. "It's the indigenous Europeans with their client relationships versus the Americans with their technical product." Mr Baird calls Daimler's acquisition of Chrysler a watershed. "Goldman advised Daimler, not Deutsche Bank," he notes.

He is impressed that Warburg has survived five years of turbulence relatively unscathed. But he sees global finance consolidating. The image is 500 top companies, 500 top institutional investors, and five investment banks in between.

"Goldman, Merrill, Morgan Stanley and CSFB make up the top four," says Mr Baird. "Warburg must fight it out with Salomon, Lehman and some others for number five."

Warburg is at a disadvantage in this fight because of its relatively weak place on Wall Street. "I am not saying they can't do it," Mr Baird explains. "But I am saying there are enough weaknesses to pose the question." Faced with this question, the trio of Warburg men go into thought- ful mode. They argue their presence in the US is underestimated. "Dillon Read is a much better US investment bank than people think," says Mr Tapner.

Ultimately, however, what comes through is an infectious optimism born of the shared sense that the tough part is behind the bank. "It's true. We're back," says Mr Tapner.