Warburg latest victim in battle of behemoths claims Warburg
John Eisenhammer says few can compete with US companies
Thursday 04 May 1995
This was no rousing send-off into a new beginning but capitulation; the end of an era. Whatever the outcome of the SBC deal, Warburg's independent days are over. It has given up the struggle against the behemoths of Wall Street and their biggest continental rivals.
It was a sad day for British investment banking. Warburg was for long its pride. Even if thoroughly demoralised of late, and haemorrhaging senior staff, it is still in many respects a fine business. But it is not up to the ruthless demands of today's global financial markets.
Few economic sectors have changed so much over the past 15 years. Financial markets have grown explosively, both in volume and the complexity of the deals and instruments traded. The profits can be immense, but so too are the risks. Gone are the days when merchant banks could rely on chums in the corporate club, and fear only their neighbourhood rivals. The battleground for every significant deal nowadays is the world, pitting American against Briton, German against Japanese, Swiss against Dutch. Globalisation is the industry's buzzword. To compete in the major league of investment banking, firms need to be able to cover the world's markets, and to offer the full range of sophisticated services, contacts and expertise.
This requires an exacting standard of international management professionalism. Barings failed that test, demolished by the failure to control its global ambitions. But Barings is not alone. Much of British corporate finance still bears traces of sloppiness and parochialism that blunt competitive edge.
Globalisation also requires money, lots of it. The information technology required to drive and control trading systems across the world, the offices and expensive staff, devour hundreds of millions of pounds. Warburg tried. At one point it had an office of 600 in New York, straining to crack the American market. It failed. When the markets turned last year, after the heady expansion in the 1993 bull run, investment houses were left carrying vast fixed costs. They all bled, from Wall Street to Tokyo, slashing costs and jobs. But the biggest can absorb the pain; Warburg could not.
The ambitions of most other British investment houses have been more modest. Kleinwort Benson and Flemings, for example, have only a small presence in New York, selling non-US equity. But they too are having to satisfy customers who want global reach, and are competing head on with the giants. Particularly after the fall of Barings, many of the small and medium-sized merchant banks are squirming amid worries about institutions with small capital bases.
There is little doubt that others will be forced down the Warburg road. An internal memo sent round the top level of Kleinwort recently suggests uncertainty over its future; Flemings and Schroders must be feeling vulnerable. The investment banking landscape in the City, already convulsed by Big Bang in the Eighties, is building up for a slower quake. Warburg is the first shock. Securities houses will either retreat to their niches or be swallowed.
The pace of change is being set by Wall Street, as usual. Drawing on the vast resources of the world's richest single market, the New York firms are among the few able to bestride the financial world. Merrill Lynch, Morgan Stanley, Goldman Sachs, for all their global reach, still earn most of their money in the US, and can put armies into the field few can match. Many observers believe concentration will leave just five or six dominant global investment houses, with the Americans prominent.
In the UK, by contrast, the domestic economy has been far too small to sustain the global ambitions of the British houses. Which is why the City has had to open itself to the markets of the world. But the upshot has been that no other financial centre has such a presence of foreign owned- houses, with Warburg set to join the ranks.
In Europe, the only institutions with global-size coffers are banks and insurers. It is no coincidence that a Swiss bank is engulfing Warburg, or that Barings was bought by ING, the Dutch banking-insurance conglomerate. All the most talked- about predators are banks - ABN Amro of Holland, Deutsche and Dresdner of Germany, Paribas of France, and the Swiss trio. The two biggest British financial conglomerates in the City belong to Barclays and NatWest Group.
Size and wealth are no guarantee, however, as the Japanese have found. Having entered the City and New York in the Eighties with cheque-books blazing, they have gone into retreat.
But some of the biggest and richest commercial banks are still in the wings: the Americans. The Glass-Steagall act of 1933 has kept apart its lending and securities businesses. But there is every sign in Congress that this partition will soon be breached, leading to universal US banks on the continental model.
The potential for change, both on Wall Street and across the world, is colossal. The concentration of financial institutions would accelerate dramatically, as a new pack of cash-rich predators was unleashed. Some of the remaining independent brokers and merchant banks in the City, with their vast expertise, would make tempting prey.
But will this concentration be the end of the story? Perhaps not. For just as industrial conglomerates were all the rage in the Seventies, only to be mostly dismantled in the Eighties, so their financial cousins may also go out of fashion. One day, Warburg and Barings may walk alone again.
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