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Warburg plans pounds 5bn merger with US bank

Britain's flagship merchant bank SG Warburg shook the City yesterday with the news that it is holding talks about a pounds 5bn merger with the US giant Morgan Stanley, prompting speculation that this is the start of a new wave of takeovers and job cuts.

Warburg's client-list boasts some of Britain's top names including ICI, GEC, Reuters and Reed Elsevier.

The announcement was interpreted as an American takeover rather than a merger, since Morgan Stanley shareholders will end up with control. The new group is expected to be called Morgan Warburg.

One option after the merger is that Warburg's 2,000-strong London workforce will leave the Finsbury Place, London, offices and join Morgan Stanley's 2,000 UK employees at Canary Wharf.

Warburg sprang to the fore in the 1986 Big Bang when the City reorganised in a wave of takeovers. Warburg has been widely seen as the best hope of building an independent British-owned global investment bank, combining securities dealing and traditional merchant banking on a scale big enough to compete with US giants such as Merrill Lynch and Goldman Sachs.

Most of Warburg's closest rivals in London are either foreign or owned by big clearing banks such as Barclays and NatWest.

Morgan Stanley is roughly twice the size of Warburg, in workforce and market value. According to the brief details announced yesterday, Morgan stockholders will get two shares in the new group to every one given to Warburg shareholders.

After years of being lionised in the City as Britain's best, the gloss has gone off Warburg this year as its performance has sagged. In October, it gave a surprise profits warning following turbulence in bond and equity markets that has hit securities firms worldwide. At its current valuation, Warburg is worth less than the pounds 1.8bn Lloyds Bank is paying for the Cheltenham & Gloucester building society.

The internationalisation of securities markets has made it harder for firms based mainly in Europe to succeed. Warburg has been looking for at least a year for a way to expand in the United States - the biggest market in the world.

Warburg owns 75 per cent of Mercury Asset Management, London's biggest investment manager, which will be a key part of the deal.

Hamish Mcrae, page 18

Embarrassing leak, page 32

View From City Road, page 33