Mark Trans in New York
WALL STREET securities firms have seen robust profits as merger activity remained hectic for the second year running, but, in keeping with the roller-coaster nature of the business, profits are expected to shrink next year.
For now, signs of the good times abound. Bear Stearns, the United States’s sixth- largest securities company, awarded more than $81-million in bonuses to its five top executives. Goldman Sachs, which suffered a disastrous year in 1993 to 1994, doubled its pre-tax profit to $1,86-billion in the first nine months of its latest financial year from a year ago.
It has been a similar story elsewhere, buoyed by big mergers and acquisitions on both sides of the Atlantic and a bull market in the US.
The merger boom has coincided with a determined push by European banks, led by Deutsche Morgan Grenfell (DMG) and Union Bank of Switzerland (UBS), to establish themselves in the US.
It is too soon to tell whether this European invasion will succeed where others have failed. Analysts are waiting with interest to see how DMG, UBS, NatWest and others cope with the inevitable slowdown. DMG and UBS have been raiding Salomon Brothers, Goldman Sachs and Merrill Lynch, paying top dollar to lure away big-name investment bankers.
When the US market loses momentum and the deals dry up, questions are bound to arise at European headquarters as to why these stars are pocketing annual salaries of at least $2-million.
DMG and UBS have decided to build from within, rather than acquire a Wall Street firm. This is the less expensive, but gradualist road. Some analysts are sceptical of this approach and believe that the two will eventually have to make acquisitions in order to have a real impact, particularly if Congress were finally to ditch the Glass- Steagall law that separates commercial and investment banking.
Such a move might trigger a buying spree by domestic and international banks, leaving DMG and UBS behind. One leading candidate in the acquisition game is Dillon Read, in which ING-Barings has a 25% stake.
It makes money from behind-the-scenes advice rather than underwriting, where profit margins are slim, and would bring first-rate contacts, the key to success in the US, where investment banks have built up relationships over years.
NatWest has adopted a different approach. Last October, it paid $135-million for Gleacher, a boutique firm, and in June acquired bond-trading firm Greenwich Capital for $590-million. NatWest Gleacher scored a considerable coup when it was retained by MFS Communications in its $14,4-billion merger with telecommunications company Worldcom.
But making an acquisition brings its own problems, as Credit Suisse discovered after buying First Boston; fusing the two different cultures has been a constant struggle. For now, none of the new arrivals has made much impact on the markets.
UBS and DMG have set ambitious goals. Markus Rohrbasser, chief executive officer of UBS, has said he wants his company to be one of the top three players in each of the areas the firm chooses to focus on. DMG wants to be the top non-American investment bank operating in the US as part of its drive to become one of the world’s top five firms.
The Europeans are not just battling the elite US investment banks. They will also be competing against high-fliers such as Citibank, Chase and NationsBank, as the lines between commercial and investment banks become increasingly blurred.
While the Europeans have the resources, the Americans have the networks and contacts. Some US investment bankers go so far as to say that lingering anti-German sentiment from World War II will work against DMG.
Rohrbasser probably speaks for all the Europeans when he asserts that an investment bank cannot have a global wholesale financial strategy unless it has a US strategy. After all, the Americans managed to succeed in Europe, and the Europeans are itching to return the compliment.
Meanwhile, 1996 is shaping up to be another bumper year for Wall Street. After a few more multi-billion-dollar deals, the 1995 merger and acquisition activity record of $502-billion may be overtaken.