Dropping the First Boston name is the easy part of Credit Suisse's plan to refocus its investment banking strategy, a plan to be officially unveiled this month. It will be harder for the Swiss bank to figure what it wants CSFB to become. Some early indications about where CSFB might place its bets in response to external and internal pressures suggest it might be embarking on another arduous journey.
There's no question that CSFB is in a tough position. On one side are big rivals such as Citigroup and JPMorgan that are willing to win business by employing their massive balance sheets – a game CSFB's Swiss parent will not play. At the same time, CSFB does not have the brand-name cachet that allows other rivals such as Goldman Sachs and Morgan Stanley to win business without deploying large amounts of capital. CSFB occupies a difficult middle ground in a highly competitive industry.
External forces are not alone in shaping strategy. The firm's Swiss owners have never appeared entirely comfortable with investment banking. And they have become even less so in recent years as the private bank has been the engine of growth and profits and the investment bank the source of headaches. Who could blame them after overpaying for Donaldson, Lufkin & Jenrette in 2001, enduring tech supremo Frank Quattrone's legal battles and tussling with the strong-willed John Mack for the future of the firm?
There are other internal tensions, largely stemming from CSFB's heritage as a firm cobbled together through a series of acquisitions, beginning with First Boston in the US a decade ago and climaxing with the purchase of DLJ. Although the factional rivalries that characterized Mack's early reign are largely a thing of the past, there are still wide differences of opinion about where the firm should focus its efforts.
For example, one possible element of the revamp is a refocusing of the investment bank on medium-size companies. It is easy to see why this might tempt CSFB. Smaller, growth-oriented companies were an area of great strength for DLJ. It was also the cornerstone of the technology franchise once headed by Quattrone, although the tech bubble inflated many mid-caps to mega-cap status for a while.
But such a manoeuvre risks drawing resources away from coverage of big companies and big deals, which determine the league-table rankings that Wall Street uses to attract new business. Indeed, in October the bank advised the Mittal family on two big steel deals, which brought the firm favourable publicity.
Naturally, CSFB would not admit to turning its back on big clients. But a subtle refocus on specific sectors, such as technology or retail, might signal just such a move.
Focusing on mid-caps has some logic. It is playing to CSFB's natural strengths. But there is another way of looking at it. CSFB is relatively strong in this area because it has over the past few years neglected the laborious task of buttering up the boards of really big companies. So the strategy could be seen as little more than making the best of its predicament. In the longer term, shareholders might be served best if CSFB were to invest in rebuilding its relationship with the world's biggest businesses.
CSFB is also said to be considering a heightened focus on the financial sponsors business. But this is also a risky move. Again, this might be in keeping with its heritage, which includes a strong leveraged finance practice, particularly the high-yield franchise that DLJ picked up from Drexel Burnham Lambert's demise at the beginning of the 1990s.
Although it is true that leveraged buyout firms are among the most active players in the M&A markets and account for about 20% of all fees paid to investment banks, they are a difficult client base to work for.
Lumpy revenue
It is not just that private-equity firms are demanding customers – the consequence perhaps of so many of their personnel being former investment bankers themselves. The bigger trouble is a statistical one: they lose more deals than they win. By definition this makes it relatively laborious to cover them and the revenue they generate is relatively lumpy.
Given this, it is hard to see what CSFB's edge would be in ramping up its financial sponsors business or how this would square with its desire to boost profitability. This is not to say that CSFB doesn't enjoy some competitive advantage in this area – only that it will be hard to turn that into fatter returns for Credit Suisse investors.
CSFB might be right to focus on the areas in which it is already doing well. But these are not in themselves a great place to be. To secure its long-term future, it probably has to adapt and become a stiffer competitor in areas where it is currently struggling. That might require a much bigger commitment of capital. The question is whether Credit Suisse has the stomach to fund such a transformation or whether it will hand CSFB over to someone else that does.