To sell or not to sell

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Rumours about an impending sale of Warburg Dillon Read have been circulating for over a year, ever since more derivatives losses were announced following the merger with UBS. This year they have resurfaced, despite a healthy performance so far (WDR accounted for 30% of UBS's pre-tax profits for the first nine months of the year, bringing in $1.34 billion). Chase Manhattan, which lacks an equity operation, and Salomon Smith Barney, which lacks a significant European equities operation, have both been touted as buyers.

A couple of months ago there were stories that several senior executives at WDR in forex and rates were being given contracts with UBS rather than Warburg. This prompted speculation that it was the beginning of the end: UBS was taking the best people in preparation for selling the investment bank. Warburg's line on this is that all contracts are ultimately with UBS, but that some have been moved to group level to join Billy Johnson, WDR's head of treasury products, who is now heading up the e-commerce strategy for the whole group.

It might be worth Marcel Ospel having a chat with Martin Taylor if he hasn't already. Taylor had to endure over 18 months of rumours about his selling BZW, and several times had to visit the trading floors to give his assurances personally.

There are a lot of differences between the two firms, though. WDR has a sizeable and successful pan-European operation in both equity and fixed-income, and is probably the most successful European bank abroad (except for Swiss-American hybrid CSFB in the US). And that is reflected in the investment bank's value. BZW finally went for about £130 million ($208 million) to CSFB. Warburg Dillon Read is a rather different animal. Warburg's value has been put as high as $18 billion. It's a far cry from the £860 million that Swiss Bank Corporation paid for SG Warburg back in 1995.

SG Warburg was then an unwanted cast-off, abandoned by Morgan Stanley, drifting around for a few months before being snapped up by SBC. It merged operations with Chicago-based derivatives group O'Connor, bought in 1992, and in 1997 added little Dillon Read, a boutique corporate advisory firm in the US. Add in a messy merger with fellow Swiss Bank UBS and you got, er, UBS (now United, not Union Bank of Switzerland). Warburg Dillon Read kept its name, while the other division took the prefix UBS, as in UBS Private Banking and UBS Brinson. Was this a sign of lack of commitment, people asked?

Not only that, could WDR claim to be a global investment bank without making a big splash in the US domestic market? It was partly because of this that Taylor decided to sell BZW - he couldn't build in the US, wouldn't buy, and had no intention of being forced to the sidelines by any merger with a US institution. Instead he waited to be pushed out by the Old Boys' Club at Barclays a year later.

Do Ospel and Markus Granziol, CEO of WDR, have the same problem? Arguably yes. In a recent pep talk to staff in Tokyo Ospel admitted: "We cannot pretend that our business in the US today is as strong as Goldman's or Morgan Stanley's. But I genuinely believe that we have a credible platform from which we can succeed in the medium term."

To be fair, there has been significant progress in the US, at least according to an internal memo sent at the beginning of November from Johan Ewerlof, head of equity sales in London, congratulating the US team on their success. Commission booked is up 2.5 times on last year, and stands eighth on Autex volume on the New York Stock Exchange. WDR has gone "from nothing to a very strong number two [in selling Euro ADRs] and fourth overall," reads Ewerlof's memo, and "the clear market leader" in selling European shares to the US with a 12.5% market share. And WDR has won a couple of big mandates, advising Ford in its takeover of Volvo's car business, and Sprint in the Sprint-MCI merger. Let's hope bonuses live up to it; staff are already salivating.

Yet still they are an also-ran in domestic business, nowhere near the top three, and with Lehman, CSFB, Salomon Smith Barney and JP Morgan - all pushing for the top slots.

So would anyone pay $18 billion for it? Possibly, although Chase might be even more interested in the asset management arm, Brinson, and Warburg staff might be less than happy with their chances of winning out if Salomon Smith Barney be the acquirer.

Ospel in Japan tried to make as definitive a statement as possible: "Our global integrated investment services firm is not simply Warburg Dillon Read. It is that, plus the Private Bank, plus UBS Asset Management, plus UBS Capital. This group of businesses is what Americans call an integrated investment bank. I would emphasize that we are a Group, and that our constituent parts form a compelling whole. I think it's simple: UBS, under my leadership, has no intention whatsoever to sell WDR..."

Well Marcel, it's still worth keeping a channel open to Martin Taylor just in case. He would tell you that if you change your mind, Goldman Sachs could do the advisory work; even if they mess it up as they did with BZW, they'll probably offer you a job.

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To sell or not to sell

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