In July 1996 the senior management of Morgan Stanley in London - seized perhaps with a sense of awe at the approaching millennium and an urge to display their own capacity for the vision thing - sat down and wrote plans for the firm's 15 or so main business lines in Europe, projecting headcount, capital, revenues and pre-tax profit for the years up to and including 2000. The reaction of some of the firm's senior executives in the US and Asia was, to put it kindly, sceptical. The Europeans were surely dreaming. They couldn't possibly achieve such ambitious targets when everyone knew the real growth story was in emerging markets, in Asia or in the US equity boom.
But in most of those businesses Morgan Stanley had reached its targets for 2000 by the second half of 1997: the remaining laggards hit their 2000 projections by the end of June this year. "What I and others had thought was an ambitious view of European prospects - and some farther away from Europe saw as unjustifiable optimism - seriously underestimated the pace of change and the opportunities here," says Sir David Walker, executive chairman of Morgan Stanley in Europe.
Walker's view of the opportunities is shared by others who are acting now to make sure they don't lose ground. Goldman Sachs has increased its headcount in Europe in absolute and proportional terms more than ever before. Its London staff are spilling out of their offices at Peterborough Court in Fleet Street into extra space up the hill near St Paul's Cathedral.
Dispersion and diversification
The growth isn't just in London, or just in mainstream investment-banking businesses such as bonds, equity and M&A advisory. In Germany Goldman has been building up an equity research, sales and trading business that is now about as big as the leading domestic banks'. In France it has been a leading investor in distressed real-estate assets and in little more than two years has built a business with 400 people. Ten years ago 400 people would have been enough to cover the whole of Europe for a decent-size US or Japanese investment bank. Today, Goldman's plans suggest its business growth in Europe will outstrip that in any other region over the next three to five years and that, for the first time, its European operations' productivity (by revenues per investment banker) will approach the high point of the US business.
|
Demand for European equity by investment vehicle
(1997 to 2010) |
|
1997 |
1998 |
1999 |
2000 |
2005 |
2010 |
| Mutual funds |
87 |
135 |
171 |
224 |
264 |
315 |
|
Pension funds |
138 |
145 |
152 |
160 |
204 |
260 |
|
Insurance funds |
85 |
94 |
101 |
110 |
149 |
201 |
|
Households |
37 |
42 |
48 |
53 |
92 |
132 |
|
Cash M & A |
152 |
116 |
116 |
110 |
182 |
160 |
|
Divided reinvested |
15 |
19 |
21 |
23 |
37 |
60 |
|
Buy-backs |
13 |
30 |
50 |
90 |
145 |
233 |
|
Net international flows |
36 |
41 |
43 |
0 |
0 |
0 |
|
Total |
565 |
622 |
702 |
770 |
1,074 |
1,362 |
| Source: Morgan Stanley Dean Witter |
When speaker of the Deutsche Bank Vorstand Rolf Breuer unveiled a reorganization of the bank into five main operating divisions earlier this year, he announced that its investment-banking unit, the so-called global corporate and institutions group, whose leading executives intend to concentrate their efforts on Europe first, is projected to be the single biggest profit contributor at Deutsche Bank by 2000, outstripping even German retail banking.
Other European giants, such as ABN Amro and the new UBS, are striving to position themselves for what promises to be a broad-based investment-banking boom. "We're very bullish on Europe, more so than on any other part of the world," agrees Hans de Gier, chairman and chief executive of Warburg Dillon Read, the investment banking unit of UBS. But he balances his sense of opportunity with this note of caution. "Only five or so firms will dominate and almost all will be American. The Europeans have still not thrown off their domestic straitjackets. They see the challenge at hand, many of them are overcapitalized and they are now struggling to catch up, hiring like crazy. But we think only one European firm is ready for this." No prizes for guessing which.
The core of the Warburg Dillon Read business is European equities. That generates between 60% and 70% of its revenues and the firm claims to account for 8% to 10% of secondary volume in European equities, its closest rival being Merrill Lynch. From end-1996 to end-1998, it is on track to increase its headcount in European equities from 761 to 1,022 and in all equities businesses worldwide from 1,488 to 2,779. It claims strong local market shares in the UK, Switzerland, the Nordic region, Germany, Spain and Italy and, unlike many firms, to run a single integrated cash equities and equity derivatives business as one risk centre with a single P&L. One growing application for its derivatives expertise may be capital protection to retail investors shifting into equities for the first time.
"Warburg had a very strong position with UK fund managers, the most influential institutions in European equities," claims Markus Granziol, joint global head of equities at Warburg Dillon Read. "And Swiss Bank Corp had a fantastic link with the only big retail market in Europe: Switzerland. What's interesting is that over the last two years, while revenues have grown by 60% in the UK client business and by 180% in Switzerland - where there has been a major shift of retail money into equities - the biggest growth, at 290%, has been with non-UK and non-Swiss European investors."
Granziol reckons that whichever way firms organize themselves for the new securities market there is no substitute for a very large Europe-wide organization. Brokers that have a big share in one country but little else across the continent will suffer.
Others recognize this. "We are in each of the 15 countries in Europe, both in commercial banking and investment banking," says Wilco Jiskoot, joint chairman of ABN Amro Rothschild. "The major challenge for us now is to further expand the basis we have in each country." The bank, which is generally not bracketed with leading equity firms such as Goldman, Morgan Stanley and Merrill Lynch, nevertheless now has 1,000 people in equity sales, research and trading across Europe. Starting with brokers Hoare Govett in the UK, and Alfred Berg in Scandinavia, it has acquired other local brokers in France, Italy and Ireland. It claims to have risen from almost nowhere three years ago to be the second largest trader of equities in Europe behind Merrill Lynch, which has itself pursued a similar strategy of local acquisitions, starting with Smith New Court in 1996.
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