After months of delays, the New York Federal Reserve Bank is close to approving Swiss Bank Corp's merger with SG Warburg in the US. But there will be a lot less left to merge than originally expected. Uncertainty about the future of the US piece of Warburg, combined with a post-integration reorganization at SBC Warburg, has led to an exodus of investment bankers and analysts in New York.
The upshot is that Warburg now has a much smaller US equities presence. Among those who have left are two high-profile members of the management team, investment bankers Mike McCarty and Philip Keevil. The two had been recruited in 1991 to build up the US investment banking effort and co-headed the firm for a time.
Swiss Bank confirms that Warburg New York has lost almost two-thirds of its investment bankers, down from 64 to 25, and the number of equity analysts has also declined dramatically, from 32 to nine. Total headcount is down from nearly 500 to about 280. That may suit the Fed, which, say former Warburg executives, has been uneasy about the extent of Swiss Bank's securities operations in the US ever since it bought aggressive US derivatives dealer O'Connor & Partners.
Adding in a relatively large Warburg equities business - at one time it ranked ninth in trading volume on the New York Stock Exchange - would be likely further to antagonize the regulator. Before Swiss Bank's purchase of Warburg, says a former US Warburg executive, at least half of Warburg's US and Canadian annual revenues of about $300 million came from the US equities business. He estimates revenues have declined to about $100 million over the past year. An SBC Warburg spokesman in London says that is speculation since the firm no longer breaks out its revenues along geographic lines.
In March, Swiss Bank paid a $3.5 million fine to settle charges from the Fed, which claimed it was in violation of Section 20 of the Glass-Steagall act, which separates commercial and investment banking. Section 20 limits the types of securities business commercial banks can undertake in the US. They are required to separate their securities business into a Section 20 subsidiary, and 90% of the revenues in that subsidiary have to come from what are considered "eligible" securities, primarily those issued by state and federal governments and municipalities. Only 10% can come from ineligible securities, including equities, corporate bonds, derivatives, and commercial paper.
At issue, says a Swiss Bank spokesman in New York, was how to calculate revenues from complicated capital markets instruments that contain derivatives, and whether they can be broken into separate parts, some of which would be considered ineligible. Although neither Swiss Bank nor the Fed would go into detail, Swiss Bank has agreed to recalculate its revenues to suit the regulator.
The recent agreement between Swiss Bank and the Fed is seen as paving the way for Fed approval of the Warburg merger. Former US Warburg executives say that as part of making the deal work, Warburg would have to convince the Fed that the foreign securities it sells in the US, a huge portion of its US business which has been expanded, should be considered eligible securities.
A Swiss Bank spokesman says the New York retrenchment has nothing to do with meeting the Fed's Section 20 requirements, but is part of a broader global reorganization since integration. "SBC Warburg made a decision to focus on certain sectors, such as mining and telecoms, not the whole waterfront. Most of our focus is in Europe and Asia." Now that the global focus is on a few sectors, he explains, "that has in effect recast the corporate finance operation. It made it smaller in the United States and smaller globally."
"Previously the US bankers would call on anyone, but not now," says the spokesman.
The remaining senior member of the corporate finance group is Anthony Durrant, head of the global mining group and a long-term Warburg employee in New York. Besides McCarty and Keevil, other heavy-hitter investment bankers who have left include Ralph Eads, who has taken his entire energy group to Donaldson, Lufkin & Jenrette, BJ Megargel, who has gone to BZW, Kim Scott, who left for an LBO firm called American Enterprise Associates, and Howard Grace, who has gone to Union Bank of Switzerland. Former chief financial officer and chief administrative officer David McGirr, another ex-member of the management committee, has also left. McCarty is now at NatWest's Gleacher & Co, an M&A boutique, and Keevil has joined Salomon Brothers.
The other remaining members of the management team include chairman Tom Wyman, who had planned to retire last summer but stayed on until the merger was completed, at which time he will continue to be an adviser; counsel Robert Errico; Ed Olsen, who is now running equities; and new member Nick Millwood, head of the Latin American group.
The handful of analysts left are primarily supporting investment bankers, and their diminished number was also part of the reorganization design, says the spokesman. Among those who have departed are Bill Duthridge, who took his telecoms team to Bear Stearns last summer. Noted market strategist Gail Dudack went to UBS. Among those who left after bonuses were announced in March was Latin American analyst Carlos Patrinina, who has landed at JP Morgan.
As much as Swiss Bank protests, former New York Warburg investment bankers say not all of the departures were of corporate design. Many US Warburg executives had been excited about the merger, which they considered a good strategic fit. But they quickly became disillusioned. "It took me about three months to figure out it wasn't gong to work," says one. "The interest the Swiss [bank] has in the United States was limited. They were obviously focused on Europe."
The regulatory snafu didn't help, since it meant that Swiss Bank and Warburg could not do anything together in the US. Swiss Bank made its application to the Fed last July, and originally expected approval by September. The date was moved to November, then January, then March, and insiders were hoping it would occur by the end of April.
But Glass-Steagall limitations were not something Swiss Bank was considering when it originally purchased Warburg last spring. At that time, the US act, which inhibits European universal banks from building a strong presence in the US, seemed destined for death - finally. But once again, attempts to dismantle Glass-Steagall failed in Congress last summer. Most recently, SBC Warburg chief executive Marcel Ospel, in the bank's annual press briefing in Basle in March, said the bank would consider buying additional US firms, focusing on "smaller-scale acquisitions aimed at filling niches in our already strong US presence." Specifically, he mentioned building corporate finance and research - interestingly the two areas now truncated. And should Glass-Steagall disappear, former Warburg execs say, watch for SBC Warburg being on the prowl for a bulge-bracket firm such as Lehman Brothers. Michelle Celarier
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