M&A advisers flock to Europe

Investment banks had a torrid time in 1998 owing to their trading activities in volatile capital markets. The focus of their ambition in 1999 is clear: international consolidation in many industrial sectors spells a bonanza in advisory fees. Europe is the fastest-growing region for M&A business. Market share there will be necessary for membership of an emerging global bulge bracket for corporate finance.

At present, the advisory powerhouses in Europe are Goldman Sachs and Morgan Stanley. They've been active in European M&A the longest of all the US banks. But all their main rivals attribute a new strategic importance to Europe, and are gearing up for a sustained regional boom.

Merrill Lynch has put in a conscious push since 1997, and has hired 28 executives from other banks in the past year, with the aim of establishing itself in a three-strong bulge-bracket. Dan Dickinson, head of European M&A, acknowledges Goldman and Morgan Stanley's lead in Europe. Their global all-round capability has been essential, he thinks. "The local competition can't match what they can do. We can match what they can do, but our problem is we've only been here a couple of years. But we took them by surprise in the US, taking a lot of market share [in 1996 and 1997], and we expect to do the same in Europe."

How big a bulge?

The two Swiss-owned houses, Credit Suisse First Boston and Warburg Dillon Read, have equally high ambitions in the new European M&A market, and are acknowledged by their rivals as serious players.

But some question Warburg's long-term strength: many industrial sectors are globalizing, requiring global M&A research and execution strengths. In the mergers that led to today's UBS group, the gap left up to now is in US investment banking.

Warburg's co-head of European M&A Warren Finegold believes the bank has what it takes, in Europe and beyond. "The winners and losers will be determined on the two sides of the Atlantic," he says, and the global bulge bracket will probably be Goldman, Morgan Stanley, Merrill Lynch, CSFB and Warburg.

Finegold dismisses the idea that clients might take Warburg less seriously as an all-round investment bank following personnel upheavals and a cut in its capital allocation. Commentators saw in the cut a move away from investment banking by parent UBS, in favour of lucrative and safer private banking. But Finegold says: "The media misunderstood the news. The capital reduction was only for the winding down of the low-margin corporate loan book. Two thirds of capital was used for that and only one third for investment banking. You'll find that the cut has the support of everyone in Warburg Dillon Read in building a global investment banking business."

Belittled boutiques

European M&A boutiques Lazard and NM Rothschild are sometimes belittled by the global integrated investment banks, who say that to stay at the top in the new Europe you need to be – guess what – a global integrated investment bank. But the two aristocratic firms' strong client relationships are helping them to win a number of very valuable deals. Lazard was the top adviser in European M&A in early 1999, working on deals worth €177 billion ($190 billion). The Paris-London-New York firm is doing particularly well in Italy, where recruiting Gerardo Braggiotti, once of Mediobanca, has helped it win mandates including the defence of Telecom Italia and the bid for BCI by UniCredito Italiano.

Rothschild's joint venture with ABN Amro – Rothschild does the origination work, ABN the research and placement – should help Rothschild win more advisory mandates in non-European markets including the US and Australia.

The second group of challengers to the hegemony of Goldman and Morgan Stanley comes from back home. Lehman Brothers and Donaldson Lufkin & Jenrette aim to expand in Europe on the back of their involvement in Olivetti's mega-takeover adventure.

Salomon Smith Barney is equally ambitious, having achieved a surprise sixth place in the 1998 European league table. A new post of European M&A head has been created for Philip Keevil, and Michael Klein's global acquisition finance group has relocated from New York to London.

Keevil concedes that Salomon's weakness will be its lack of advisory relationships in Europe, compared with Goldman and Morgan Stanley. But he believes Salomon's global approach will prove a selling point: "Goldman Sachs's style is that they have a country banker who knows the local culture, backed up by generalist corporate financiers. At Salomon, we have global industry groups to back up our country bankers, because a client wants to know what competitors across the whole globe are doing. That makes us much more useful in the modern world. We are taking advisory work to the next generation."

Goldman Sachs's head of European M&A, Rick Sapp, thinks the relative newcomers will struggle to muscle in. Sapp says: "If you haven't started yesterday, you're in trouble." Ambitious hiring policies are no match for track record and settled internal teamwork. "It helps if you've worked together for a long period of time. Some banks have gone out and tried to hire everyone they could get, but the people they hired didn't coalesce. A soccer team can be world champion if it doesn't have all the best players in the world, but they play well together."

But Goldman's one weakness may be that its team squad isn't big enough as the game expands. Sapp says: "Our people are the key to our success. However, it takes time to develop market professionals in our culture. Sometimes the level of market activity overruns our capacity to service it. We tend to take on people one at a time. Other banks are now hiring whole teams."