Is Robert Fleming worth $7.78 billion? Possibly, but at this price its new owner, Chase Manhattan, is going to have to work hard to extract value from the UK-based asset management and investment banking firm.
Flemings had been floundering for several years, and has the air of an institution with a fine history and a good deal of promise, but lacking the cohesion and scope to make a success long-term. Its investment banking activities in the UK and Europe hardly register on the scale. Its operations in Asia are formidable but the region is still dragging itself out of a two-year slump. Its asset management operations, though commendable, lack scale at $99 billion under management. Arguably the best way to extract value would have been to break up the businesses and sell them off separately.
Not according to Chase which is one of the few financial institutions that can claim success in its mergers and acquisitions. Ten years ago the sum of the commercial banking parts – Chase, Chemical and Manufacturers Hanover – were just three New York-area banks plodding along with no clear direction. The two-stage merger of these three is one of the few real successes among the US commercial bank mergers, producing a strong retail presence, good relationships with corporates across the US, top-notch loans and foreign exchange services and a solid fixed-income and M&A presence.
Its acquisition last autumn of Hambrecht&Quist, the west-coast technology investment banking specialist, was a clever way of putting itself in a position to offer a full range of banking products to one of the hottest sectors in the US. At $1.35 billion it was a full price, but Chase appears to have picked well, and integrated even better.
Chase had no intention of using H&Q for anything other than its main strength – tech banking. There was already a captive client inside Chase – venture capital arm, Chase Capital Partners – which in its 10 years has amassed investments in a lot of successful tech-focused companies. Matching Chase’s client list and broader product offering with H&Q’s expertise has so far paid off.
But investors and analysts need to be reassured that Flemings is value for money. For a bank which has spent three years proclaiming its desire to get into all fields of investment banking – but only at the right price – it seems Chase is becoming hooked on smaller deals.
Now Chase has to explain how this fits its overall strategy. Supposedly the main aim has been to get a top-tier equities operation. But with Flemings, and before that H&Q, Chase has played down the equities franchises those two firms add.
The purchase of Flemings is all about its asset management business. At least this is not encumbered, as Mercury’s was, with poor performance and embarrassing lawsuits from former clients. It appears to be more dynamic, justifying the higher purchase multiple of 4.2% of funds under management, compared with the 3.1% Merrill paid for Mercury. It also sits well with Chase’s funds, which, at $225 billion, are primarily US-based and concentrated in cash and fixed income.
As for the investment banking part of the equation, the $2.8 billion effective purchase price is not that unreasonable for a firm with a formidable Asian business and a small European outfit – especially given the $2.1 billion Citigroup paid for Schroders’ faltering European divisions. Chase is hoping that the Asia franchise will be a high-growth area. The region is certainly coming out of its slump, though the potential for earnings volatility remains high.
The problem with Flemings is that the Asian franchise is all it has. It was losing out to those investment banks with a full product offering in Europe and the US. Linking up with Chase will do little to change that until Chase picks up its equities deal back home.
While Chase cherry picks its high-growth businesses, it is failing to get anywhere with its long-stated aim to find a transformational deal. Over the last two years Chase has approached, and been rebuffed by, all the major brokerage houses. Either they weren’t ready to be subsumed into a commercial bank, or Chase was not prepared to pay a high premium, or both.
This has presented the bank with a dilemma: wait around for the right deal, or do something else. Chase appears to be trying to do both. Is the Flemings deal evidence that Chase is finally giving up on the lofty goal of that one big deal?
The chances of Merrill being the candidate have reduced sharply this year: its forays into domestic retail banking and international banking and investment services could be enough to secure its independence. Goldman Sachs and Morgan Stanley Dean Witter likewise appear to be free from any pressure to get hitched to a commercial bank. That leaves JP Morgan or Lehman Brothers. Both have decent US franchises but are not willing bedfellows.
JP Morgan shows the difficulty of growing alone. It is only through acquisition that other institutions have become fully-rounded firms. Merrill Lynch, for example, has made 19 significant acquisitions since 1995. Chase still has some shopping to do.
