Chase wins this award on a paradox – that it has not managed to achieve what it wanted to.
But the way in which Chase has dealt with its inability to buy itself into the equities business is intelligent, and more importantly ought to bring nothing but upside for the firm.
How different it would have been had Chase succeeded in its quest to buy Merrill Lynch or Morgan Stanley, for example, or any other large brokerage house. On paper it would make for a formidable universal bank, lacking Citibank’s relationships but with much more product power. In reality it would have been an expensive mess, especially in the debt capital markets groups where Chase and all of its potential targets can claim strength.
Chase has followed a different path, one that increases its presence without having to risk the whole of the firm. It does not create a global, bulge bracket investment bank, but it opens doors to new products, new markets, and the new economy.
Hence it wins the award for most improved investment bank. In fact, with close to $2 billion in earnings from its wholesale business (syndicated loans, foreign exchange, debt markets and derivatives), Chase is no small contender to start with. And it has leveraged off this to rise up the M&A tables, coming sixth in the US and eighth globally in 1999 – and without any equities presence. It’s the sort of performance smaller investment banks such as Barclays Capital can only dream of.
But Chase is not content to leave it at that.
It has rejected the JP Morgan approach of building an equities presence from scratch – wisely so, for Chase would be starting late in the day, and would surely have to spend more than the $3 billion or more JP Morgan has, and more quickly than 10 years, and with no guarantee of success. What Chase has done is to buy selectively, and not for product either, but for new business opportunities.
First came the $1.35 billion acquisition of Hambrecht&Quist last November. This tech-focused equities and M&A house had begun to struggle against the big boys such as Goldman and Morgan Stanley, and needed capital and more product. With no equities hierarchy but a host of non-equities products, Chase was a good fit. And having seen how Nationsbank and BankAmerica struggled to integrate Montgomery and Robertson Stephens, Chase was very clear on what it wanted from H&Q. “We like its industry focus, and we’ll keep it highly focused and new economy-centric,” Jimmy Lee, vice-chairman at Chase, told Euromoney at the time. In other words, H&Q was not to be the staging ground for a massive push into the whole equities business. Chase and H&Q were to complement each other’s strengths. And it gave Chase Capital Partners, the bank’s large private equity group, an in-house underwriter for its IPOs of its portfolio companies, most of which are tech-related companies.
The next acquisition was Robert Fleming, at $7.78 billion rather dear but again a price Chase CEO Bill Harrison can afford if it doesn’t work out. This again has not been presented as an equities play, but as an asset management play in Europe and Asia, adding $99 billion of assets under management to Chase’s $225 billion, and as an Asian investment-banking play. Chase is in Asia, but lacks the relationships Citigroup has and has a limited product offering. Fleming helps solve that problem at a time when many are predicting Asia’s rise from the 1997 and 1998 crises.
Third, in May, Harrison spent $500 million on the Beacon Group, run by former Goldman Sachs partner Geoff Boisi. The firm is an M&A boutique with no clear specialization but a lot of experienced bankers. More crucial, though, is that Boisi is to run investment banking, shunting aside Jimmy Lee, who has built the business up from scratch but is clearly not viewed as having quite the right image or leadership for Chase going forward.
There are some lingering management concerns.
First, that Chase may continue to buy these small boutiques and strap them on. It may look good on paper, but the addition of too many cultures can be counter-productive – just ask ABN Amro. Second, Harrison describes all three acquisitions as opportunistic, implying that a big deal is still possible. If so, how safe are these three in the shakeout? And third, Chase is now top-heavy with former CEOs and business heads. It already had Don Layton as vice-chairman in charge of all investment banking and Jimmy Lee, now shunted aside to make room for Boisi from Beacon. From H&Q comes CEO Dan Case, and from Flemings CEO William Garrett. He in turn will report to vice-chairman Neal Garonzik, formerly head of equities at Morgan Stanley, hired by Chase to develop an equities strategy and now running asset management and private banking. Then there’s Steve Black, a former Salomon Smith Barney equities head who was hired in April to run equities for Chase. And stuck in almost as an afterthought is David Coulter, formerly CEO of Bank of America who left the bank after its merger with Nationsbank and after losses in Russia of over $1 billion were announced. He had taken on a role at Beacon, and “is going to stay on with us here in a very senior role, we just haven’t decided what that is yet,” says Harrison.
But Chase has a good track record of integration stemming from the two-stage, tri-partite mergers of the three New York banks in the early 1990s. The bank has grabbed hold of three Firms that could be very lucrative. And still they hold out hope for the big transformational deal.
