Allen Wheat must sometimes wish he had never done his big merger. CSFB’s chief executive officer was the driving force behind last year’s acquisition of Donaldson, Lufkin&Jenrette, widely adjudged one of the least logical deals of the year.
Few can find a rationale for CSFB spending $13 billion on DLJ, a firm that would have sat much better with a less well established player. CSFB culled large numbers of staff in debt and equities, and has since watched several of the senior DLJ investment bankers it really wanted to keep decide to resign.
All leading investment banks will be struggling to keep costs down this year, in anticipation of leaner times as the US economy slows.
But last month Wheat had to stump up big bucks to keep one of the strongest teams from the old CSFB from decamping to Barclays Capital.
The decision of this 40-strong team first to quit and then to turn back to CSFB when it offered them more money is a grotesque episode even by the warped standards of investment bankers.
No doubt CSFB likes to think of its ability to keep the high-grade fixed-income executives as a success. But it leaves CSFB rife with suspicion, bruised egos, uneven compensation packages and mismatched personalities from the very top down. The chances of significant changes in personnel, both in the fixed-income group and elsewhere, are now higher than ever.
The defection was instigated and masterminded by Jack Dimaio, a rising star for CSFB. Not yet 35, he is the head of developed markets credit business, head of fixed income for North America, and head of real estate finance. He approached Bob Diamond, CEO of Barclays Capital and an ex-CSFB man himself, in early February, telling him that he and a significant number of other executives at CSFB were unhappy there and would be willing to move.
He wasn’t exaggerating – at least 40 bankers accepted offers from Barclays before being persuaded by CSFB to stay put. Among them were some of the firm’s key players: John Walsh, global head of debt capital markets; Don Devine, head of US syndicate; Mark Landis, head of investment-grade bond sales; Ben Cohen, head of futures and also the firm’s debt e-commerce head; and Paul Tregidgo, head of emerging debt capital markets.
This is the second time in five months that Wheat has had to pay up to keep a key team in place. In September, the entire high-yield group from DLJ accepted an offer from HSBC, a virtual nonentity in US capital markets.
Bigger compensation, a seat on CSFB’s executive board for team head Bennett Goodman, and a stern phone call to HSBC chairman Sir John Bond kept the bankers in place.
But that was merger-related. This latest defection was not, as the CSFB high-grade division won out over the newer, much smaller, if successful, DLJ team.
CSFB’s only official comment is that the bankers have decided to remain. Insiders suggest they wanted a bigger say in running the business, and that the bank addressed that satisfactorily enough for them to stay. In fact, little has changed in the past year in the way they conduct their business. The only change is the man running it, Stephen Hester, who took over as head of fixed income last May.
It was largely a political appointment – Hester has not worked in fixed income since the start of his career. He is a corporate financier by trade, and was co-head of investment banking in Europe before he was made CFO in 1996. It did not go down well with those now reporting to him.
As one former CSFBer puts it: “There was a big clash between him on the one side and Dimaio, Walsh and Devine on the other.” For Barclays Capital it appeared ideal: here was a group of senior bankers willing to leave their firm and who had chosen Barclays as their preferred new employer.
Just to be on the safe side, Diamond struck a deal by which all 40 agreed that they would leave together, and would not consider any counter-offer from CSFB. Insiders at CSFB say they chose to stay because their gripes about the way the business was run were dealt with.
A more sensible decision might have been to let the 40 bankers go. Instead, says one former employee: “CSFB has effectively branded its bankers as mercenaries. The only question they need to answer now is: ‘what price?'”
According to rumours, Barclays was offering a total package of between $250 million and $300 million. The most junior staff would have been on $1.5 million a year, the average pay-out was around $2.5 million, guaranteed for two years, while the top five would have got between $20 million and $30 million, possibly guaranteed for three years.
For a low-margin business like investment grade bonds that is pretty steep, but not unusual. CSFB would have had to match Braclays’ offer and even top it for the really key men. Some have negotiated additional shares of profits, if the exceed budgeted returns at a time when the Fed is cutting rates and bond markets are booming. Even more worrying for the shareholders of Credit Suisse Group is that the defectors have now secured guarantees. These will have to be met, even if the bond markets turn sour and revenues and profits fall far below budget.
This is likely to worry Wheat’s bosses in Zurich as well as shareholders. CSFB is already having to increase bankers’ pay as a result of the merger. “Wheat announced that he was going to improve compensation across the board for the old CSFB people to get them more in line with the old DLJ bankers who generally earn more,” says a banker who left the merged firm late last year. There is a danger that the package scrambled together to keep the high-grade debt team, as well as a promise from Wheat to increase the pay of those they would have left behind, could spark an upward spiral in costs.
All this comes at a time when CSFB and other firms should be thinking of pruning costs. The aborted defections have also created, or worsened, personal disputes. Some of those who remained were offered promotions which will not now be forthcoming. Others are hurt by what they see as a betrayal by their bosses and colleagues.
John Romanelli is a key man to watch. He, Walsh and Devine were thought to be thick as thieves until Romanelli was transferred to London last year to run international debt capital markets. He was ordered back to New York to take charge once the 40 had resigned, and is now back at Canary Wharf. Then there are the less senior bankers not included in the deal who now know who is and who isn’t valued by their vacillating bosses.
The ripples run all the way to the top. The most obvious candidate for removal or transfer is Hester. In persuading the naughty 40 to stay, Wheat apparently left Hester out of the discussions, even after he hurried back from holiday. “Hester’s authority has gone to zero,” says one former CSFBer. “He must be on the fast track back to admin.”
That leaves Wheat with another dilemma. If and when Hester moves, who gets his seat on the executive board? Dimaio ought to be the obvious candidate, but Wheat, who is not known for his forgiving nature, might not countenance that.
Wheat has survived a few near disasters as CEO, most notably a $3 billion or more loss in Russia in 1998. But the turmoil that has followed the $13 billion acquisition of DLJ harks back to the bad old days of the late 1980s and early 1990s.
Still, don’t bet against Wheat surviving. He has staying power and, says one former employee, “has proven his ability to tackle any challenge to his position.” We’ll see this month, when non-compete clauses in many DLJ contracts run out.
