Source: www.breakingviews.com is Europe’s leading financial commentary service.
In the past two months, two of the UK’s biggest corporate brokers have suffered serious reverses. And this has led some to question whether the UK’s distinctive corporate broking system may finally be in decline.
HSBC recently dropped Cazenove as its broker in what the international bank claimed was a move to broaden its international shareholder base. And troubled insurer Royal & SunAlliance dumped Hoare Govett, from the team handling its rescue rights issue.
Corporate broking is a peculiarly British phenomenon. Companies usually employ one or more investment banks as corporate brokers to communicate with their institutional investors.
They do so partly for regulatory reasons. The Financial Services Authority obliges listed companies to have a “sponsor” broker to ensure they comply with listing rules. But brokers are also seen as a valuable source of independent advice, as well as a sounding board for deals and governance issues.
US banks have made huge inroads into most areas of the City but not into corporate broking. Of the top three firms in 2002, only one is an American interloper – Merrill Lynch. And its position was largely inherited from Smith New Court, the broker it bought in 1995.
The others – Cazenove and Hoare Govett – were both in the top three before the deregulation of the London Stock Exchange nearly 20 years ago.
US investment banks have found it hard to break into broking because it does not fit easily into their business models. Banks such as Goldman Sachs and CSFB are highly deal-driven, looking to maximize their earnings from every deal that comes along, while broking is a relationship business.
A recent example was during the bid battle for Safeway. CSFB, which had a broking relationship with the supermarket chain, switched horses in order to advise KKR on a bid for the company. The lucrative opportunity won out over the relationship.
US banks insist that corporate broking is in decline and that companies want to discuss the full range of products when considering their financing needs, which plays decisively to their strengths.
One-stop shopping might threaten some corporate brokers. Cazenove, for instance, does not have a large debt business. So it would be hard for it to offer itself as a one-stop shop for a company’s financing needs.
But though product capability is important, the last few years have, after all, demonstrated to companies the value of disinterested advice.
In any case, most of the large corporate brokers, such as Hoare Govett (through its parent ABN Amro), UBS and Merrill Lynch, do have access to a wide suite of products.
Arguably, the current threat to the top-table brokers comes as much from the opposite direction. Many banks are still trying hard to break into the broking business. Citigroup, for instance, has built a big team. And HSBC replaced Caz with its own corporate broking arm.
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