Eating the British lunch? (Americans and the British corporatefinance business after the Big Bang)

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By:
Jones, Rosamund
Published on:

EATING THE BRITISH LUNCH?

Will the Americans, after Big Bang, steal British corporate finance business from UK banks? The US investment banks say: Sure we will. The UK merchant banks complacently say: Never. But UK corporate finance officers told Euromoney: Maybe.

"We would use any borrowing deal which we thought was best," said the treasurer of one of the biggest British companies. "There will be a loss of business for merchant banks, and some will go to the wall. There will not be room for all the banks."

Another finance manager commented: "We really don't care who it is who comes through the door. If the Americans have a bright idea which is not being put to us by the UK banks, we'll be interested -- and the Americans have a lot of bright ideas about the UK scene."

However, Justin Welby, treasurer of Enterprise Oil, said: "UK banks will be able to do a better job at advising people on domestic issues and where relationships are important British banks will continue to do well. I would be surprised if US banks led many domestic mergers and acquisitions."

He will be proved wrong if the American banks follow the example of Goldman Sachs, which in the first half of this year acted as adviser on takeover deals to the value of 6.6 billion [pounds sterling]. It helped Standard Chartered to fight off a bid from Lloyds Bank, and Woolworth to fight off Dixons. It failed to prevent the takeover of Imperial by Hanson, Pritchards by Hawley Group and Debenhams by Burton, but not for want of trying.

For certain British bankers, the fact that Goldman Sachs has been so busy has created a mixture of agitation and surprise. It was described as "interesting" by the corporate finance director of one British bank.

He added: "Some are readily understandable -- Standard Chartered, for example. It was argued that there was some US interest in Debenhams. But Woolworth? I think they did that just for the fun of it.

"If the object was to earn fees, fair enough. But if the thinking was that the company would derive benefit, then no. This is not sour grapes, but any company wishing to do a takeover bid to the exclusion of British merchant banks gets nothing extra."

There was in fact an American angle to Woolworth's defence, because it was important to know how much a US company might be willing to pay for such an acquisition.

At Goldman Sachs, John Thornton (vice president, mergers and acquisitions) stressed that Goldman's takeover clients were not new, but have been taking advice from the bank on other matters for years. Goldman arrived in the UK in 1968 -- only 22 years after Warburg, as Thornton pointed out. American bankers like to remind the City that Warburgh, Schroder and Rothschild were not originally British.

"We are staffed in London," Thornton said, "with professionals who have experience both in the domestic market and in the US."

A great preoccupation of Goldman is to appear as British and conservative as possible. Yet the manner of Thornton and his colleague Robert Agostinelli could not be more American. In the light of their success, their determination to remove any yankee twang from what they told Euromoney is hard to understand. They insisted that they should not be reported as saying: "Guys". They'd intended to say: "Men".

Some British bankers argue that Goldman has not yet been the lead bank in any transaction. However, John Tyce, a bank analyst with Alexander, Laing and Cruickshank, said: "Goldman are concentrating on being second largest on transactions. One day they will be the largest."

No other American bank approaches Goldman's activity in British takeover business. One British banker said: "In the two years that I was on the Takeover Panel, I never saw an American at the door."

Yet the biggest British corporations are already using American advice -- and not only for takeovers. British Petroleum, traditionally reliant on Lazards, has also done business with Goldman Sachs and Morgan Stanley, And Salomon? "At Salomon's we've always tended to start late," said Stephen Brisby, who is vice president of corporate finance there. "But not too late. In five years' time it will be a very different scene."

Brisby, a former director at Schroder, is one of the British bankers who has gone to work for US institutions. He argued that the Americans were more likely to provide the corporate treasurer with a fully integrated banking service. "The reason that we won our latest deal" -- he refused to specify -- "was that the corporate treasurer felt we have been more pro-active, and that it had meant comparatively more to us. Leverage was included and we could mobilize capital -- if necessary from our own pockets. Lastly, he felt comfortable with our team."

Peter Smith, head of corporate finance at BP, said: "US banks are progressively encroaching and possibly taking over the UK market share. They have very aggressive marketing techniques."

"Over the past three to six months there has been a big increase in the number of US banks calling us up," said another corporate treasurer.

Brisby saw nothing wrong with aggressive marketing. "A few years ago Morgan Grenfell began taking its ideas to people, and that's how clients were attached, and how Morgan Grenfell reached the top of the takeover league."

Here, the most conservative British bankers are beginning to agree with him. Adam Broadbent, head of corporate finance at Schroder, admitted: "I would not have said this three years ago -- but marketing, which is about knowing your client and meeting his needs, is half the name of the game. As product salesmen, the Americans are impressively organized, have high quality people -- and they have much to teach us. We hope to learn from them, apply what is best for our market, and drop the rest."

For some time the British have argued that the Americans are weak at relationship banking. They are supposed to have a "just do the deal" method of conducting business.

If this was true, it is now changing. Jacques Gelardin, chairman of Shearson Lehman Brothers International, London, said: "Although we are an American firm, we work in a European environment and employ Scandinavians for Scandinavia, French in France -- why not British over here?"

Another British argument is that the Americans are not so much encroaching on the British market as dealing with those companies which are already international. John Gillum, director of corporate finance at NM Rothschild, told Euromoney: "Goldman's interests, and the interest people have in Goldman, is international rather than national."

He added: "If you're operating in Atlanta, Georgia, you'll call on Goldman Sachs. If you're in Accrington, on the other hand..."

Others point to the encroachment of British banks in the US -- as when Warburg acted for Chrysler in its final disposal of Peugeot equity, leading a syndicate of banks in a multi-market offering. And didn't Schroder acquire a 50% interest in Wertheim, a New York-based investment banking firm, for 100 million [pounds sterling]?

What may shatter British complacency is the much larger capital base of the American banks. After Big Bang the American bought deal may come to Britain. Merchant banks or new City conglomerates may buy an entire issue, in order subsequently to place it with other institutions. "The bought deal should take off quickly," predicted William Harrison, another British refugee from Schroder, who has gone to Shearson to head its operations in London. "There ought to be a tremendous amount of interest."

American methods of doing business appear increasingly likely to take over from established London ways in the light of the recent block trade of 108 million [pounds sterling]-worth of BP shares by Salomon and Hoare Govett. The issue, which was sold in London and internationally on behalf of Guinness, may set a trend.

The Americans, with more financial clout, will be in a stronger position to offer this cheaper and quicker service to their clients. Once the 3% discount had been arranged and shares sold to Salomon and Hoare Govett, Guinness could relax. Elated after completing the deal, Stephen Brisby told Euromoney: "We bought and sold over 100 million [pounds sterling] in under one hour."

This may well be where the British banks feel the pinch. "The British merchant banking community is short of capital," Brisby said. "Out of the top six or seven banks, concentrating on what they do already, there will be some who will discover that they are not making money. There will be a polarization."

The British insist that the Americans are making no headway with second-tier companies. At Schroder, Broadbent said: "A large range of companies are not looking just for gun-slinging or product salesmen. They want advisers who know and care about their business and are comitted to helping them grow."

Do the Americans want this market? Timothy Barker, director of corporate finance at Kleinwort, Benson, said they did not. "Major Wall Street houses do not particularly concern themselves with smaller companies. They do not give them a decent return on effort."

At Brown Shipley the director of corporate finance, Derek Connolly, said: "Our clients tend to be smaller. I don't think the Americans would be interested in them. A wheelbarrow maker in Huddersfield does not want the sort of advice they can offer. They have certainly not given the impression that eager young Americans have been knocking on their doors, saying: 'We can help you'."

"If the Americans were to contact us," said Keith Single, finance controller of Barrie Investment and Finance, "it would have to be something quite extraordinary for us to go and look at it. If their services were cheaper we'd just go to our advisers in the City and say that we had received a good offer. I think we'd find that they would put their prices down."

This is just what the advisers in the City are afraid of. "in any price war there will be corpses which will have to be moved out of the roadway," said Gillum of Rothschild. "Mindless undercutting would end in tears."

Gillum suggested that price modifications were a more likely outcome than radical change. "To suggest that London lacks innovation and has to learn from New York is rubbish. The deficiencies in the London set-up are infinitely less than one might believe."

David Clementi, director of corporate finance at Kleinwort, Benson, said "We have worked with the US on many occasions and we're not very worried."

Some think they should be. An Englishman at an American bank said: "Those British merchant banks where corporate finance is a major part of their earnings will be in deep water."

And Richard Colker, executive director of Kidder, Peabody International, spoke of the welcome Kidder had had from "two of the UK's largest companies." He added: "We were pleasantly surprised. They had no hesitation in speaking to us."