North America


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The Americans have learned some painful lessons about mergers. The Canadians have been told they can't merge. Fifth Third Bank is successful where others aren't, and TDM in Canada shows the rest how to acquire and integrate. Antony Currie

United States
Best domestic bank: Fifth Third Bank

Best foreign bank: HSBC

Best domestic equities house: Morgan Stanley Dean Witter

Best foreign equities house: Deutsche Banc Alex Brown

Best domestic bond house: DLJ

Best foreign bond house: TD Securities

Best domestic M&A house: Goldman Sachs

Best foreign M&A house: Deutsche Banc Alex Brown

George Schaefer has a very simple recipe for banking. "We buy money at 4%, sell at 8%, and don't get involved in every new fad," says the CEO of Fifth Third Bank. You might think that's the sure-fire way to kill off your bank, but Fifth Third is by far the most successful bank in the US as measured by profitability, shareholder value, customer contentment, staff retention, successful mergers and a host of other criteria.

The bank, which is one of the top 15 in the US by market capitalization, has increased earnings every year for 26 years - the last 10 of which have involved double-digit growth - and has average earnings growth of 17.5% for the past 26 years. It boasts the best expense ratio in the business, at 40% (the norm is 55-60%), has a P/E ratio double the industry average, and is rare in that it only acquires other institutions if they add to the bottom line.

What's more surprising is that the bank's core markets are Ohio, Indiana and Kentucky. In other words in the Midwest, where several banks - including Huntingdon and Bank One - have been suffering of late.

Fifth Third's strength appears to come from its desire to do business simply, but aggressively. Bank employees, whether executives, managers, clerks or janitors, get bonuses each time they introduce a new customer to the bank, and 80% of the employees are stock owners. "We practise capitalism from the top to the bottom of this company," says Schaefer. "We encourage our managers to run each operation as an entrepreneur."

Over the past three years the bank has doubled in size through acquisitions, yet remains decentralized, which might remind some of the way Bank One hit problems in the mid-1990s - too much autonomy was granted to too many businesses, leading to a lack of overall structure. But Fifth Third has thus far avoided such pitfalls. "The company manages the company in roughly $3 billion pieces, so that the size of any one of its affiliates does not exceed the size of what the original Fifth Third in Cincinnati used to be," says CSFB banks analyst Mike Mayo. There are 14 affiliate banks. More important, it is only the front end where decentralization is allowed; all the back-office functions are centralized.

Just over 50% of the earnings come from retail banking, 10% from investment advisory and 30% from commercial banking. In the latter, 70% of revenues come from the middle-market companies (with revenues of $5 million to $200 million) 20% from large corporates and the rest of it from small businesses. Commercial leasing, commercial real estate and construction are the largest segments.

But it is its fourth business line that is intriguing, transaction processing, which makes up 9% of earnings. In the 1970s the bank realized that technology would play a bigger role in banking, so beefed up its systems.

Morgan Stanley is the top underwriter of initial public offerings, and of all equity offerings, and its after-market performance is enviable high. The bank has successfully maintained its lead as the top bank for tech IPOs, lead managing seven of the top 30 performing deals of 1999, such as Sycamore, Ariba, and Brocade Communications. And it has avoided the pitfalls of its rival Goldman Sachs by not over-concentrating on business-to-consumer internet stocks, which have been heading downwards for more than six months.

It's not just tech stocks that the bank underwrites, of course, but all sectors.

Perhaps one of its most successful deals in the old economy last year was the November IPO for United Parcel Service, at $5.47 billion the largest ever US IPO. The mandate was the reward for three years of advice given to UPS by the bank's head of the transportation group, James Runde.

Goldman Sachs's dominance of the US M&A market continued over the course of the past 12 months, making it the fifth year in a row that Goldman has topped the league tables.

Highlights include advising AT&T (along with CSFB and Merrill Lynch) on its aggressive acquisition of MediaOne for $63 billion, Warner-Lambert on its $89.6 billion merger with Pfizer, Cap Gemini on its $11 billion acquisition of Ernst&Young's Consulting business, and E-Tek on its $11.2 billion sale to JDS Uniphase.

Awarding a bank not even in the top 10 in the league tables for high-grade debt is somewhat controversial. But DLJ wins the award as best bond house for two reasons: first, its ongoing prowess in high-yield debt, where it is now at the top of the league tables for the seventh year in a row. Second, for the innovative way in which it has successfully entered the high-grade space. It's not after the big mandates from the big companies, explains head of high-grade debt Chris Lynch. "DLJ does not manage its high-grade business for league table results, as much of that is commoditised, and thus very low margins producing a lower-quality business."

On December 31 last year Times Square in New York was jam-packed with people celebrating the new year for each country around the world as each hour passed towards midnight east-coast time. Not Youssef Nasr, though. The CEO of the US operations of HSBC was sitting in his office finalizing the acquisition of Republic New York Corporation. It made HSBC the third-largest commercial bank in New York State, just as it entered its 150th year in the territory.

The acquisition was one of three signs in the past year that HSBC takes the US commercial banking market very seriously. Last year it listed on the New York Stock Exchange, and last month announced that it was refocusing its commercial banking operations on 11 core markets, one of them, of course, the US.

The Republic acquisition added scale to the retail franchise in New York, and significantly increased HSBC's private banking operations in the Americas, especially in Latin America.

Even without acquisitions HSBC has done well to work with what it's got. It has, for example, two joint ventures in place. The First is with Wachovia, one of the largest banks in the south-east US, and the venture focuses on providing services the other cannot. The second is with Wells Fargo on the west coast, called Wells Fargo HSBC Trade Bank, with HSBC owning 40%.

Two years ago Deutsche Bank was a near-laughing stock in the US. The Europe-First policy espoused by the bank's Vorstand in Frankfurt alienated staff and clients alike, causing tech banking head Frank Quattrone to jump ship to CSFB just two years after joining from Morgan Stanley.

The acquisition of Bankers Trust Alex Brown has changed that perception, and added a depth to the equity and M&A franchises in the US which could never have been built conomically.

Alex Brown's expertise in growth companies, whether tech-oriented or not, has continued apace, and the company has been involved in some of the leading transactions of the past year. Ditech Communications, which develops fibre-optic equipment, was the year's third-best performing IPO, Foundry Networks, for example, which makes the gigabyte ethernet switches to help avoid website bottlenecks, was the 18th best.

And this year Deutsche Banc Alex Brown lead managed the IPO for Krispy Kreme Doughnuts, launched in mid-April as stock markets plummeted around it. It launched towards the top of the filing range, and has increased in price since the deal.

In M&A, not one of Deutsche's strong points in Europe, the acquisition added the Wolfenson Group which BT had bought in 1996, and the respected, if small, Alex Brown bankers. Its biggest coup so far was to act as advisers to NTT in its $5.5 billion acquisition of Verio.

Other deals include advising FlyCast Communications on its $2.5 billion sale to CMGI and Havas Advertising on its $2.1 billion acquisition of Snyder Communications.

But not all of Deutsche's US strengths come from the acquisition. Its equity derivatives and portfolio trading divisions are among the best in the world. In the latter Deutsche has ranked First in portfolio trading on the NYSE for the past five quarters, and its derivatives franchise - partly built on another acquisition, that of the NatWest Markets team in 1997 - continues to grow.

There are those who argue that there are no decent foreign bond houses in the US. Many try to break into the market, but as yet there are no major successes. The big two in the mid-1990s trying to get in were Deutsche Bank and UBS. These were the two spending all the money to hire staff back then. But they still have yet to deliver.

Deutsche's bond operations promised much but stayed small and then entered into a year-long integration headache with Bankers Trust. Only now is it coming out of that, especially in high yield where it has been one of the major lead managers in a quiet market. Having hired CSFB's asset-backed securities team in March, as well as snaring ex-Merrill supremo Seth Waugh, Deutsche could well be the one to watch out for next year.

UBS Warburg, meanwhile, is in build-up mode, having hired Art Penn, formerly of Bankers Trust, to steer the US leg of its leveraged-finance unit.

The only two with a decent track record throughout the entire year are Greenwich Capital and TD Securities, two small specialist firms. Greenwich has done an excellent job over the years, but is now suffering as a result of the Royal Bank of Scotland acquisition.

So the award goes to TD Securities. It is small, but has had a great year in leveraged lending to the media and telecommunications sectors, consistently ranking in the top three in the league tables.

Best domestic bank: Toronto Dominion Bank

Best domestic equities house: RBC Dominion Securities

Best foreign equities house: Goldman Sachs

Best domestic bond house: CIBC

Best foreign bond house: Merrill Lynch

Best domestic M&A house: RBC Dominion Securities

Best foreign M&A house: Goldman Sachs

Toronto Dominion Bank wins the award this year largely for its acquisition and integration of Canada Trust Financial Services. TD announced the acquisition in August last year, stating that it had entered into talks with Canada Trust's owner, British American Tobacco, in October 1998 after the government turned down the plans for the big four banks to become the big two.Through the deal TD becomes the largest retail and small business bank in Canada, displacing Royal Bank of Canada.

What has impressed analysts and investors the most is the near seamless way with which TD has integrated Canada Trust. "It has come together very well," says one analyst. "But the coup de grace was to make CT's CEO, Ed Clark, the CEO of the retail and small business unit. Combined with the retention of the name [the unit is called TD Canada Trust], it was a huge vote of confidence in the skills of Canada Trust."

As foreign investment banks take a greater slice of the Canadian market, RBC Dominion Securities stands out as the main Canadian house in equities and M&A. It was, for example, the only house appointed to advise Canadian Airlines on its merger with Air Canada announced last month. And RBC Dominion was the main Canadian bank involved in all stages of the BAT-Imasco-Shoppers Drug Mart restructuring. It all stems from when Charlie Baillie, CEO of Toronto Dominion Bank, made it known to BAT that he would like to buy one of its assets, Canada Trust.

That was sold for $6.8 billion last August, with RBC one of six advisers to Canada Trust.

At the same time, BAT announced it was to buy the 58% of Imasco it did not already own.

Imasco is a Canadian conglomerate that had interests in tobacco, financial services, retailing and property development, and wanted to sell off all non-core assets.

BAT/Imasco then decided to sell its retail arm, Shoppers Drug Mart, to an investor group led by KKR for C$2.55 billion, in February.

RBC Dominion was joint adviser to Shoppers with Goldman Sachs.

Although Merrill Lynch has upstaged the Canadian banks for innovation in the bond markets over the past 12 months, CIBC World Markets still maintains a good league-table presence for both domestic and international bonds for Canadian issuers. It is still strong in the telecoms sector, but has been branching out into other sectors and has been developing better links with LBO funds.

The increasing influence of foreign domestic banks in Canada is best represented by the advisers for the recently announced merger between Air Canada and Canadian Airlines. Just a couple of years ago this purely domestic merger would have had purely domestic advisors, but not any more. Goldman Sachs was appointed as joint adviser to Air Canada with Nesbitt Burns.

This is just one of several examples where Goldman has become a core adviser in Canadian deals, as well as an indication, says George Estey, chairman of Goldman Sachs Canada, "of how many of the Canadian companies are global players needing global solutions, and that plays to our strengths."

Much of the rest of its business has been in cross-border activity, such as advising Thompson during June on its divestiture of newspaper assets, including its Canadian assets, Seagram on its merger with French company Vivendi, and BAT on its restructuring of its Canadian operations.

In equities Goldman has been involved in a number of the headline-grabbing deals, including the IPO for 360 Networks, one of the First tech IPOs after the April crash; Mutual Life's demutualisation, as well as doing both a convertible and a common stock offering for both Seagram and Canadian National Railway.

Merrill Lynch is a powerful player in Canada, whether for international or domestic bonds for Canadian issuers. It lead managed Five of the seven global bonds last year for provinces and government agencies (such as Hydro Quebec and the Export Development Corporation), and became the First foreign bank to lead manage a domestic issue for a province when it took Ontario to the markets.

On the MTN front, Merrill has increased its participation on domestic programmes by an average of one a month since January 1999, meaning that it is involved in over 55% of all domestic programmes.

But last year's real coup was Merrill Lynch single-handedly creating a commercial mortgage-backed securities market in Canada with the launch of four Merrill Lynch led transactions for a total of C$853 million. Two of the four transactions consisted of Merrill Lynch mortgage conduit originated mortgages. Merrill Lynch led a deal backed by mortgages originated from the Caisse de Dépôt et Placement in Quebec.

Merrill Lynch also led the First Street Tower transaction which was a revolutionary concept in financing for an office tower in Calgary being built by H&R REIT and leased entirely by TransCanada Pipeline.