European Banks on Shopping Spree in U.S.Published: September 28, 2000 in Knowledge@Wharton
European financial institutions are ready to spend billions for U.S. investment banks and brokerage firms.
In July, Swiss banking giant UBS announced it would acquire PaineWebber Group for $10 billion. In late August, Zurich-based Credit Suisse Group said it was buying Donaldson, Lufkin & Jenrette for $11.5 billion.
Last week, reports circulated that Deutsche Bank was in talks to acquire J.P. Morgan. Those discussions ended with the announcement on Sept. 12 that Chase Manhattan will buy J.P. Morgan for $36 billion in stock, but it nonetheless demonstrates Deutsche Bank’s continuing interest in linking up with an American institution. And, just this week, the Wall Street Journal announced that another German company, Dresdner Bank, was in talks to acquire Wasserstein Perella, a major adviser on mergers and acquisitions, for somewhere between $1.2 billion and $1.5 billion.
Why are the Europeans so eager to open their wallets?
"The great frustration felt by many European giants is that they have global capacity but a weak presence in the U.S., which is the largest capital market," says Wharton finance professor Richard Herring. "They’ve not been able to make it onto the list of ‘bulge-bracket firms’ – Goldman Sachs, Merrill Lynch and Morgan Stanley Dean Witter – the companies that capture the bulk of the worldwide underwriting business. In general, the vision is that to be a truly global player you have a major presence in Europe, Asia and the U.S. And the U.S. has been the toughest one to get into."
Not only do European investment banks have a relatively small presence in the U.S., they also lose business to American firms on their home turf, says Wharton finance professor Richard Marston.
"If you compare the respective positions of the top American investment firms – Morgan Stanley, Merrill Lynch, Salomon Smith Barney and Goldman Sachs – and compare the top European firms, there is no comparison in the breadth of the American firms’ expertise and the number of markets in which they dominate," Marston says. "If you’re a European firm doing a merger with another European firm, you’re more likely to go to a Merrill Lynch or a Goldman Sachs than to an investment bank in Europe."
European institutions have been trying to shore up their U.S. presence in recent years. But except for a couple of cases - Credit Suisse’s acquisition of a controlling stake in First Boston in 1988 and Deutsche Bank’s purchase of Bankers Trust in 1999 - attempts to build beachheads in the U.S. have been less than stellar. "The Europeans have a serious need to develop a presence in the most important financial market in the world, but right now they’re having trouble on their home turf," says Marston. "I’m not surprised there would be takeovers."
Herring says the Credit Suisse/DLJ and the UBS/PaineWebber deals make sense. "Credit Suisse had come close with its acquisition of First Boston, and now the acquisition of DLJ almost puts them in that league. It will make them dominant in junk bonds, which is a business they have intentions of growing in Europe, and in private equity transactions, where both companies have strengths."
Herring says the UBS merger with PaineWebber is being driven by slightly different factors. He says PaineWebber is an excellent fit for UBS’s product line. UBS has a large share of the world private-banking market and PaineWebber has a great list of high net worth clients. "The UBS merger wasn’t designed to move it into the bulge bracket because PaineWebber has never been a major player in the underwriting business. Still, it’s a very important move for UBS," Herring notes.
Deutsche Bank, a European powerhouse, has already made inroads into the U.S. market, but remains on the prowl for additional acquisitions. "Deutsche Bank has almost made it on its own by building from without," Herring says. "There was a considerable amount of skepticism that they could make the Bankers Trust merger work and that was true even six months into it. But with the last few quarters’ results, they have been making inroads into investment banking, which now accounts for 35-40% of total Deutsche Bank profits."
Now that J.P Morgan is out of the picture, remaining potential targets include Bear Stearns and Lehmann Brothers, Herring says. European banks with the managerial and financial wherewithal to make acquisitions include HSBC, ING and ABN Amro.
Prominent mergers always attract attention, but they do not always result in an easy or successful fit. UBS and Credit Suisse will have to overcome some formidable hurdles to make their acquisitions work.
"These two deals raise the ante for being a big-time investment banking player," Herring says. "But a more careful observer would say that the case for being a giant firm remains to be proven. Some feel you have to be large to deal with the very largest customers, but there are some huge challenges involved: Merging cultures, merging compensation systems - which are very different at DLJ and Credit Suisse - and merging technology and risk management. Any of these things can go wrong and destroy more value than the merger creates. Morgan has always said it is more agile because it is smaller."
Marston and Herring agree that the deals could be seriously harmed if Credit Suisse and UBS cannot retain key people at DLJ and PaineWebber and leave their distinctive cultures intact. "The trick with all of these mergers is whether new management can retain their old assets," Herring says. "The problem with most of these transactions is your most important assets walk out the door at five o’clock. You want talented people in the firm and you have to develop compensation systems to reward them."
Says Marston: "These takeovers have to leave the Americans with a lot of autonomy. Take PaineWebber, which is a wonderful firm with talented financial consultants. Those people have a lot of pride in their operation. They’re used to a certain kind of remuneration. They will look unkindly on any attempt to impose a different management structure in the U.S. Financial consultants can very easily go to other firms. Many of them have open offers. If UBS is not careful, many people at PaineWebber will leave. Now, UBS has a generous compensation package for the PaineWebber consultants and their top management, but it’s still a concern.
"A place like PaineWebber is only valuable as long as the top management and top consultants stay," Marston adds. If you buy an investment bank and lose your top traders and investment bankers, you lose an important part of the firm. You have to be sure the culture is not destroyed in the takeover process. That requires cultural sensitivity. This was in issue in the takeover of Bankers Trust by Deutsche Bank and will surely be the issue in any future takeovers by the Europeans."