Investment Banking Acquisitions and Consolidation

Posted on Monday, 26 May 2008. Filed under: Commentary, Mergers |

When companies are down and out, they become acquisition candidates, of course.  Who better at this time than investment banks?  The share prices of all investment banks – even those who were less impacted by the credit crisis – are much lower than last summer, and continue to be very volatile. 

Does this make them attractive acquisition candidates?  It shouldn’t – at least to firms from outside the industry.  (And if a non-banking company did consider entering investment banking now, wouldn’t you just wish you could listen when the independent non-executive directors asked  ‘why would we want to enter investment banking NOW and what how will our shareholders respond?’)

But how about industry consolidation?  Banks buying investment banks.  Investment banks buying each other or merging. 

Barclays missed out on ABN AMRO (and aren’t they happy about that!).  Deutsche Bank still isn’t enough of a bulge bracket firm to its liking – despite a strategy to achieve that status since it’s acquisition of Morgan Grenfell in 1989 almost 20 years ago and it’s acquisition of Bankers Trust / Alex Brown 10 years later. 

So I’m not talking here about companies buying INTO investment banking, but rather investment banks (or universal banks) buying other investment banks.  Stay tuned, but it may be starting.

See the reports first in Bloomberg on a possible Allianz (Dresdner Bank) / Commerzbank / Postbank merger.  Note the stories, first reported by The Daily Telegraph, that Bob Diamond at Barclays was interested in buying the investment banking parts of UBS or perhaps Lehman.

The big question I think is whether the large banks in China and India will want to get into this business.  They have been quietly building their domestic capabilities, but having been largely unaffected by the credit and liquidity market issues of the past ten or twelve months, they have a relatively greater ability to make a purchase than many American and European financial services firms.  Not sovereign wealth funds, but real banks.

Any comments welcome.  Who actually would be willing to buy into this industry?  Or who could be a consolidator?  Are Chinese banks ready yet for all the ‘fun’ of being global investment banks (with apologies to Ken Lewis of Bank of America who said last year that he’d had just about enough fun in investment banking, thank you)?


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3 Responses to “Investment Banking Acquisitions and Consolidation”

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Just a comment on my own post, to say that it is interesting to see the Lex, in the Financial Times on Tuesday, 27 May (the first day back at work after the weekend when I wrote this), had a similar comment entitled ‘Emerging Banks’, noting that their market share is still only 2% but likely to grow.

Possibility of a Chinese commercial bank buying a major western brokerage house: none.

Any large overseas acquisition by four major Chinese commercial banks must be approved by State Council (equivalent of the cabinet in the west). About a year ago, there was a rumor of China Construction Bank (CCB), arguably the best-run domestic bank in China, buying Bear Stearns. But State Council killed it. As a consolation prize, Bear Stearns signed on Citic Securities (arguably the best-run domestic brokerage house in China) as a strategic partner in Asia, and two parties initially agreed to swap one billion equity. Bear got its regulatory approval, yet State Council was slow to give Citic its blessing. And before you know it, pfff, Bear was gone. The latest episode in Chinese banks overseas ventures was China Development Bank interest in buying into Citigroup. As we know now, State Council killed that too. Adding that to the stock price performance of Blackstone and Morgan Stanley, how likely we see China buying a major western brokerage house? Highly unlikely.

It doesn’t mean Chinese banks do not hold global ambitions. They do. Yet given current turbulent market prospects, conservative Chinese bankers and bureaucrats are unlikely to commit a sizable capital expenditure. Also, managerially speaking, those Chinese banks yet to produce enough competent managers to effectively supervise unruly Caucasian investment bankers. Within a decade, maybe, but not now.

Finally, I read somewhere that if ‘mother Merrill’ ever bought by the ‘Communists’, their rich retail clientele will dissipate overnight 🙂 So will their high-prized brokers! And after CNOOC saga, the Chinese learn that fast.

On the other hand, you never know…

Many firms offer professionals whose perspective on any engagement is limited to their background and experience primarily as bankers – a financial perspective singularly focused on a specific transaction.

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