Purchasing a U.S. investment bank is far from a sure thing for offshore banks.
Michael S. Rulle's game plan for this year is quite simple.
"We're going to make money," says Mr. Rulle, chief executive of CIBC Oppenheimer Corp.
Making money on Wall Street has turned out to be very hard for Canadian Imperial Bank of Commerce and other foreign banks that bought securities firms in New York in the last two years. CIBC, ING Group and Societe Generale all saw their recent acquisitions lose market share and incur significant losses in 1998.
The poor performances once again fan the doubts about whether foreign companies have what it takes to make it on Wall Street.
"It's not surprising," says Michael Ancell, a bank analyst with St. Louis brokerage Edward Jones. "A lot of European banks have tried to crack the U.S. investment banking market and wound up with their noses bloodied."
To be fair, 1998 was tough on all of Wall Street, with the midyear downturn in the stock and bond markets taking a toll on securities firms large and small. However, the Securities Industry Association reports that profits for the first nine months for all firms totaled $6.6 billion, and the fourth quarter is looking strong for many companies.
By contrast, Oppenheimer lost upwards of $140 million during its last fiscal year, according to equity analysts who follow CIBC.
Furman Selz used to be one of the Street's most profitable small investment banks, yet its Dutch owner, ING Groep NV, reports that Furman lost $7 million through the first nine months of 1998.
French toasted
Societe Generale has yet to release financials for SG Cowen Securities Corp. But SG Cowen's waning market share in investment banking makes it unlikely that the firm made money for its French bosses in 1998.
Analysts say there are special circumstances that made the brokerage firms' results look so poor. Large amounts of money were set aside in retention pools to keep staffers from fleeing to other firms. CIBC Oppenheimer, for example, incurred a one-time retention expense of $125 million last year. Societe Generale's pool for SG Cowen reached $75 million.
But a much bigger problem is the high price foreign banks paid. SG Cowen was sold for $615 million, while Furman Selz fetched $600 million. These prices represented four times SG Cowen's and Furman's book values--twice the going rate for investment banks in years past.
"Some acquisitions, notably Cowen, still appear hard to understand," wrote Merrill Lynch & Co. analyst Sarah Manton in one report.
While all small and midsized investment banks have unpredictable earnings, the three acquired firms specialize in underwriting initial public offerings and selling small-cap stocks. Small stocks have been in the doldrums for over a year now--Internet stocks are the obvious exception--and their woes saddled the three firms with substantial trading losses.
"It was quite an unpleasant surprise," says Salomon Smith Barney's John Leonard, a bank analyst who follows CIBC.
With small-caps out of favor, IPO underwriting became a much tougher and more competitive business. CIBC Oppenheimer underwrote just four IPOs last year worth $228 million, according to Securities Data Co. That's down from eight deals and $255 million in 1997.
The drop-off was even more pronounced for SG Cowen and Furman Selz. SG Cowen underwrote four deals worth $147 million last year,
vs. nine worth $307 million in 1997. Furman did two deals last year worth $116 million, vs. four deals worth $263 million in 1997.
Given the standard 7% fee banks charge for underwriting IPOs, the decrease in volume likely cost SG Cowen and Furman around $10 million apiece.
The pair did not fare much better in mergers and acquisitions, another lucrative Wall Street business. In a year in which total M&A volume in the United States surged 81%, SG Cowen's plummeted 58% in 1998. Furman Selz's fell 80%.
flaw in la logique
Such declines highlight a flaw in foreign banks' Wall Street strategy. When their acquisitions were announced, bank executives touted the potential for cross-selling. They believed corporate lending clients would become investment banking clients of their new U.S. units.
"These firms bought boutiques that had thrived by having a low cost structure," says Stuart Pulvirent, a Furman partner who resigned last month to become head of research for hedge fund Zweig DiMenna. On the strength of their research, SG Cowen, Furman and Oppenheimer had all carved out investment banking niches in specific industries such as technology, media and gaming.
"What's happened is that the banks that bought them came in and said, `We don't want to do that anymore,"' says Mr. Pulvirent. "Instead, they want to be Morgan Stanley or at least Lehman Brothers."
But for the foreign banks to have any chance of competing head to head with a Morgan or Lehman, they first must convince their clients of the advantages of one-stop shopping. "And so far cross-selling isn't really working," says Gary Goldstein, president of the Whitney Group, a Wall Street executive search firm.
Over the long run, CIBC Oppenheimer may be the best-positioned of the three. The $525 million that CIBC paid for Oppenheimer was a relative bargain at 1.6 times book value. Oppenheimer's strong retail operation, which employs more than 650 full-time stockbrokers, means it is less vulnerable to downturns in corporate finance.
Also, CIBC recognized the shortcomings of Oppenheimer as an investment bank early on, and responded by recruiting veteran bankers from large competitors to fill in the gaps. Conrad Bringsjord, for example, one of Salomon Smith Barney's top M&A bankers, was hired last July, and by the end of the year CIBC had quadrupled its M&A business over 1997. Still, such gains were the exception.
"Nobody can be happy with the types of results that occurred on the wholesale side of Wall Street last year," says Mr. Rulle. "But in terms of the logic of the strategy and the progress we've made, we're absolutely satisfied."
Crain News Service
