SBC Warburg

views updated

SBC Warburg

1 Finsbury Avenue
London EC2M 2PA
England
(0171) 606 1066
Fax: (0171) 382 4800

Public Company
Incorporated: 1934 as New Trading Company
Employees: 4,472 Total Assets: £22.58 billion Stock Exchanges: London

SICs: 6711 Holding Companies; 6012 Recognized Banks;
6211 Stock Brokers, Dealers, & Flotation Companies

Founded by Siegmund Warburg, a scion of a German banking dynasty, SBC Warburg was established as a mutual aid society for Jewish refugees from Nazi Germany. After World War II it became known as a daring merchant bank whose bold initiatives frequently startled London’s financial establishment. The company grew to be the United Kingdom’s premier investment house and darling of the financial world; however, in the mid-1990s the bank encountered an exceptional string of setbacks that left it vulnerable to a takeover from a stronger bank, and in May 1995 Warburg formed an alliance with the Swiss Bank Corporation (SBC), Switzerland’s third-largest bank.

The origins of Warburg can be traced back to 1559 in the small town of Warburg in Westphalia, Germany, where Simon von Cassei, prevented because he was Jewish from a free choice of professions, started a family money-lending business. From small beginnings the business prospered, and in time the family name was changed to Warburg. By 1902, the year that Sieg-mund Warburg was born, M. M. Warburg had become a banking dynasty, based in Hamburg but with interests worldwide. After his education, Siegmund Warburg joined the bank, gaining valuable experience in its offices in London, New York, and Boston before settling to pursue his career in Berlin.

With the rise of the Nazi Party, Siegmund Warburg left Germany for good, emigrating to London in 1934. There he set up the New Trading Company, which quickly attracted a number of German and Austrian refugees from the Nazis. The company financed the growth of small businesses and aided refugees in recovering the assets they had been forced to leave behind in their homelands. For more than ten years it was a small, sheltered Jewish enclave, bound together by a philosophy of reciprocal support and an atmosphere of friendly, even familial, camaraderie: the members were known as the “uncles,” and the company’s internal language was German.

After the war, however, Siegmund Warburg and his partner, fellow German emigre Henry Grunfeld, transformed the New Trading Company into the merchant bank S. G. Warburg and Company and proceeded to tackle Britain’s banking establishment on its own terms.

Over the next few decades S. G. Warburg steadily gained a name for itself. Occasionally the newcomer shocked the traditionalists of the banking community, most notably in 1958, when S. G. Warburg engineered the first hostile corporate takeover London had ever experienced. For its clients Reynolds Metal and Tube Investments, Warburg clandestinely acquired 10 percent of British Aluminium, then advised its clients on a hostile bid for the firm—a maneuver that many in the financial establishment found unsavory (though it subsequently became commonplace). In 1963 Warburg again broke new ground, taking a pioneering role in the launching of the Eurobond market with a £10 million loan for the Italian roadbuilder Autostrade Italiane.

Throughout the 1960s and 1970s, S. G. Warburg’s image as an outsider, as the “Jewish emigre” bank, increasingly faded: by 1982, when Siegmund (now, tellingly, Sir Siegmund) died, the bank he had founded had become an integral part of the financial establishment.

Sir Siegmund did not leave a successor as such, but it was the man widely known as his “adopted son,” David Scholey, who piloted the bank through its next important phase. In 1986, with the so-called Big Bang, deregulation allowed London merchant banks for the first time in 200 years to diversify into the fields of broking and market-making. Under Scholey’s direction, S. G. Warburg lost no time in taking advantage of the new freedom: in quick succession in 1986 and 1987, stockbrokers Rowe & Pitman, jobbers Akroyd & Smithers, and gilt market-makers Mullens & Co. were brought under the Warburg umbrella to create an integrated merchant banking and stockbroking firm.

Thus liberated by deregulation, and freed, as well, from the more cautious dictates of Sir Siegmund, who had never countenanced unnecessary risk-taking or over-extension, it seemed there was no stopping S. G. Warburg’s ambitious and successful growth. The company was widely considered Britain’s flagship investment bank.

As a leading investment banker with 30 offices in 23 countries, Warburg offered financial advice and services, through its 385 corporate finance executives, to corporations, governments, and investors worldwide. S. G. Warburg was the leading securities company in the United Kingdom, and among the top 20 internationally. In fiscal year 1993-94 the company represented 560 corporations and governments and traded with or in the interests of 2,000 institutional investors. Half of Britain’s foremost 100 firms were Warburg’s corporate finance clients. It was known as an adroit manager of corporate mergers, acquisitions, and restructurings, and was the world’s third-largest adviser on such activities. Warburg was the world’s largest research house, boasting more than 250 analysts producing macroeconomic, interest rate, currency, and company-specific information, including information on some 2,400 companies in 30 countries. The bank excelled in equity financing, managing more than $6 billion of international equity and equity-linked financings, and ranking sixth worldwide in international equity issuance. It was active also in fixed interest financing, offered securities distribution and trading, provided specialist financing in areas such as leasing, banking, and project finance, and supplied securities custody and administration services. Through its 75 percent stake in Mercury Asset Management (MAM) the bank governed one of the United Kingdom’s most prominent and prosperous international investment management companies, providing services to 5,000 institutional and individual clients and 100,000 retail investors. In the international market, S. G. Warburg was the United Kingdom’s strongest contender, better equipped than any other domestic bank to compete with the bigger investment houses of Wall Street. In all markets the bank enjoyed long-standing relationships with high-profile, often blue-chip clients. S. G. Warburg was, in short, what the Independent called “a standard bearer for the City and a model of sound, inspirational management and success.”

It came as a profound shock, then, when suddenly, beginning in late 1994, an unusual series of events reversed S. G. Warburg’s position. In October of that year the first faint alarm bells were heard when Warburg announced a profits warning: the profits of the group were less than half what they had been in the year before for the same period. Two months later, word leaked that Warburg was in the process of negotiating a merger with the U.S. investment bank Morgan Stanley. The merger, which would have created the world’s largest investment bank, would have been advantageous to both parties. Warburg would have gained the clout it lacked in America, where it had been struggling for years to build a substantial presence with only limited success. Morgan Stanley would similarly have won a stronger position in Europe, and the U.S. bank was also very attracted to MAM.

When Morgan Stanley backed out of the deal, however, for reasons that were never fully explained, the abortive merger was seen not just an embarrassment but as a downright debacle, and Warburg’s credibility was severely compromised. The Independent was typical in its assessment that Warburg had suffered “a public relations and strategy disaster from which the bank may take years to recover.” The Times demurred, declaring, “City mutterings about Warburg inevitably stem from natural envy and a typically British denigration of success,” but this was definitely the minority view.

The failed merger seemed to highlight Warburg’s shortcomings, with the very fact that Warburg had desired a merger with Morgan Stanley in the first place viewed as a tacit admission that the bank was unable to succeed alone as a global operation. An expansionist strategy was considered difficult for a U.K. bank, because, unlike Wall Street firms, it did not have a large, profitable domestic market to draw on, and without the capital thus afforded could not hope to compete effectively.

After the attempted merger, Warburg’s fortunes declined quickly. A month later, in January 1995, Warburg pulled out of the Eurobond market. Although the move was probably a wise one, as dollar issues dominated the market relative to sterling, commentators remembered that it had been S. G. Warburg itself that had pioneered the Eurobond market and viewed its departure with alarm. In addition, it was remembered that Morgan Stanley, had it joined with Warburg, could have helped shore up the latter’s flagging bond operations. Was this withdrawal an admission that Warburg could not compete alone in the fixed-interest market? In short, the move was another public relations disaster following much too closely on the last one.

Doubts about Warburg’s future began to affect the bank internally, with morale at an all-time low. In February, key employees began to defect to rival houses. First to go were the joint heads of Warburg’s equity capital markets, who joined Morgan Grenfell, a London-based investment bank owned by Deutsche Bank. Within days, several members of their team followed. To an investment house, where confidence is of paramount importance and staff a critical asset, it was a severe and shocking blow. “Readers beware,” warned the Sunday Times somewhat snidely. “If you are walking past S G Warburg’s Finsbury Avenue offices, take extra care. There is a danger you will be trampled by hordes of senior executives rushing from the building.”

Someone was needed to take the blame, and the chief executive, Lord Cairns, duly resigned his post. His position was filled by chairman David Scholey, who postponed his own planned retirement to remain at the helm of the troubled bank. The maneuver proved of little help, however. In March Warburg curtailed its equities business in New York; in May the bank issued another profits warning. From the record pre-tax profits of the previous years, Warburg had sunk to what would have been a loss if not for MAM’s good performance. A steady trickle of departing staff continued.

In May 1995 S. G. Warburg announced that it had formed an alliance with a stronger partner, the Swiss Bank Corporation (SBC), Switzerland’s third-largest bank. In many ways the two complemented each other, with Warburg’s strength in equities balanced by SBC’s expertise in debt markets and derivatives and its position as a lead arranger in international bond issues. SBC was not strong in the American market, however, which was a long-cherished dream of Warburg’s. Still, Scholey asserted confidently that SBC and Warburg fit together “like the clunk of a Rolls-Royce door.” Some observers found the alliance less satisfying. “There is no point in pretending this is going to be anything but a rape,” growled the Independent.“This could never have happened had Siegmund Warburg... still been at the helm,” insisted the Guardian.”His legacy has been betrayed by his successors.” More sympathetic but no less disapproving, the Times commented: “The death throes of SG Warburg are truly distressing to watch. For someone who remembers the heady days after Big Bang in 1986, when SG Warburg was the ultimate mover in the City, arrogant, powerful and effective, it seems scarcely credible that the current management is leading the bank off to the corporate equivalent of the knackers’ yard.”

SBC bought Warburg for £860 million, in a deal that did not include MAM: Warburg distributed its 75 percent stake of that company to its shareholders. For many it was the end of an era, as S. G. Warburg became SBC Warburg.

Warburg’s future after the takeover remained unclear. Certainly the bank retained its core strengths in corporate finance and research. Indeed, the company was named in July 1995—for the fifth year in a row—as the leading research house in Extel’s influential survey. Despite its troubles, Warburg could still point to countless successful projects undertaken for its blue-chip clients; whether those clients would choose to remain with Warburg, however, was an open question. Most significantly, the intentions of new owner SBC were unknown: it remained to be seen whether the house of Siegmund Warburg would find itself eventually subsumed into the larger corporation or would continue on to write new chapters in its interesting and distinctive history.

Principal Subsidiaries

Rowe & Pitman Ltd.; S. G. Warburg & Co. (Far East) Ltd. (Hong Kong); S. G. Warburg and Co. GmbH (Germany); S. G. Warburg & Co. Inc. (U.S.A.); S. G. Warburg & Co. (Japan) Ltd.; S. G. Warburg & Co. Ltd.; S. G. Warburg Futures & Options Ltd.; S. G. Warburg International; S. G. Warburg Options Inc. (U.S.A.); S. G. Warburg Securities Ltd.; S. G. Warburg Trust Co. Ltd.; S.G.W. Finance pic.