Investment Banking: Addressing the Management Issues

191 Pages·2003·1.16 MB·English

by  Steven I. Davis

Investment Banking
Addressing the Management Issues
Steven I. Davis
Investment Banking

Investment Banking
Addressing the Management Issues
Steven I. Davis
© Steven I. Davis 2003
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First published 2003 by
PALGRAVE MACMILLAN
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175 Fifth Avenue, New York, N.Y. 10010
Companies and representatives throughout the world
PALGRAVE MACMILLAN is the global academic imprint of the Palgrave
Macmillan division of St. Martin’s Press, LLC and of Palgrave Macmillan Ltd.
Macmillan® is a registered trademark in the United States, United Kingdom
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Union and other countries.
ISBN 1–4039–0144–9
This book is printed on paper suitable for recycling and made from fully
managed and sustained forest sources.
A catalogue record for this book is available from the British Library.
Library of Congress Cataloging-in-Publication Data
Davis, Steven I.
Investment banking:addressing the management issues/Steven I. Davis.
p. cm.
Includes bibliographical references and index.
ISBN 1–4039–0144–9
1. Investment banking. 2. Investment banking—Case studies. I. Title.
HG4534 .D38 2002
332.66′068—dc21
2002030805
10 9 8 7 6 5 4 3 2 1
12 11 10 09 08 07 06 05 04 03
Printed and bound in Great Britain by
Antony Rowe Ltd, Chippenham and Eastbourne
Contents
List of Figures vi
List of Tables viii
1 Introduction 1
2 A Brief History Lesson: Getting Here From There 6
3 The Business Model: Products, Clients and Markets 18
4 People: the Role of Culture and Leadership 46
5 Structure and Process 58
6 Compensation 71
7 Risk Management 81
8 Cost Management 93
9 Growing by Mergers and Acquisitions 107
10 Case Studies in Success 117
11 Views for the Future 136
12 Our Own Views 150
Notes 161
Appendix 1: List of Institutions Interviewed 163
Appendix 2: The 14 Core Values of Goldman Sachs 164
Bibliography 166
Index 168
v
List of Figures
2.1 Disaggregation in Europe tracks US model 8
2.2 US global bulge group wins market share in Europe 15
3.1 Pure US investment banks earned premium ROE over
commercial/universal banks during the late 1990s 22
3.2 Cross subsidization supports low return businesses 22
3.3 Big three US investment banks win market share
in key lucrative products 25
3.4 Global investment banking fees paid – by product
(% of total) 26
3.5 Estimated breakdown of US and European investment
banking pre-tax profits in 2001 29
3.6 The equity issuance revenue multiplier effect 30
3.7 Convergence of historical and projected commission
rates for equity trading 30
3.8 Derivatives: products and solutions 31
3.9 Steady decline in margins on key US investment banking
products 32
3.10 BNP Paribas’ approach to corporate client coverage 36
3.11 Relative importance of fixed income sales factors 40
3.12 Relative profitability of fixed income dealing
relationships 42
3.13 Revenue shift towards Europe 44
5.1 Structure of a full-service securities firm 63
5.2 Key revenue-generating functions in investment
banking 64
5.3 JP Morgan integrated client relationship model 66
5.4 Société Générale: corporate and investment banking
organization chart 69
7.1 US investment banks replace fees/commissions with
principal/trading income and assest management fees 83
7.2 Trends of VAR/tangible equity capital ratio for major
US investment banks, 1998–2001 84
7.3 Risk-adjusted dealing profitability of global
investment banks 84
8.1 Key cost ratios for US investment banks 94
8.2 Breakdown of global broker–dealer cost base, 1999–2000 95
vi
List of Figures vii
9.1 Post-merger loss of market share by
CSFB/DLJ in US IPOs 109
10.1 Citigroup’s equity capital base dominates the sector
(in $bn as of end 2001) 122
10.2 Citigroup’s product and geographical scope 123
10.3 Morgan Stanley institutional securities
trading volume and cost per trade 125
10.4 Future direction of Macquarie’s international
expansion 132
11.1 Most trends point to further margin pressure 138
11.2 Morgan Stanley’s view of Europe 145
12.1 Projections for global fee pool to 2003 by geography
(amounts in $ billions) 151
12.2 Equity-related revenue and profit by product
for global players, 1999–2000 152
12.3 Virtually identical business models for global leaders 156
12.4 Leading players have disproportionately
large market share 157
List of Tables
2.1 Relative growth in key drivers of investment 7
banking expansion, 1983–2000
2.2 Global investment banking fees received: league 12
tables by individual institution (%)
2.3 Breaking into the premier league – mergers 17
& acquisitions by leading universal banks
3.1 Average length of US investment banking 24
relationship with lead bank
3.2 Factors determining mandate for M & A advisory 25
3.3 Factors determining equity book-runner mandate 27
3.4 Geographical breakdown: corporate and 35
institutional customers by region
4.1 Management practices in investment and 52
commercial banks
8.1 Global investment bank IT spending patterns 94
8.2 Evolution of US investment bank personnel 95
costs and revenues, 1990–2001E ($ billion)
8.3 Estimated 2000 cost per head of selected 104
investment banks (in US $000 annualized)
viii
1
Introduction
The world of investment banking has long exerted a fascination for
academics, management consultants, and financial analysts as well as
practitioners. Today the fascination has reached fever pitch as the
business, having grown globally at a phenomenal rate in the 1990s of
perhaps three times GDP in key markets like the US and Europe, faces
some of the consequences of its turbulent existence. From essentially
acottage industry a few decades ago, it has attracted investors with
returns on capital rarely seen in other financial businesses, the cream of
the world’s business schools with compensation levels inconceivable in
earlier eras, and competitors from the world’s wholesale banks desperate
to preserve at least a portion of their corporate banking franchise.
For me, the fascination of the business lies in the management issues
raised in this headlong but volatile expansion. A flurry of recent consultant
and analyst reports focuses on the outlook for the sector and its likely
winners and losers. A handful of books have been written by journalists
and other outsiders on some of the more dramatic case studies such as
the collapse of Barings, Lehman Brothers’ turmoil in the 1980s, and the
host of British merchant banks who succumbed to the onslaught of US
investment banks following Big Bang in 1986.1 Only a very few actual
practitioners have described how their institution rose or fell over the
past two decades.2
But today’s generic management issues remain largely unexplored.
For example:
•
how can management cope with the high and rising cost base in
asector distinguished by revenues which seem to collapse with some
regularity every three or four years?
1