Pierre Olivier Sarkozy was one of a hundred bankers at Credit Suisse First Boston, a division of Credit Suisse, the Swiss bank, who had been guaranteed a one-time bonus of US$4 million, plus a salary of at least US$3.5 million for two years. Credit Suisse had hoped that the money would keep top bankers like Sarkozy from leaving after its purchase of Donaldson, Lufkin & Jenrette, an investment bank, for US$13.5 billion in November 2000.
But in March, Sarkozy -- whose job is advising large banks on acquisitions -- quit to join UBS Warburg, an investment banking unit of UBS, another large Swiss bank.
The departure of high-priced, talented executives like Sarkozy is just one symptom of what has shaped up as a painfully expensive and largely unsuccessful foray by many large banks into the investment banking business.
Lured by dreams of quantum leaps in profits from mergers, underwritings and strategic advice to corporate clients during the bull market of the 1990s, big banks spent more than US$40 billion acquiring investment banks, with relatively little to show in return except a lot of high-level turmoil in the ranks.
The most prominent example of that occurred last Thursday, when Geoffrey Boisi was forced out as co-head of investment banking at JP Morgan Chase after two years. The performance of the investment banking business had been weak, and Boisi had clashed with William Harrison Jr., the chief executive. Boisi was replaced by David Coulter, the former chief executive of BankAmerica who had been head of JP Morgan Chase's consumer bank side.
The troubled marriages of banks and investment banks were inspired by the relaxation during the 1990s of Depression-era legislation that had kept commercial banks out of the investment banking business. The first large deal came in 1997, when Bankers Trust New York now a part of Deutsche Bank, bought Alex. Brown for US$2.1 billion.
Commercial bankers were eager to get into the investment banking business because it is potentially far more profitable than making loans. During the peak of the bull market, the return on equity for investment banks was substantially higher than for commercial banks, according to study results released last month by McKinsey & Co, the consulting firm.
But by the end of the decade, most of these acquisitions were already proving to be disappointments. After paying peak prices for the acquisitions, many of the big banks failed to keep the important investment bankers whose talents had made these acquisitions enticing.
Most big banks chose not to go after large investment banks, like Merrill Lynch or the Goldman Sachs Group. Instead, banks went after relatively small firms, whose tightknit culture and entrepreneurial approach often became lost in the acquirer's bureaucracy.
"The reason some of these didn't work is that large financial institutions haven't had the commitment to build a global capital markets business," said Thomas Weisel, who sold his firm, Montgomery Securities, to Nationsbank, now Bank of America, for US$1.2 billion in 1997.
Weisel left Nationsbank a year later with a group of executives and went on to form an investment bank, Thomas Weisel Partners, after having clashed with Hugh McColl Jr., then the bank's chief executive. Today, only nine of the 68 Montgomery partners at the time of the merger remain at the bank, Weisel said.
RSS