To the casual observer, the US banking and investment giant Salomon Smith Barney’s acquisition of Schroder, a 183-year-old firm steeped in UK history and culture, in 2000, was just another merger – one of some 35 involving investment banks between 1994 and mid-2000. But to the British, it was a dark day that marked the end of one of the few remaining investment banks of its size still in UK hands.
One Financial Times writer summed it up aptly, stating that “Investment banking in the City of London has often been compared to Wimbledon – an excellent British-hosted tournament that overseas players always win. If that is so, yesterday was quarter finals day, the moment when the last British seeded players finally exit.”
Was this a win for the out-of-town team? If so, how does one go about measuring merits in this type of deal? ask Michael Fidance, an Associate at Merrill Lynch & Co., and Ingo Walter, Professor at the Stern School of Business, New York University, and Professor of International Management at INSEAD.
As an industry, investment banking has seen tremendous consolidation in the past decade. Reasons for this include the 1999 repeal of a 1993 US securities law that prohibited capital raising and investment banking businesses from combining with commercial banks, and a shift in industry dynamics, including globalization, margin compression and horizontal integration. As a result, firms began consolidating in order to gain market share and build higher levels of equity capital to service the massive and growing needs of investors and securities issuers around the world.
On the other side of the Atlantic, another set of trends pushed consolidation in the industry. Growth prospects for European capital markets were strong, with privatisations of state run enterprises, from oil companies to banks, airlines, and eventually pension programs, spreading across the Continent and providing an impetus for new equity issuance.
With this as a backdrop, Citigroup (the parent company of Salomon Smith Barney) in 2000 faced a major challenge: a gap in its mega-bank business in Europe. With numerous suitors eyeing Schroders for its strong UK investment banking business, strong corporate finance and relationship focus and entrenched brokerage operations in Madrid, Milan, and Paris, Citigroup moved quickly on its bid, paying US$2.2 billion, 1.7 times book value of Schroder's investment bank assets. Citigroup company stated that the price reflected what it hoped to achieve: large, credibility, and critical mass in Europe that would allow revenues to grow and move the combined firm into the top tier, where the bulk of revenues from both issuers and institutional investors is derived. According to the Case Study, a senior executive has reported that revenues have grown five-fold since the merger, supporting the hypothesis that the combination of the Citigroup balance sheet, the Salomon Smith Barney distribution platform, and the Schroder product mix gave it access to clients that neither firm could manage alone.
The impressive revenue results can be attributed in large part to a strong integration plan. This involved integrating not only cross-culturally, but across two very different business cultures: the Schroder culture was very specialist oriented and research concentrated on selective services to customers, while the Salomon Smith Barney side was much more transaction focused on a global platform.
In a post mortem, the authors return to the company 18 months after integration and report that initial results suggest that the new firm is making headway despite difficult market conditions: a massive slowdown in IPOs and M&A activity, the collapse of the technology and Internet stock market bubble, and recessions in both Europe and the US.
INSEAD-New York University, 2003