4 October 2003
12. Bankenforum
Dr. Hanns-Alexander Klemm
Recent developments in Investment Banking –
Business Models and Differentiation
Contents
1.
Introduction to Cazenove
2.
What do Investment Banks do?
3.
The Investment Banking market
4.
Different business models in Investment Banking
5.
Recent challenges
1
Section 1
Introduction to Cazenove
2
1 – Introduction to Cazenove
Independent since 1823
Investment Banking
Corporate Finance
Fund Management
Equity Capital Markets
Research
 Initial
 Financial
 M&A
assets of close to
€10 billion
based approach for large caps
 Specialist
investment management
services and independent advice
based approach for mid caps
 Global
distribution capability with
c.100 sales people
advisory
 Manages
intelligence
 Country
offerings
Private
Clients
110 analysts
 Sector
advisory
 Equity
 Debt
 Over
advisory
Charities
Distribution & execution
 Market
Public Offerings
Institutional
& Retail
Equities
 Execution
 Private
Equity / alternative
investments
services internationally
Cazenove is a relationship based advisory firm, combining high quality impartial advice with strong distribution
• London
• Frankfurt
• Paris
• Milan
• Hong Kong
• Beijing
3
• Singapore
• Johannesburg
• New York
1 – Introduction to Cazenove
History and Background
1823
1930s
The origins of
Cazenove can be
traced to the early
Huguenot financiers
who left France in
the late seventeenth
century.
In 1819 Phillip
Cazenove joined
the business of his
brother-in-law John
Menet: in 1823 they
became partners,
and the modern firm
of Cazenove was
established
In the mid-1930s
the business
reached its position
as one of the City of
London’s preeminent
stockbroking
partnerships
1980s 1990’s
In the 1980s
Cazenove played
an important part in
most of the British
Government’s
privatisation issues
and, as the only
major independent
firm in the London
securities industry,
successfully built its
business both
domestically and
internationally
4
Growing
internationalisation.
Development of
pan-European
equities, research
and distribution.
Build-up of advisory
capabilities,
including Mergers &
Acquisitions.
2001
The firm changed
from a partnership
to corporate status
in April 2001,
raising finance from
some of the leading
institutional
investors in the UK.
Nevertheless, the
firm remains
substantially owned
by its employees.
Set up Frankfurt
and Beijing offices
1 – Introduction to Cazenove
A leading financial adviser in German M&A
German M&A activity 1st half year 2003
Selected transactions 2001 - 2003
Advisory ranking for announced deals
Rank
1
2
3
4
5
6
7
8
9
10
Deutsche Bank
Merrill Lynch
Rothschild
Lazard
Cazenove
Greenhill
Drueker
Goldman Sachs
UBS
KPMG Corp. Fin.
Source: Merger rmarket
Rank value
(€m)
11,072
9,502
8,661
8,028
7,043
6,805
6,691
4,327
2,729
2,269
Advised Procter & Gamble in its € 6.7
billion takeover of Wella AG.
Advised Securicor in the disposal of its
50% stake in Securicor Omega Express
to Deutsche Post for €247 million
Advised Gerling NCM in the €655 million
sale to Swiss Re and Deutsche Bank.
Advised Agiv Real Estate in its disposal
of the internet businesses myLoc and
Taxxus Internet Solutions to GlidePath
Advised De La Rue in the €22 million
disposal of its 6.28% stake in Koenig &
Bauer AG to an investor group
Advised Abbot Group in its £134 million
acquisition of Deutag from Preussag /
TUI
5
1 – Introduction to Cazenove
At a glance…international capital markets transactions in 2002
Sweden
UK & Ireland
IPO
Burberry
Engelfield
Intertek Group
John Wood Group
Mouchel
William Hill
Wolfson Microelectonics
Xstrata
Global Offering
Allied Domecq
BPB
Centrica
HBOS
Serco Group
Rights Issue
Royal & Sun Alliance
Intrum Justitia, IPO
D Carnegie, Placing
Bonds
Daily Mail & General Trust
GUS
Land Securities
Yorkshire Water
Eurobond Issue
BG Group
John Lewis
EMI Group
Allied Domecq
BOC Group
FirstGroup
Japan
Daido Life, IPO
Arrk Corp, Primary Offering
D&M Holdings, Bought Deal
Norway
Aktiv Kapital, Placing
Italy
ASM Brescia, IPO
Hera, IPO
China
Taiwan
China Telecom, IPO
Fubon Financial Holding,
Convertible Bond Issue
France
Autoroutes du Sud de la France, IPO
Hong
Wanadoo, Placing
Kong
Malaysia
BOC Hong Kong (Holdings), IPO
Placing
Spain
Chen Hson, Secondary Placing
Amphenol
Enagas, IPO
China Oilfield Services, IPO
Bookham Technology
CNOOC, Guaranteed Notes
Christian Salvesen
Govett Strategic Trust
Comba, IPO
Independent Investment Trust
Fong’s Industries Company, Secondary Placing
Premier Farnell
Fountain Set, Placing
Stanley Leisure
Callable Notes
Harbin Brewery, IPO
TNS
Barclays Bank
Kowloon
Development
Co, Placing
Vernalis
Egg
Lee & Man Paper Manufacturing, IPO
HSBC
USA
Lerado Group, Placing
Secured Bonds
Chicago Mercantile Exchange Holdings, IPO
Lianhua Supermarket, IPO
London Merchant Securities
Regal Entertainment Group, IPO
Linmark Group, IPO
Travelers Property Casualty, IPO
Tier One Notes
Moulin, Placing
Bank of Ireland
Alcon Laboratories, IPO
Shanghai Real Estate, Placing
Accenture, Global Offering, Secondary Offering Bought Deal
Sinotrans, Placing
The Thomson Corporation, Follow-On Offering
Intertek
Standard Chartered, IPO
Peabody Energy Corporation, Follow-On Offering Perpetual Capital Subordinated Securities
Techtronic Industries, Follow-On Offering
UT Starcom, Secondary Offering
Victory City International, Placing
Prudential plc
PLUS Expressways, IPO
Maxis Communications, IPO
Convertible Bond Issue
Anglo American
BAA
Cable & Wireless
Dimension Data
Friends Provident
International Power
lastminute.com
6
Singapore
Lindeteves Jacoberg, Warrants
Noble Group, Placing
1 – Introduction to Cazenove
Raising new capital for European companies
A recent survey by IFR ranked Cazenove 1st as bookrunner in 2002 for all primary equity activity in the UK
and 4th in Europe (as well as the Middle East and Africa)
Primary capital raising EMEA*
Primary capital raising EMEA*
2002
2002
Rank Bookrunner
1
2
3
4
5
6
7
8
9
10
Adj. US$(m)
Cazenove
UBS Warburg
Goldman Sachs
CSFB
Citigroup/SSSB
Merrill Lynch
ABN Amro
Deutsche Bank
Morgan Stanley
DRKW
3,190
2,890
2,107
1,969
1,700
1,566
1,419
1,345
1,133
952
% of
Total
15.3
13.9
10.1
9.5
8.2
7.5
6.8
6.5
5.4
4.6
Issues
Rank Bookrunner
15
11
4
8
8
10
8
4
5
6
1
2
3
4
5
6
7
8
9
10
Source: Thomson Financial
UBS Warburg
CSFB
Goldman Sachs
Cazenove
Citigroup/SSSB
Deutsche Bank
Merrill Lynch
Morgan Stanley
HSBC
ABN AMRO
Source: Thomson Financial
* EMEA - Europe, Middle East & Africa
Cazenove
recently
received
the
prestigious EuroWeek 2002 Awards for
‘Best Global Accelerated Issue’ and
EuroWeek
2002 Awards
Best Global Accelerated Issue
Best European Accelerated Issue
‘Best European Accelerated Issue’ for
our performance in the HBOS £1.3bn
Sole Bookrunner
Global Offering
7
Adj. US$(m)
4,519
4,026
3,749
3,665
3,103
2,704
2,277
2,053
1,822
1,715
% of
Total
9.7
8.6
8.0
7.8
6.6
5.8
4.9
4.4
3.9
3.7
Issues
20
18
9
16
14
11
15
9
6
12
1 – Introduction to Cazenove
Long term player in Europe
With the exception of
Germany where the
France
Holland
1982 with Bongrain
1984 with Wessanen
Spain
Belgium
1982 with Banco Hispano
Americano
1985 with Société Générale de
Belgique
capital markets opened
up much later to foreign
banks, Cazenove has
been active in Europe
for up to
Italy
Sweden
1985 with STET (precursor of
Telecom Italia)
1982 with SCA
20 years, starting in
each country with the
deals shown opposite
Switzerland
1983 with Société Générale
de Surveillance
Norway
1988 with Rieber & Son
Denmark
Portugal
1984 with Radiometer
1988 with Corticeira Amorim
Finland
Germany
1984 with Nokia
1996 with Deutsche Telekom I
8
1 – Introduction to Cazenove
Key European transactions - examples
Current
June 2002
March 2002
(Spain)
(France)
Initial Public Offering
Initial Public Offering
€917m
€2,633m
Co-Manager
Co-Manager
November 2000
June 2000
(UK/Netherlands)
(Germany)
Global Offering
Global Offering
£711m & €961m
€13,300m
Joint Bookrunner
Co-Manager
Initial Public Offering
tba
Co-Lead Manager
March 2002
Initial Public Offering
£1bn
Joint Bookrunner
9
1 – Introduction to Cazenove
Equity research

Over 100 analysts worldwide

Integrated Pan-European approach to Eurotop 300 research out of London – nearly 90% by value under coverage

Establishing global teams in key sectors

Experienced lead analysts with an average of over eight years coverage of a sector and over eleven years relevant industry
experience

Country approach to researching small and midcap stocks through specialist teams
10
1 – Introduction to Cazenove
Global institutional equity sales
63 sales people
Over 2,000
global roadshows
selling UK
and
Continental European
Equities
Asia (ex Japan), 456
Austria, 2
Belgium, 6
Denmark, 120
Finland, 130
France, 409
Germany, 184
Iberia, 91
Iceland, 1
Ireland, 61
Italy, 141
Netherlands, 138
Norway, 170
Sweden, 243
Switzerland, 5
US, 253
in London and
New York
11
15 Asia Pacific
(ex Japan), 6 US and
6 South African
sales people
based in
London,
New York,
Johannesburg
and Asia Pacific
Section 2
What do Investment Banks do?
12
2 – What do Investment Banks do?
Basic functions
Investment Banks mainly perform three functions:
Primary
market

In the primary market they
Secondary
market

float new securities for cash
In the secondary market for

Mergers & Acquisitions

Debt Advisory
acting as a broker or dealer

Equity advisory
Derivatives

Valuations
existing securities, they
assist buyers and sellers by

Advisory
–
Lending
–
Balance sheet
transactions
–
Principal investments
13
2 – What do Investment Banks do?
Information and product flow
Research
Feedback
Capital Markets
M&A
Ideas
Corporate
Finance
Sales
Derivatives
Product
Trading
Other
Chinese Wall
14
2 – What do Investment Banks do?
Product needs over a company´s life cycle
Investment banking approach
Private Client
Private
Placement
IPO
M&A
Secondary
Convertible
Debt
Commercial banking approach
15
2 – What do Investment Banks do?
Revenue mix
Investment Banking
3%
6%
2%
13%
2%
9%
5%
7%
7%
1%
4%
2%
3%
2%
7%
3%
3%
-
2%
1%
2%
8%
7%
13%
8%
4%
-
Fixed
Income
4%
17%
21%
26%
15%
33%
20%
25%
14%
6%
3%
6%
19%
M&A
Citigroup
CSFB
Deutsche Bank
Goldman Sachs
JPM / Chase
Lehman Brothers
Merrill Lynch
MSDW
UBS
1
Average
Trading
Equity
Debt
(1) No split given between primary and secondary investment banking revenues
16
Equity
Asset Mgt.
And Private
Banking
Corporate
Banking
Retail
Insurance
1%
10%
13%
19%
4%
11%
7%
8%
18%
11%
36%
22%
31%
17%
28%
57%
32%
41%
14%
0%
12%
17%
-
42%
8%
16%
36%
21%
20%
22%
18%
10%
-
10%
31%
11%
24%
17%
Section 3
The Investment Banking market
17
3 – The Investment Banking market
Cyclicality of the industry
Industry revenue percentage change, year over year banks
Profitability of securities firms versus commercial
30%
60%
50%
25%
Industry Revenue
Brokers
40%
20%
Banks
30%
15%
20%
10%
10%
5%
0%
0%
-10%
Source SIA
18
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1981
1982
1980
1979
1978
1977
Source SIA
1980
-5%
-20%
3 – The Investment Banking market
Industry growth rates
Growth rates (Revenues)
60
Growth rates (%)
40
20
0
-20
-40
-60
-80
1Q02
2Q02
3Q02
4Q02
Completed M&A (YoY)
1Q03
2Q03
3Q03
Debt underwriting (YoY)
19
4Q03
2001
Equity underwriting (YoY)
2002
2003
3 – The Investment Banking market
Mergers & Acquisitions
Global announced & completed M&A
4,000
Transaction value (US$bn)
3,500
3,000
2,500
2,000
1,500
1,000
500
0
1997
1998
1999
2000
Global announced M&A
2001
Global completed M&A
Global M&A volume down by 65% (1997 – 2002)
European M&A volume down by 52% (1997 – 2002)
20
2002
2003 YTD
3 – The Investment Banking market
German M&A down by 50%
German inbound M&A transactions by value
German outbound M&A transactions by value
1997
1997
1998
29,696
53,148
1998
85,102
1999
2002
2003
102,539
1999
261,969
2000
2001
30,723
126,061
2000
110,478
54,785
26,102
139,011
2001
52,653
2002
50,839
2003
16,523
Deal value (US$m)
Deal value (US$m)
Source: Thomson Financial
Source: Thomson Financial
21
3 – The Investment Banking market
Global Underwriting
Equity underwriting activity
Debt underwriting activity
300
6,000
700
1000
900
600
5,500
400
-28%
150
300
100
-31%
50
200
Total Debt Underwriting (US$bn)
500
200
800
700
5,000
+31%
4,500
600
500
400
4,000
300
200
100
3,500
100
0
1997
1998
1999
IPO
2000
2001
2002
3,000
2003
YTD
0
1997
1998
1999
2000
2001
2002
Total equity underw riting
Total Debt
Source: Thomson Financial Data
22
High Yield
2003
YTD
High Yield Debt Underwriting (US$bn)
+98%
Equity IPO Underwriting (US$bn)
Total Equity Underwriting (US$bn)
250
3 – The Investment Banking market
Fund flows
US mutual fund flows 1985 - 2001
400
350
300
250
150
100
50
0
-50
Bond
Equity
23
Money Mkt
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
-100
1985
$bn
200
Section 4
Different business models in Investment Banking
24
4 – Different business models in Investment Banking
Segmentation
SEARCH SLIDE
Global „bulge bracket“ banks
International Independent banks
Other
CSFB
Deutsche Bank
Goldman Sachs
JP Morgan
Lehman Brothers
Merrill Lynch
Morgan Stanley
UBS Warburg
Cazenove
Lazard
Rothschild
Commerzbank, Dresdner KW
Cooperative/Landesbanks
Sal Oppenheim
HSBC
25
4 – Different business models in Investment Banking
Significant differences (examples)
Large integrated firms
Independent and other firms

Balance sheet

Broad infrastructure

Lending

Capacity utilisation

Proprietary trading

Cross selling / product sales

Derivatives

Specialisation / Divisionalisation

Broad product offering

Opportunity cost

Limited balance sheet

Independent advisory

Limited or no proprietary trading

Impartiality / limited or no conflict

Limited or no lending / derivatives

Long-term client focus

Focused products / services

Entrpreneurship
26
4 – Different business models in Investment Banking
Competitive dynamics in Germany – generic view
Followers
GS
ML
Leaders
DB
MS
CSFB
Independents
LAZ
SSSB
Franchise
Roth
CAZ
USBW
DB
LB
Coba
DKW
DG
0
2
4
6
8
Market share
27
10
12
4 – Different business models in Investment Banking
Investment banks vs. MSCI World 2001 to date
120
110
Rebased to 100
100
90
80
70
60
50
40
Jan-01
May-01
Sep-01
Jan-02
MSCI World
May-02
Sep-02
Jan-03
World Investment Banks
Quoted investment banks performed in line with the MSCI global index
Source: Datastream
28
May-03
Sep-03
4 – Different business models in Investment Banking
Results considerably better than a year ago
Q2 2003 vs. Q2 2002
Gross profit margin (%)
 +4.2%
JPMC
40%
BS
Citi
ML
30%
Q2 2003
: 31.0%
UBS
CSFB
LB
Q2 2002
: 26.9%
MS
20%
GS
DB
10%
0%
0.5
1.0
Q2 2002
1.5
Q2 2003
2.0
2.5
3.0
3.5
4.0
Revenues ($bn)
 +18.8%
Note:
Average calculated on a revenue weighted basis; operating revenue for investment banking and institutional sales and
trading; extraordinary charge-offs excluded; Morgan Stanley´s profit margin skewed by compensation payments
accrued for following quarters
29
4.5
4 – Different business models in Investment Banking
Revenues / employee (2002)
100,000
300,000
200,000
50,000
100,000
0
0
Bear
Stearns
Citigroup
Credit
Suisse
Deutsche
Bank
Goldman
Sachs
JPMorgan
Chase
Revenues (US$m)
Lehman
Brothers
Merrill
Lynch
Morgan
Stanley
UBS
Merrill
Lynch
Morgan
Stanley
UBS
No. of employees
Revenues / employee
(US$'000)
Revenues by employee
800
600
400
200
0
Bear
Stearns
Citigroup
Credit
Suisse
Deutsche
Bank
Goldman
Sachs
JPMorgan
Chase
30
Lehman
Brothers
No. of employees
Revenues (US$m)
Revenues, no. of employees
Section 5
Recent challenges
31
5 – Recent challenges
Challenges / Issues
Market

Cyclicality

Low activity

Desintermediation

Fee levels / margins
Regulatory

„Spitzer“ / research

Sarbanes Oxley

Basle II
An industry in change
Internal / Institutional

Cost structures

Management

Staff turnover

Reputation

Capacities
32