4 October 2003 Recent developments in Investment Banking – Business Models and Differentiation 12....

4 October 2003

Recent developments in Investment Banking – Business Models and Differentiation

12. BankenforumDr. Hanns-Alexander Klemm

2

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

Contents

3

Section 1Introduction to Cazenove

4

• London • Frankfurt • Paris • Milan • Hong Kong • Beijing • Singapore • Johannesburg • New York

Cazenove is a relationship based advisory firm, combining high quality impartial advice with strong distribution

Corporate Finance Equity Capital Markets

Distribution & execution

Investment Banking

Independent since 1823

Fund Management

Research

EquitiesInstitutional

& RetailCharities

Private Clients

Manages assets of close to €10 billion

Specialist investment management services and independent advice

Private Equity / alternative investments

Market intelligence

Over 110 analysts

Sector based approach for large caps

Global distribution capability with c.100 sales people

Country based approach for mid caps

Execution services internationally

Initial Public Offerings

Financial advisory

M&A advisory

Equity offerings

Debt advisory

1 – Introduction to Cazenove

5

History and Background

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

18231823In the mid-1930s

the business

reached its position

as one of the City of

London’s pre-

eminent

stockbroking

partnerships

1930s1930sIn 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

1980s1980sThe 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

20012001


Growing

internationalisation.

Development of

pan-European

equities, research

and distribution.

Build-up of advisory

capabilities,

including Mergers &

Acquisitions.

1990’s1990’s

6

A leading financial adviser in German M&A

Rank Rank value (€m)

1 Deutsche Bank 11,0722 Merrill Lynch 9,5023 Rothschild 8,6614 Lazard 8,0285 Cazenove 7,0436 Greenhill 6,8057 Drueker 6,6918 Goldman Sachs 4,3279 UBS 2,72910 KPMG Corp. Fin. 2,269

Advisory ranking for announced deals

Source: Merger rmarket

German M&A activity 1st half year 2003

Advised Gerling NCM in the €655 million sale to Swiss Re and Deutsche Bank.

Advised Securicor in the disposal of its 50% stake in Securicor Omega Express to Deutsche Post for €247 million

Advised De La Rue in the €22 million disposal of its 6.28% stake in Koenig & Bauer AG to an investor group

Advised Agiv Real Estate in its disposal of the internet businesses myLoc and Taxxus Internet Solutions to GlidePath

Advised Abbot Group in its £134 million acquisition of Deutag from Preussag / TUI

Advised Procter & Gamble in its € 6.7 billion takeover of Wella AG.


Selected transactions 2001 - 2003

7

At a glance…international capital markets transactions in 2002

Hong KongBOC Hong Kong (Holdings), IPO

Chen Hson, Secondary Placing

China Oilfield Services, IPO

CNOOC, Guaranteed Notes

Comba, IPO

Fong’s Industries Company, Secondary Placing

Fountain Set, Placing

Harbin Brewery, IPO

Kowloon Development Co, Placing

Lee & Man Paper Manufacturing, IPO

Lerado Group, Placing

Lianhua Supermarket, IPO

Linmark Group, IPO

Moulin, Placing

Shanghai Real Estate, Placing

Sinotrans, Placing

Standard Chartered, IPO

Techtronic Industries, Follow-On Offering

Victory City International, Placing

FranceAutoroutes du Sud de la France, IPO

Wanadoo, Placing

NorwayAktiv Kapital, Placing

SingaporeLindeteves Jacoberg, Warrants

Noble Group, Placing

JapanDaido Life, IPOArrk Corp, Primary OfferingD&M Holdings, Bought Deal

SwedenIntrum Justitia, IPO

D Carnegie, Placing

TaiwanFubon Financial Holding,

Convertible Bond Issue

MalaysiaPLUS Expressways, IPO

Maxis Communications, IPOSpainEnagas, IPO

ItalyASM Brescia, IPO

Hera, IPO

ChinaChina Telecom, IPO

USAChicago Mercantile Exchange Holdings, IPO

Regal Entertainment Group, IPO

Travelers Property Casualty, IPO

Alcon Laboratories, IPO

Accenture, Global Offering, Secondary Offering

The Thomson Corporation, Follow-On Offering

Peabody Energy Corporation, Follow-On Offering

UT Starcom, Secondary Offering

UK & IrelandIPOBurberryEngelfieldIntertek GroupJohn Wood GroupMouchelWilliam HillWolfson MicroelectonicsXstrata

Global OfferingAllied DomecqBPBCentricaHBOSSerco Group

Placing AmphenolBookham TechnologyChristian SalvesenGovett Strategic TrustIndependent Investment TrustPremier FarnellStanley LeisureTNSVernalis

Rights IssueRoyal & Sun Alliance

BondsDaily Mail & General TrustGUSLand SecuritiesYorkshire Water

Eurobond IssueBG GroupJohn LewisEMI GroupAllied DomecqBOC GroupFirstGroup

Convertible Bond IssueAnglo AmericanBAACable & WirelessDimension DataFriends ProvidentInternational Powerlastminute.com

Callable NotesBarclays BankEggHSBC

Secured BondsLondon Merchant Securities

Tier One NotesBank of Ireland

Bought DealIntertek

Perpetual Capital Subordinated SecuritiesPrudential plc


8

Raising new capital for European companies

Rank Bookrunner Adj. US$(m) % ofTotal

Issues

1 UBS Warburg 4,519 9.7 20

2 CSFB 4,026 8.6 18

3 Goldman Sachs 3,749 8.0 9

4 Cazenove 3,665 7.8 16

5 Citigroup/SSSB 3,103 6.6 14

6 Deutsche Bank 2,704 5.8 11

7 Merrill Lynch 2,277 4.9 15

8 Morgan Stanley 2,053 4.4 9

9 HSBC 1,822 3.9 6

10 ABN AMRO 1,715 3.7 12

Primary capital raising EMEA*

2002

Source: Thomson Financial

* EMEA - Europe, Middle East & Africa

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)

Cazenove recently received the

prestigious EuroWeek 2002 Awards for

‘Best Global Accelerated Issue’ and

‘Best European Accelerated Issue’ for

our performance in the HBOS £1.3bn

Global Offering

E u r o W e e k2 0 0 2 A w a r d s

B e s t G l o b a l A c c e l e r a t e d I s s u eB e s t E u r o p e a n A c c e l e r a t e d I s s u e

S o l e B o o k r u n n e r

E u r o W e e k2 0 0 2 A w a r d s

B e s t G l o b a l A c c e l e r a t e d I s s u eB e s t E u r o p e a n A c c e l e r a t e d I s s u e

S o l e B o o k r u n n e r


Rank Bookrunner Adj. US$(m) % ofTotal

Issues

1 Cazenove 3,190 15.3 15

2 UBS Warburg 2,890 13.9 11

3 Goldman Sachs 2,107 10.1 4

4 CSFB 1,969 9.5 8

5 Citigroup/SSSB 1,700 8.2 8

6 Merrill Lynch 1,566 7.5 10

7 ABN Amro 1,419 6.8 8

8 Deutsche Bank 1,345 6.5 4

9 Morgan Stanley 1,133 5.4 5

10 DRKW 952 4.6 6

Primary capital raising EMEA*

2002

Source: Thomson Financial

9

Long term player in Europe

With the exception of

Germany where the

capital markets opened

up much later to foreign

banks, Cazenove has

been active in Europe

for up to

20 years, starting in

each country with the

deals shown opposite

Germany1996 with Deutsche Telekom I

Finland1984 with Nokia

Sweden1982 with SCA

Italy1985 with STET (precursor of Telecom Italia)

Denmark1984 with Radiometer

Portugal1988 with Corticeira Amorim

Norway1988 with Rieber & Son

Switzerland1983 with Société Générale de Surveillance

France1982 with Bongrain

Holland1984 with Wessanen

Belgium1985 with Société Générale de Belgique

Spain1982 with Banco Hispano Americano


10

Key European transactions - examples

March 2002

(France)

Initial Public Offering

€2,633m

Co-Manager

June 2002

(Spain)


€917m

Co-Manager

November 2000

(UK/Netherlands)

Global Offering

£711m & €961m

Joint Bookrunner

June 2000

(Germany)

Global Offering

€13,300m

Co-Manager


March 2002


£1bn

Joint Bookrunner

Current


tba

Co-Lead Manager

11

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


12

Global institutional equity sales

15 Asia Pacific (ex Japan), 6 US and

6 South African sales people

based in London,

New York, Johannesburg and Asia Pacific

63 sales people

selling UK and

Continental European Equities

in London and New York

Over 2,000 global roadshows

Asia (ex Japan), 456Austria, 2Belgium, 6

Denmark, 120Finland, 130France, 409

Germany, 184Iberia, 91Iceland, 1Ireland, 61Italy, 141

Netherlands, 138Norway, 170Sweden, 243

Switzerland, 5US, 253


13

Section 2What do Investment Banks do?

14

Basic functions

In the secondary market for existing securities, they assist

buyers and sellers by acting as a broker or dealer

Derivatives

– Lending

– Balance sheet transactions

– Principal investments

2 – What do Investment Banks do?

Investment Banks mainly perform three functions:

Primarymarket

In the primary market they

float new securities for

cash

Mergers & Acquisitions

Debt Advisory

Equity advisory

Valuations

Secondarymarket

Advisory

15

Information and product flow

Research

Sales

Trading

Capital Markets

Corporate Finance

Ideas

Feedback

Product

M&A

Derivatives


Chinese Wall

Other

16

Product needs over a company´s life cycle

IPOPrivate

Placement

Private Client

ConvertibleSecondary

M&A

Debt

Investment banking approach

Commercial banking approach


17

Revenue mix2 – What do Investment Banks do?

M&A Equity DebtFixed

IncomeEquity

Citigroup 3% 1% 2% 4% 1% 11% 14% 42% 22%CSFB 6% 4% 1% 17% 10% 36% 0% 8% 18%Deutsche Bank 2% 2% 2% 21% 13% 22% 12% 16% 10%Goldman Sachs 13% 3% 8% 26% 19% 31% - - -JPM / Chase 2% 2% 7% 15% 4% 17% 17% 36% -Lehman Brothers 9% 7% 13% 33% 11% 28% - - -Merrill Lynch 5% 3% 8% 20% 7% 57% - - -MSDW 7% 3% 4% 25% 8% 32% - 21% -

UBS1 7% - - 14% 18% 41% - 20% -

Average 6% 3% 6% 19% 10% 31% 11% 24% 17%

(1) No split given between primary and secondary investment banking revenues

Investment Banking Trading Asset Mgt. And Private

BankingInsuranceRetail

CorporateBanking

18

The Investment Banking marketSection 3

19

Cyclicality of the industry3 – The Investment Banking market

Industry revenue percentage change, year over year banks Profitability of securities firms versus commercial

200

0

199

9

199

8

199

7

199

6

199

5

199

4

199

3

199

2

199

1

199

0

198

9

198

8

198

7

198

6

198

5

198

4

198

3

198

21

981

198

0

197

9

197

8

197

7

-20%

-10%

10%

20%

30%

40%

50%

60%

Industry Revenue

Source SIA

0%

200

0

199

9

199

8

199

7

199

6

199

5

199

4

199

3

199

2

199

1

199

0

198

9

198

8

198

7

198

6

198

5

198

4

198

3

198

2

198

1

198

0

0%

5%

10%

15%

20%

25%

30%

Banks

Brokers

Source SIA

-5%

20

Industry growth rates

Growth rates (Revenues)

-80

-60

-40

-20

0

20

40

60

1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 2001 2002 2003

Gro

wth

ra

tes

(%)

Completed M&A (YoY) Debt underwriting (YoY) Equity underwriting (YoY)

3 – The Investment Banking market

21

Mergers & Acquisitions

Global announced & completed M&A


0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

1997 1998 1999 2000 2001 2002 2003 YTD

Tra

nsa

ctio

n v

alu

e (

US

$b

n)

Global announced M&A Global completed M&A

Global M&A volume down by 65% (1997 – 2002)

European M&A volume down by 52% (1997 – 2002)

22

29,696

53,148

85,102

261,969

110,478

54,785

26,102

1997

1998

1999

2000

2001

2002

2003

German M&A down by 50%

Source: Thomson Financial Source: Thomson Financial

Deal value (US$m)

30,723

102,539

126,061

139,011

52,653

50,839

16,523

1997

1998

1999

2000

2001

2002

2003

German inbound M&A transactions by value German outbound M&A transactions by value

Deal value (US$m)


23

3,000

3,500

4,000

4,500

5,000

5,500

6,000

1997 1998 1999 2000 2001 2002 2003YTD

Tot

al D

ebt U

nder

writ

ing

(US

$bn)

0

100

200

300

400

500

600

700

800

900

1000

High Y

ield Debt U

nderwriting (U

S$bn)

Total Debt High Yield

Global Underwriting

Debt underwriting activityEquity underwriting activity


50

100

150

200

250

300

1997 1998 1999 2000 2001 2002 2003YTD

Tot

al E

quity

Und

erw

ritin

g (U

S$b

n)

0

100

200

300

400

500

600

700

Equity IP

O U

nderwriting (U

S$bn)

IPO Total equity underw riting

Source: Thomson Financial Data

-28%

-31%

+98%

+31%

24

Fund flows

US mutual fund flows 1985 - 2001

-100

-50

0

50

100

150

200

250

300

350

400

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

$b

n

Bond Equity Money Mkt


25

Section 4Different business models in Investment Banking

26

Segmentation

SEARCH SLIDE

Global „bulge bracket“ banks

CSFB

Deutsche Bank

Goldman Sachs

JP Morgan

Lehman Brothers

Merrill Lynch

Morgan Stanley

UBS Warburg

International Independent banksCazenove

Lazard

Rothschild

Other

Commerzbank, Dresdner KW

Cooperative/Landesbanks

Sal Oppenheim

HSBC

4 – Different business models in Investment Banking

27

Significant differences (examples)

Large integrated firms

Independent and other firms

Balance sheet

Lending

Proprietary trading

Derivatives

Broad product offering

Limited balance sheet

Limited or no proprietary trading

Limited or no lending / derivatives

Focused products / services


Independent advisory

Impartiality / limited or no conflict

Long-term client focus

Entrpreneurship

Broad infrastructure

Capacity utilisation

Cross selling / product sales

Specialisation / Divisionalisation

Opportunity cost

28

Competitive dynamics in Germany – generic view

0 2 4 86 10 12

Fra

nchi

se

DG

Coba DKW

LB

DB

LAZ

CAZ

Roth

USBW

SSSB

CSFB

MLGS

MS

Independents

Followers

Leaders

DB


Market share

29

Investment banks vs. MSCI World 2001 to date4 – Different business models in Investment Banking

40

50

60

70

80

90

100

110

120

Jan-01 May-01 Sep-01 Jan-02 May-02 Sep-02 Jan-03 May-03 Sep-03

Re

ba

sed

to 1

00

MSCI World World Investment Banks

Source: Datastream

Quoted investment banks performed in line with the MSCI global index

30

Results considerably better than a year ago

Q2 2003 vs. Q2 2002

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

DB

GS

CSFB

ML

MS

UBS

JPMC

CitiBS

LB

0%

10%

20%

30%

40%

0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5

Revenues ($bn)

Gro

ss p

rofit

ma

rgin

(%

)

Q2 2002 Q2 2003

Q2 2003: 31.0%

Q2 2002: 26.9%

+18.8%

+

4.2

%4 – Different business models in Investment Banking

31

0

50,000

100,000

BearStearns

Citigroup CreditSuisse

DeutscheBank

GoldmanSachs

JPMorganChase

LehmanBrothers

MerrillLynch

MorganStanley

UBS

Rev

enue

s (U

S$m

)

0

100,000

200,000

300,000 No. of em

ployees

Revenues (US$m) No. of employees

Revenues / employee (2002)

Revenues, no. of employees

Revenues by employee

0

200

400

600

800

BearStearns

Citigroup CreditSuisse

DeutscheBank

GoldmanSachs

JPMorganChase

LehmanBrothers

MerrillLynch

MorganStanley

UBS

Re

ven

ue

s /

em

plo

yee

(U

S$

'00

0)


32

Section 5Recent challenges

33

Challenges / Issues5 – Recent challenges

Cyclicality

Low activity

Desintermediation

Fee levels / margins

„Spitzer“ / research

Sarbanes Oxley

Basle II

Market

Regulatory

Cost structures

Management

Staff turnover

Reputation

Capacities

Internal / Institutional

An industry in change

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