Warburg's hopes crumble

BY JOHN WILLCOCK

Financial Correspondent

The end of Warburg's ambitious attempts to build a world-scale integrated banking group was clearly in sight last night, with Swiss Bank Corporation set to absorb its investment bank and securities operation. Warburg's profitable fund management arm, Mercury Asset Management, looked poised to become fully independent for the first time.

The planned deal, which is understood to be well down the road to completion, would mean the full integration of Warburg and SBC's investment banking operations worldwide, sources said. The official Warburg statement made it clear that any approach from SBC would not involve an offer for the whole of SG Warburg Group.

Sources said that it was still too early to talk about a price, although they hoped to seal the deal within weeks rather than months. At yesterday's closing prices, Warburg was valued at £675m, after deducting the value of its 75 per cent stake in Mercury.

The talks have been conducted in London between Sir David Scholey, Warburg's chairman and chief executive, and Marcel Ospel, SBC's head of international and financial operations. Exploratory talks started as much as a year ago, and more serious negotiations this March.

A spokesman at SBC in London, which is headed by Rudi Bogni, confirmed that talks were under way with Warburg, but refused any further comment. Mercury in a separate statement said that it had been kept informed of the discussions between Warburg and SBC.

No decision has yet been made on the future of the Warburg name, its offices or any future cost-cutting, sources said. Mercury, whose shares closed 68.5p higher at 861p, said it was being advised by the merchant bank Lazard Brothers and would make a further announcement when appropriate.

Warburg's shares closed 46p higher at 821p after a day of frenzied market activity. Market rumours had centered on an approach for Warburg by the Wall Street retail broker Smith Barney. Suggestions that a third party like Smith Barney may still come in with a full bid for Warburg were discounted by sources close to the talks, since any hostile approach could provoke a mass walk-out of staff.

Sources also said that if this deal failed to be completed, it would be very serious for Warburg. Given the damage caused by the aborted offer by Morgan Stanley six months ago, the prospects of Warburg surviving as an independent entity after a second failed deal are slim. The offer by Morgan Stanley foundered partly because of the problem of buying out the minority 25 per cent shareholding in Mercury not already owned by Warburg.

Analysts were at first surprised that Swiss Bank should emerge as Warburg's latest bid partner. The two banks have been involved in a series of well publicised and acrimonious City disputes over the last year. They were on opposing sides in the Enterprise/Lasmo takeover, in the Eurotunnel rights issue, and in the recent furore over Trafalgar House's bid for Northern Electric. But they acknowledged that Warburg's culture was much closer to SBC than that of Smith Barney, an aggressive retail broker.

Chris Wheeler, head of research at Lehman Brothers, said: "This could be something like Credit Suisse First Boston, except with a UK/Swiss link instead of US/Swiss.

"SBC has a tremendous asset management business. It has a very strong derivatives side, where Warburg is weak. SBC has a weak equities side where Warburg is strong. The Swiss have a very strong debt operation where Warburg is weak, and so on. The two together could then buy something in the US."

Until last summer Warburg was the City's flagship investment bank, formed by a merger between a broker, a jobber and a corporate finance house during Big Bang in the mid-1980s. The bumper conditions of 1993 were followed by leaner markets, and Warburg was forced to pull out of Eurobonds, a market it pioneered, and most of its derivatives operations.

The collapse of merger talks with Morgan Stanley last December led to staff defections and the resignation of the chief executive, Lord Cairns. Lord Scholey, the chairman, retook the reins as both chairman and chief executive, promising to revive the bank's flagging fortunes.

Later this month Warburg is expected to announce 1994 profits of up to £130m, most of that due to the Mercury stake, and practically none from investment banking.

Warburg's employees were concerned yesterday by the defection of four of their top European equities colleagues to their acquisitive rival, Morgan Grenfell. Morgan recently poached 10 top capital markets people, leading to fears that Warburg was bleeding to death.

A Warburg insider said: "Following the failure to come to an agreement with Morgan Stanley there is a feeling the senior management will be under enormous pressure to come to some kind of agreement with the Swiss. The staff defections will have weakened the management' position even further."

"It is the worst set of defections to date," a Warburg banker said. "The management in this area has been written off. Morgan Grenfell are left with a very good management network and we expect them to start filling it with people."

The four defectors were Miko Giedroyc, head of the European research department, David Haysey, co-head of European equities, Joe Hall, head of UK equity sales, and Ian Wace, head of European equities trading.