Warburg whispering swells

There are two broad views you can take of the dramatic share price movement of SG Warburg and its 75 per cent-owned Mercury Asset Management over the past two days. Either a dramatic merger or acquisition announcement is imminent, or else the deal ing rooms have been getting over-excited.

Both views have been widely expressed over the last couple of days. Sources close to Warburg have suggested a market-maker got stuck with a pile of the bank's shares and spread the rumours to raise the price and thus shift the shares.

Others, particularly the bank's rivals, have suggested that "Big Bang Mark Two" has merely been delayed rather than ended by the collapse of the Warburg/Morgan Stanley merger talks last month. As Warburg had extensive talks with JP Morgan in 1993 over a possible merger, this has made JP Morgan the obvious candidate for the renewed speculation.

Less likely, but rather more intriguing, there were also whispers in the market that Morgan Stanley had restarted the abandoned talks with Warburg.

Warburg's shares shot up 41p to 737p on Wednesday, and added 8p yesterday. MAM rose in tandem, and yesterday added 20p to finish at 768p, after brushing its year's high of 775p.

Critics of Warburg, the City's flagship investment bank, where Lord Cairns is chief executive, say it has never been so vulnerable in its 60-odd-year history. The aborted Morgan Stanley merger talks in effect put a "for sale" sign over Warburg: it signalled that the firm could not envisage an independent future.

Competitors adjacent to Warburg's Broadgate offices say that more sackings are on the way, following the closure of the Eurobond operations last week at the cost of 180 jobs. They say that many staff are keen to leave. A common theme is that the bank needs a dramatic gesture or vision to jolt people out of this sense of drift, and that insisting that independence is the way ahead is not it.

Threfore teaming up with JP Morgan, Morgan Stanley, Lehman Brothers or Deutsche Bank seems to make sense. But not everyone agrees with this analysis.

Martin Cross, a banking analyst with UBS, says: "The Morgan Stanley talks showed that Warburg may be interested in getting together with someone. But that doesn't mean they want to jump into bed with any old Tom, Dick or Harry."

Certainly Warburg's recent share price rise cannot be justified by anything tangible, Mr Cross says. The main problem facing the bank is that although a merger with an American bank may appeal to the management on strategic grounds, it seems impossible to cut a deal that will also satisfy Warburg's shareholders.

For instance, the Morgan Stanley deal would have handed control over to the Americans with no premium whatsoever. This became a highly publicised problem as far as MAM was concerned, but Warburg shareholders were also less than impressed with the proposed deal, Mr Cross says.

"I can't see any deal being structured which would be right for the management and right for the shareholders. All this rumour-mongering is only of interest among the market-making fraternity."

Mr Cross advises his clients to start selling Warburg at 750p, and MAM at current prices.

He also attacks another current strong rumour - that Warburg is about to cut or sell off completely its 75 per cent stake in MAM. As the MAM management took much of the blame for scuppering the Morgan Stanley deal, the theory is that Warburg feels it would be better off alone.