Money Tips Network

Corporate mergers and acquisitions have been more important even than new issues in keeping the merchant banks’ names in the public eye. Over the past few years, such deals have become even more acrimonious with charge and counter-charge flying back and forth in national newspapers. The growing importance of American banks in this field is increasing the use of the rather less ‘gentlemanly’ tactics used in US takeovers.

Both the company which is attempting to make a takeover and the company defending against it usually employ a merchant bank to advise them on tactics. The takeover process is discussed at length in Chapter 10, but it is worth noting here how the same forces which have caused the City revolution have affected the merchant banks and the takeover market.

As outlined earlier, overseas banks have been moving on to the UK market. They were able to back takeover deals with their cash as well as with their advisory skills. This faced the British merchant banks with a great problem since they were effectively dwarfed by their foreign competitors.

A good example of a finance-backed deal was the acquisition by Beazer, the British construction and aggregates group, of the US company Koppers. Shearson Lehman, the US bank, and County Nat West not only advised on the deal, they owned half of the specially created company which was used as a vehicle for the bid. On top of that, they raised much of the $1.7 billion finance needed. The deal also illustrates how merchant banks face competition from the merchant banking subsidiaries of the UK retail banks. Some merchant banks, like S. G. Warburg, have responded by becoming part of new conglomerates. Others, such as Barings, have given up the unequal struggle an concentrated on their skills in niche areas where financial muscle is less important.

It is as yet far from clear which set of merchant banks have adopted the best strategy. After the 1987 Crash, when activity in the City slowed to a trickle, some of the larger banks were forced to lay of staff. The smaller houses, which had not increased their costs so much, were able to ride out the problems.
Fund Management

Another important area of merchant banks’ work is fund management. Many of the investment and unit trusts advertised in the daily papers are run by merchant bankers. In addition, there is a growing trend among companies with large pension funds towards spreading the management of such funds among several banks, rather than manage the funds within the company. The merchant banks, with their reputation for financial expertise, have been ideally placed to take advantage of this trend.

Fund managers are normally paid on a percentage of the assets they manage. Thus the better they perform, the more they earn. This was very good news for managers in the bull market years, when without being particularly brilliant, they could continue to increase their fees. It was of course very bad news at the time of the Crash.

In any case, survey after survey has shown that managers under perform the stock market index. This has led to the increasing popularity of ‘passive’ funds which slavishly follow the index and require little management (and small management fees). It is rather unfair to expect fund managers to beat the index. After all, since institutions constitute the vast majority of equity investors, the index largely reflects the decisions those fund managers take. If all the fund managers perform well, the index will perform well and vice versa. But fund managers will always face dealing costs, so logically they should under perform the index.

Merchant banks’ fund management business should continue to expand. The greater interest of private investors in the equity market, and the growth of personal pensions, is likely to provide more than enough funds for the banks to manage.