RETRENCHMENT AT SECURITY PACIFIC : NEWS ANALYSIS : Bank Made Push Into a Field Now Judged Too Risky : Financing: It hoped to reap large fees from the type of merchant banking activities that brokerages carry out. But there were too many players.
Security Pacific’s move to disband its merchant banking division threatens to further remove grease from the wheels of corporate finance in California--the network of lenders that provides capital and financial advice to companies.
But if Security indeed exits completely from such fields as merger advisement and leveraged-buyout lending, it won’t leave much of a vacuum in the short run, the bank’s competitors say.
Most investment bankers admit that there are far too many deal makers vying for a shrinking pie; in any case, they say, Security’s corporate finance strategy didn’t seem well-focused.
Of greater concern to competitors and to corporate clients is whether Security’s troubles in merchant banking foretell greater financial problems for the bank in the long run.
Security’s announcement Monday that it will refocus on its traditional lending businesses did not specify all of the merchant-banking businesses it will depart. But it will shrink or shut down completely its corporate lending activities in Europe and Australia, and overall about 4,000 jobs worldwide could be cut as the bank exits other facets of merchant banking.
The broad umbrella of “merchant banking” encompasses a multitude of businesses at Security, as at most of California’s large commercial banks. Generally, merchant banking involves those corporate finance activities beyond the scope of straightforward lending to businesses: merger-deal financing, leveraged buyout lending, underwriting of corporate bonds and, perhaps most important, international lending.
What most merchant-banking businesses have in common is that they typically are riskier than traditional banking.
Security’s lunge into merchant banking in the 1980s was part of a dramatic expansion by major American commercial banks into new fields. The wave was partly designed to combat Wall Street brokerages’ increasing pilferage of banks’ traditional corporate customers. Banks felt that they needed to offer their business customers new financing options to keep up with brokerages.
Also, as takeover mania soared worldwide, banks saw merger-advisory and financing as a great way to snare new fee income.
Security jumped into international merchant-banking in a big way in 1982, when it bought 30% of London-based brokerage Hoare Govett. In 1987, Security took over Hoare Govett completely and also bought 30% of Burns Fry Ltd., one of Canada’s major brokerages.
Further, the bank expanded its merger-advisory business in the United States throughout the 1980s, often hiring star investment bankers away from Wall Street brokerages at big salaries.
“The commercial banks in general came after Wall Street and busted the salary scale,” said one Los Angeles investment banker.
Security’s aggressiveness also extended to the pricing of services, competitors say. “They were willing to work on the cheap,” one Los Angeles competitor said. If a company wanted an estimate of what a division might fetch if sold, Security might charge $50,000 for what a Wall Street brokerage would charge $100,000, competitors say.
The goal, of course, was to build market share. Security also was able to use its leverage with existing corporate customers to sell new corporate-finance services, competitors say.
But many executives in the Los Angeles offices of Wall Street brokerages maintain that Security tried to do too much under merchant-banking chief David R. Lovejoy, and that its strategy wasn’t clear. “They just never pulled it off,” said one executive at a regional brokerage. Lovejoy did not take phone calls Monday.
Even in 1989, while the takeover business still flourished, profit at Security’s merchant-banking arm was disappointing. Its return on average assets, a measure of earning power, was just 0.61% last year. In contrast, the bank’s retail-banking division earned 2.27% on assets.
Security’s merchant-banking division has had some major successes, including a money-management unit that invests $25 billion for clients, and the Sequor Group, which handles clearing and settlement of securities. Competitors believe that Security will keep both of those operations, melding them into other parts of the bank.
But Security’s investment in Hoare Govett soured as trading and financing in Europe dried up after the 1987 stock market crash. “It became a sinkhole for them,” said one Los Angeles money-management professional. Also, Security now is suffering major loan problems in Britain and Australia. In September, the bank opted to get rid of 51% of its Hoare stake by selling it to the brokerage’s managers.
The final blow to Security, as to many other banks and brokerages in merchant banking, was the plunge in merger and takeover activity worldwide this year. Caught with a staff full of investment bankers and other professionals, Security now is merely following the lead of its competitors, slashing payroll and entire divisions.
Now, beyond the piecemeal decisions about what to keep and what to jettison from merchant banking, Security also must show that the international loan portfolio its investment bankers built up in the 1980s isn’t full of more disasters waiting to happen, competitors say.
MAIN STORY: A1
TRACKING SECURITY PACIFIC STOCK
The stock market applauded the bank’s move to curtail risky investment banking activities and lifted the price $1 a share.
Tuesday close: $23, up $1.
SECURITY: HOW THE PIECES FIT Profits and losses of Security Pacific Corp.’s key divisions in 1989.
Division 1989 profit (millions) Retail banking $344.7 Financial services system 174.1 Merchant Bank 145.6 Business banking 139.8 Interstate banking -59.0 (loss) Other -4.6 (loss) TOTAL, SECURITY PAFICIC CORP. $740.6
MERCHANT BANKING LAGGED Security’s Merchant Bank was one of the firm’s least profitable divisions, measured by return on average assets, a key measure of bank profitability.
Division 1989 return on avg. assets Retail banking 2.27% Financial services system 1.29% Business banking 1.16% Merchant Bank 0.61% Interstate banking -0.38% (loss)
Source: Security Pacific Corp.
