London - A year ago JPMorgan Chase declared its investment in the 181-year-old Cazenove Group "an important step forward in growing our client franchise". The London-based merger of Britain's most successful stockbroker with the third-largest US bank may have been an even bigger step for the competition.
While JPMorgan Cazenove's revenue rose 14 percent and it advised on more UK takeovers, the jointly-owned firm lost market share in the London equity market.
Six of Britain's biggest companies defected to Morgan Stanley, UBS, Citigroup, Goldman Sachs Group, Credit Suisse First Boston and ABN Amro Holding's Hoare Govett securities unit.
"Is it surprising we would get some erosion of our market share? No, it isn't surprising," said JPMorgan Cazenove chief executive Robert Pickering. "The speed at which it's happened has been a little bit surprising."
How Cazenove, led by chairman David Mayhew, failed to fortify its grip on the market for FTSE 100 firms demonstrates the transformation of London's financial centre from a cosy domestic preserve to an international free-for-all.
UK institutional investors, Cazenove's traditional network, have ceded influence to overseas money managers and hedge funds.
Peter Hahn, a former managing director at Citigroup, who is doing a doctoral thesis on UK corporate boards at London's Cass Business School, said foreign shareholders made up 32.6 percent of investors in UK firms last year, with most of that in the largest firms, up from 12 percent in 1991.
Michael Findlay, the co-head of Merrill Lynch's corporate broking team in London, said: "UK investors used to dominate but overseas investors and hedge funds are now very important."
"The changing shareholder landscape means that UK corporates need a corporate broker who has good access to all the various constituencies."
JPMorgan paid £110 million (R1.26 billion) for 50 percent of JPMorgan Cazenove and contributed £50 million in capital and about 70 of its own people to help gain underwriting fees in London's stock market. Since the venture was announced last November, JPMorgan Cazenove has lost 13 clients, including six members of London's benchmark FTSE 100 index, and gained 13 smaller companies.
JPMorgan Cazenove is still corporate broker to 38 of the UK's 100 largest companies, more than any firm. British companies appoint corporate brokers to serve as a liaison with investors and to help them comply with stock market rules.
The assignments, compensated with a nominal fee or sometimes unpaid, can lead to more lucrative business such as managing share sales and advising on mergers and acquisitions.
JPMorgan Cazenove's lead over UBS narrowed in the past year as longtime Cazenove clients such as Marks & Spencer Group, the UK's biggest clothing retailer, and BAA, the world's largest airport operator, were lured away.
"What had been a relatively sheltered backwater has become the key battleground in the UK market," Pickering said. Centrica, the UK's largest energy supplier, replaced JPMorgan Cazenove and Hoare Govett with Goldman Sachs and UBS in July. Cazenove had been Centrica's broker since the company's creation in 1997, said spokesperson Andrew Turpin.
The three other FTSE 100 firms that dropped JPMorgan Cazenove as their broker in the past year are Diageo, the world's largest liquor maker; HBOS, Britain's biggest mortgage lender, and ITV, the country's top commercial broadcaster.
"What's happening in corporate broking is that there have been a number of major investment banks that really haven't been competitors, which have made a push to get into that business," Pickering said.
"The UK is a very competitive market and they've alighted on corporate broking as a key to the market."
Morgan Stanley has built up its corporate broking division in the past two years. It hired 12 people from Merrill Lynch, CSFB and UBS last year. It recruited three more people this year including Nick Wiles, who was a partner at JPMorgan Cazenove.
Citigroup hired a seven-person team in June from Hoare Govett, led by chief executive Nigel Mills. Hoare Govett, which had 25 FTSE 100 broking clients when Mills left, has since lost three - Centrica, Cadbury Schweppes and Compass Group, the world's biggest caterer.
While the deal with Cazenove bumped JPMorgan up from ninth among London equity underwriters, the partnership has not improved the combined company's position, Bloomberg data show.
In a record year for London share offerings, JPMorgan Cazenove arranged a combined $3.27 billion of stock sales this year in London, below their $3.35 billion in the same period a year earlier, according to the data.
This year's transactions had generated higher income, Pickering said. Cazenove and JPMorgan had won equity business that neither company would have attracted alone, he said.
Examples include the £761 million initial public offering (IPO) of Kazakh copper mining house Kazakhmys, as well as the IPO of Inmarsat, a London-based satellite phone service company. Inmarsat named JPMorgan Cazenove as one of its corporate brokers.
JPMorgan had relationships with the buyout firms, also known as financial sponsors, that owned Inmarsat, while Cazenove had a stronger network with UK equity investors.
"In the UK, many of these IPOs come out of financial sponsors and the old Cazenove business wasn't particularly well placed to win those," Pickering said. "JPMorgan had a very major financial sponsors business, but not the track record Cazenove had in equity issuance in the UK."
JPMorgan Cazenove has gained ground in UK merger advice, rising to second this year behind Goldman Sachs, the world's biggest merger adviser, Bloomberg data show.
The partnership has done 60 transactions worth a total of $100 billion, according to the data. A year ago JPMorgan ranked seventh with $53.7 billion of deals and Cazenove ranked ninth with $38.7 billion.
JPMorgan reported last month that the venture with Cazenove contributed to record third-quarter net revenue at its securities unit and an 8 percent increase in investment banking fees.
"Our revenues are up 14 percent and that is way beyond expectations, especially in a period of merger integration when just matching the previous year's figures is usually a stretch," said Klaus Diederichs, the head of European investment banking at JPMorgan in London and a non-executive director on the JPMorgan Cazenove board.
"We're much better off as JPMorgan Cazenove than we were a year ago as JPMorgan," he said. Pickering dismisses the notion that JPMorgan Cazenove's success relies on client ties developed by Mayhew.
"We probably have more revenue in the UK investment banking market than any other firm, and this year we may do more than 300 corporate transactions. It's not physically possible for any one person to have a dominating presence over a franchise that broad," he said.
- Bloomberg