Cazenove joint venture may not bring JPMorgan the value it seeks

Determining and capturing the value in mergers and acquisitions is a subject that never goes out of fashion among M&A bankers or company chief executives. In financial services, the concept of value can be particularly tricky to pin down because it is often a question of intangibles. In investment banking, the value of a firm is rooted in its bankers and the quality of their relationships. The question of whether the acquired bankers (or, in some cases, the bankers from the acquiring firm) stay with their new owner – and whether the client relationships migrate with them when the firm’s identity is changed – can make or break a deal.

Lessons to learn

This was the conundrum facing managers at JPMorgan last month when it firmed up a joint venture with Cazenove costing Ł110m. The ill-fated acquisition of Wasserstein Perella (WP) by Dresdner Kleinwort Benson is a prime example of what can go wrong, even if JPMorgan is paying a fraction of the price Dresdner paid at the height of the market. Dresdner coughed up Ł1.4bn to buy the US firm – but did Bruce Wasserstein produce any significant business before he jumped ship to Lazard? And did the other WP bankers add any real value to the newly named Dresdner Kleinwort Wasserstein? Market pundits are pretty much agreed that answers are: not really, and no.

Staying independent

JPMorgan Chase hopes the joint venture (to be called,unsurprisingly, JPMorgan Cazenove) will give JPMorgan’s UK investment banking business a bigger footprint in the UK corporate broking market, where Cazenove built its reputation. Cazenove, meanwhile, will maintain “operational independence” but will have access to JPMorgan’s global network, which surely also means access to JPMorgan’s deep pockets.

There are potential problems with the partners’ arrangement – aside from that of maintaining any kind of independence when someone else is controlling the purse strings; and especially when that purse-holder is the kind of organisation that publishes a staff booklet containing 123 principles to which all employees should adhere (which JPMorgan has done recently, according to reports).

But the real pitfalls lie in the value of what JPMorgan is paying for, the cost of which will not stop at the initial investment in the new partnership. First, Cazenove is built largely on the twin pillars of the chairman, David Mayhew (who is to head the joint venture), and the chief executive, Robert Pickering. This is all well and good – they both have a great reputation in the UK market – but many observers believe that Mr Pickering hankers after another job and Mr Mayhew, like Mr Wasserstein at Dresdner, will leave the company in the not too distant future, possibly to retire.

Second, what about the other Cazenove bankers? Of the 750 existing investment bankers, pessimists have argued that only about 15-20 have the star quality JPMorgan dreams about. And without knowing the lock-in terms, if there are any, we cannot determine whether they will stay with this new hybrid venture – one that is neither the old Cazenove nor the US-style JPMorgan.

Deriving value

The third and, perhaps, most important issue for JPMorgan managers is the question of how much value JPMorgan will actually derive from Cazenove’s vaunted FTSE 100 relationships. By comparing revenues – Cazenove’s $251.4m turnover with JPMorgan’s $33.3bn in 2003 – it is easy to conclude that the venture cannot only be about adding Cazenove’s profits to the JPMorgan pot. The aim is clearly to cross-sell to generate additional revenues, for example, by using loans to win advisory fees or debt or equity mandates.

Corporate need

But it would be disingenuous to suggest that FTSE 100 corporates do not already have relationships with other banks. Good though Cazenove is, it cannot satisfy every corporate need. So, aside from its particularly British culture, which UK corporates may find sympathetic, and the close relationship Mr Mayhew has with his clients, the value of Cazenove to UK corporates has been based, at least partly, on the fact that it is cheaper than the bulge-bracket firms.

This pricing disparity will not last when JPMorgan is, to all extents and purposes, calling the shots. Equally, UK executives will not respond well to the inevitable new style of banking where bankers say: “Yes, of course we’ll lend you Ł750m, as long as you give us a seat at the table for your debt issue or your advisory business.”

This will not generate the sort of corporate bonhomie that Cazenove currently basks in.