Barclays Capital’s CEO explains how proving itself in Europe is an ideal platform for building its US business. By Geraldine Lambe and Brian Caplen

When Barclays Capital CEO Bob Diamond was passed over for the top position at Barclays last October, there was a lot of media speculation that if a good offer came from another firm, he would be happy to jump ship. Mr Diamond’s rebuttal is adamant and he says his “enriched mandate” to combine the wholesale and institutional businesses gives him a good enough reason to stay.

“There was a lot of silly talk that I would throw my toys out of the pram, but I have always been open about how much I love the platform I have. The real point about the announcement is that the board is pushing us to grow a quality business on a risk-adjusted basis at a greater pace; the team is really pumped up to try to achieve it.”

Timing right

Mr Diamond is justly lauded for having built a reinvigorated investment banking operation out of the BZW debris, but he admits it is equally true that events played right into his hands and that of his pared-down, debt-focused vision for Barclays Capital: the equity markets collapse and equity related regulatory scandals could not have been better timed to spur BarCap’s growth.

Mr Diamond is convinced, however, that the structure is just as well placed to take the business to the next level. Eschewing the high-margin – and high cost, he stresses – IPO and M&A businesses of competitors, he says BarCap’s business model gets at more than 95% of capital raised in the world each year – and not just in these markets, but also when the equity markets are hot. “Of course, there is cyclicality around interest rates and the economy, but nowhere near so much cyclicality as in the business model of the traditional bulge bracket US investment bank.”

In Europe, twin forces spell continued good business for BarCap. Mr Diamond says a shift away from bank lending to capital markets funding is a big driver for the firm’s growth. Similarly, the need to boost Europe’s pension assets as a percentage of GDP also bodes well. He says that because Europe is in the very early stages of a move from government funded to privately funded, from unfunded to funded pensions, and because international accounting standards are driving a better asset-liability balance, there is a “voracious appetite” for debt-like securities building across Europe. “This is incredibly powerful because the growth areas we are seeing in financing and risk management almost perfectly match our business model,” he says.

Focus on Europe

BarCap clearly laid out its strategy – as a debt focused risk management and financing firm, with a global structure but a focus on Europe – in December 2001. Being a success in the US is crucial to the firm’s credibility, but first it had to build its credentials in Europe. That has now been largely achieved; BarCap consistently ranks in the top three for debt capital markets in Europe and sits atop the table for international sterling bonds.

More exciting for the firm are Dealogic’s third-quarter 2003 figures, which showed that BarCap had entered the top 10 in the Americas for investment grade corporate issuance, was sixth globally – above CSFB, Merrill Lynch, UBS and Goldman Sachs – and was ranked 12th overall for DCM.

It’s good but not yet good enough, says Mr Diamond. “In Europe our aim is to be number one, but legitimately we should at least be in the top three across everything we do. In the US, it would be disingenuous to have that as our immediate goal, so we are aiming for the fifth or sixth mark. If we could accomplish that, combined with our European position, it will put us in the top handful of firms globally.”

In the US, Mr Diamond says the growth prospects are not nearly as big, so it is a market share game for the firm. But he says the two key elements needed to pursue BarCap’s US strategy are now firmly in place: it has established its credibility with US issuers in Europe, and has put in place the right team.

Building is still under way, however. BarCap’s upcoming recruitment drive, with 250 new bankers planned in Italy, France, Germany, Spain and Portugal, includes a massive hiring spree in the US; sources say that the firm will increase its current American headcount of 1200 by almost 50%.

So the big push is clearly imminent, but the firm has already made inroads: in 2003 it lead managed 108 dollar deals, compared to 35 in 2002 and none in 2001. Strikingly, all were for issuers for whom BarCap had already done sterling or euro deals.

Proven credentials

“We are asking our clients to give us a shot at their dollar business, not a shot at their business, period. In previous years, European firms traipsed into the US with no competitive edge and had to compete on price or risk. We have waited until integrated financing is the accepted model and have proven credentials in sterling and euro. Therefore our build in the US has a lot more substance to it,” says Mr Diamond.

He freely admits that BarCap can no longer count on competitors being distracted by credit losses and New York State Attorney General Eliot Spitzer’s piercing attention, and that future growth will be more hard won. There will also surely be competitors who will adopt the BarCap approach. Some banks are still prevaricating over what their business mix should be. For example, AT Kearney is advising HSBC on its investment banking model. Mr Diamond is not worried that others may crowd in on BarCap’s strategy.

“If the competition are calling in the consultants then we know we have a good couple of years ahead. I’ll help pay for them to do some more studies. If you have to ask what you should do with your business model at the end of 2003, you should be ashamed of yourself,” he says.

He feels no need to emulate other firms’ approaches or to adjust BarCap’s product focus. Little has changed, he says, since BZW exited the IPO business after performing badly in a “business model that is not successful”. It is not a philosophical objection, merely a belief that the IPO model still works only for the top four or five firms and that until it changes, BarCap will not dip its toe in the water.

“If I were a Goldman Sachs or a Morgan Stanley, I wouldn’t exit the new issue equity business, I’d probably just cut around the edges. But we’ve seen firm after firm invest a lot in an equity platform and not make any money out of it. The barriers to entry are too high.”

Is there an economic way to run an IPO business in the current climate? “Yes, we’re doing it,” says Mr Diamond. “We got out.”

In the secondary markets, electronic access and straight-through processing are the keys, he says. According to Mr Diamond, BarCap is about third or fourth out of non-Japanese firms in terms of execution volumes on the Tokyo Stock Exchange. “There aren’t the same barriers to entry there as in the US,” he says.

In the US, it will remain a different story until the New York Stock Exchange grasps the nettle and sweeps away the “antiquated oligopoly” fostered by its specialist system. “John Reed [appointed interim CEO of the NYSE in September 2003] is not an ‘agent for change’. An agent for change would be taking the exchange electronic, not protecting Morgan Stanley or Goldman Sachs and the few specialist firms that benefit from its current structure,” he says. (Subsequently, Goldman Sachs president John Thain has been appointed CEO. He says a priority will be to address the specialist system.)

Areas of potential

There are three product areas that Mr Diamond believes offer explosive growth potential in the next year or so, which will be a focus for the firm: structured credit products and derivatives; commodities – increasingly critical to the firms corporate clients such as utilities, mining and metals firms – and companies active in Russia and China; and equities. With the latter, BarCap’s emphasis is in those areas where it can display its risk management expertise, such as rights issues, equity derivatives and convertibles.

Barclays Capital still has a lot to do if Mr Diamond’s ambitions are to be achieved, but he believes the foundations are more than well laid. There are synergies between the wholesale and institutional businesses that haven’t even begun to be exploited and more between Barclays Global Investor and retail asset management activities around the group.

An acquisition is not out of the question Mr Diamond says that should he be able to prove its value, then the board has made it clear it would be supportive. “What we are most pleased about is that we don’t feel we have to do it. With our brand and support I don’t know a European bank that is better positioned in investment banking and asset management. I’m not sure that there is a US bank that is so well placed.

Does the market share the same view on the bank’s prospects? Mr Diamond laughs and says perception always lags reality. And, anyway, “it’s very invigorating to be the underdog”.

Career history BA in Economics from Colby College, Maine (1974). MBA from the University of Connecticut, (1977). Member of the Board of Trustees and chairman of the Investment Committee at Colby College. Member of Barclays Executive Management Committee since September 1997

2002: Appointed chairman of Barclays Global Investors

1996: Joined Barclays Capital as CEO

1992: Joined Credit Suisse First Boston. In Tokyo he was chairman, president and CEO of CSFB Pacific, responsible for investment banking, equity, fixed income and FX. Moved to New York, where he became vice chairman and head of global fixed income and FX. Member of the Executive Board and Operating Committee of CSFB and a member of the Board of Credit Suisse Financial Products

1979: Joined Morgan Stanley as director of management information systems. Later, appointed managing director and head of European/Asian fixed income trading for Morgan Stanley International, based in London

1976-1977: Began his career as a lecturer at the School of Business, University of Connecticut

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