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Going for brokers

Investment banks in Europe are hiring like they did at the peak of the bull market. They?re hoping the business will follow suit.

Morgan Stanley poaches from rival Merrill Lynch & Co. a team of seven senior bankers to establish a corporate broking presence in London and bolster its U.K. investment banking business. Citibank lures a team of three European media analysts from Goldman, Sachs & Co. after its top-ranked analyst defects to Morgan Stanley. Deutsche Bank raids Credit Suisse First Boston for nine technology bankers in the U.S., part of the same team that defected from Deutsche six years earlier. And CSFB, like many other houses, brings back guaranteed bonuses to replenish its investment banking ranks just two years after the firm banned the practice.

Sound like the roaring '90s? In the first six months of this year, securities firms have embarked on the biggest hiring spree in years, recruiting bankers and traders -- from proven rainmakers to associates and junior analysts -- by the hundreds and cherry-picking individuals and teams from their rivals. The result is the hottest job market that the industry, both in Europe and around the world, has seen since the peak of the equity bull market in 2000. Spirits -- and paychecks -- are rising from London to New York, as demand sends salaries up anywhere from 20 percent to 50 percent, bankers and recruiters say.

"Interest is across the board," says Jason Garner, a director at London-based recruitment agency Morgan McKinley, which filled three times as many jobs in the City in the first quarter of this year compared with the same period last year and has registered 7,000 job openings in the past 12 months alone. The recruiting spree, he says, mirrors that of the mid-'90s in its breadth, with banks now recruiting aggressively in corporate finance, equity capital markets and equity derivatives and continuing to expand in fixed income and credit derivatives. "Everybody's hiring for everything," sums up Guy Moszkowski, a securities industry analyst at Merrill Lynch in New York.

Today's hiring is being driven by a number of factors, foremost among them a global economic rebound that has raised hopes for a sustained upturn in business. Structural changes are also at work, sharpening rivalries dramatically in what has always been a fiercely competitive business. Citigroup's success in exploiting its balance sheet and lending relationships to develop a bulge-bracket investment bank has encouraged newly aggressive players like Bank of America Corp. and HSBC Holdings to hire scores of bankers and traders. Several European banks, including Barclays Capital, Deutsche Bank and UBS, are expanding in the U.S. to establish global credentials. And traditional powerhouses like Goldman Sachs, Morgan Stanley, Lehman Brothers and J.P. Morgan & Co. are seeking to shore up or expand their franchises after years of cutbacks and cost reductions.

"I have rarely seen the investment banking market in such a state of flux," says Benoît D'Angelin, head of European investment banking at Lehman Brothers International.

The new exuberance is welcome, at least among bankers themselves, after years of restraint, but it carries significant risks for their employers. Disciplined cost control, after all, helped the industry maintain profitability during the bear market, and it has contributed to record profits at several firms in recent quarters as stock markets and deal making recovered. A return to the bad old days of escalating salaries and guaranteed bonuses would risk undermining that profitability.

"I think some firms are hiring the wrong people at the wrong prices," says Robert Diamond, chief executive officer at Barclays Capital. "But that's no different than the past 20 years in this business."

These words of caution come from the man who is arguably the most aggressive recruiter in the market: Barclays, a fixed-income specialist, has hired 800 traders and bankers in the past six months as part of an effort to transform its European debt-trading and underwriting franchise into a global powerhouse. Barclays has some 6,400 staff worldwide.

The risks for firms are high because business is still spotty. Resurgent M&A activity remains well below its peak volumes. The rebound in equity issuance is fragile, too, particularly in Europe, where Deutsche Postbank and France's Snecma recently had to scale back their price targets to sell their IPOs. And the once-booming bond market, which has fueled industry profits during the past three years via underwriting fees and proprietary trading gains, could be in for a setback as inflation picks up and investors brace for the Federal Reserve Board to continue raising interest rates after last month's quarter-point hike.

The danger of overextension is particularly high in Europe, where the recovery of M&A activity, like economic growth, has lagged significantly behind the U.S. Merger volume totaled $302.1 billion in Europe in the first six months of this year, up 11 percent from a year earlier and roughly a third of its peak in 2000, according to figures from Dealogic. U.S. merger volume, meanwhile, doubled to $410.9 billion but is still some distance from the 2000 peak.

To a large extent the recent hiring reflects a return to more-normal activity after the severe cutbacks of the past three years. "All of us have been through a period of restructuring," says James Leigh-Pemberton, head of European investment banking at CSFB. "When you're finished you have to turn your sights to growth." Those prospects are distinctly more modest in Europe, though, he cautions. "This is not a marketplace in which the tide is discernibly rising."

Robert Gillespie, co-head of global investment banking at UBS in London concurs, "I'd be surprised to see a sustained frenzy of hiring, because I don't think the level of business will be that much higher in 2004 than in 2003."

Yet if Europe is short on investment banking profits, it doesn't lack for ambition. Underlying the surge in hiring is the sheer number of competitors. Regional players like ABN Amro, Dresdner Kleinwort Wasserstein and Société Générale vie with global powerhouses like Citigroup, Goldman Sachs, Morgan Stanley and UBS, prompting some bankers to rue the fact that the bear market didn't last long enough to prompt a shakeout.

What's more, several new entrants are expanding aggressively in the already-crowded European investment banking market. HSBC has hired 415 people so far this year, including more than a dozen senior investment bankers poached from rival firms, as part of its effort, led by capital markets chief Stuart Gulliver and former Morgan Stanley M&A impresario John Studzinski, to develop a bulge-bracket investment bank. Royal Bank of Scotland has been hiring debt traders and salespeople in both Europe and the U.S., where it lured away John Walsh, the head of debt capital markets at CSFB, in its drive to emulate the fixed-income success of Barclays Capital. Bank of America has hired some 50 debt professionals in London so far this year; its fixed-income staff there now numbers 350. Lehman Brothers, one of the biggest powers in the bond market, has responded to the competitive pressure by hiring 100 fixed-income employees in the first five months of the year, half of them in Europe.

Behind all the hiring, banks are contemplating even bigger strategic moves. Citigroup sounded out Deutsche Bank about a possible acquisition earlier this year. Deutsche's Swiss chief executive, Josef Ackermann, has talked openly about potential consolidation in Europe. And most major investment banks have taken a close look at Cazenove, the British securities house struggling to arrange its own IPO, because of its deep client base in the U.K.

CSFB, meanwhile, appears determined to go it alone following the abrupt departure late last month of John Mack as co-CEO and head of the Swiss bank. The replacement of Mack, who had favored a merger, by Brady Dougan could make CSFB an even more aggressive bidder for talent to strengthen its franchise. One of the hottest areas is U.K. corporate broking, the business of advising companies on issues related to their share prices. This peculiarity of the London market has gained fresh currency because of the increased activism of institutional shareholders and the desire of many banks to exploit broking relationships to gain more-lucrative equity underwriting and M&A advisory business. "It gives you ear time -- access to people in the company -- because if there's one thing a CEO likes to talk about, it's the share price," says Philip Raper, head of corporate broking at Goldman Sachs International.

"If you've got a relationship with a particular company, you get more share of wallet," says James Renwick, head of corporate broking at UBS. The bank helped arrange a £2.67 billion ($4.88 billion) placement of shares in Royal Bank of Scotland, a UBS broking client, in May to finance RBS's acquisition of Cleveland-based bank Charter One Financial.

Morgan Stanley started the game of musical chairs in this sector in April by hiring seven bankers from Merrill Lynch, the second-biggest U.K. corporate broker, after Cazenove. The hires included Paul Baker, formerly co-head of Merrill's corporate broking team. Morgan Stanley, which also poached four bankers from the broking teams at CSFB and UBS, had ignored corporate broking in the past, treating the U.K. as part of the wider European market where broking is almost unknown. The firm now believes British market practices will endure as the country remains outside the euro. It also sees an opportunity to gain clients because of the uncertainty at key players like Cazenove, which counts nearly half of the FTSE 100 companies as clients, and ABN Amro's Hoare Govett unit.

"Corporate broking is going to remain relevant," says Morgan Stanley's U.K. head, Simon Robey. "It's pretty clear our clients wanted it. Clients really value the incredible insights that a broking franchise in an international platform like ours can provide."

The effort won't come cheap. Rivals estimate that the new broking team could cost Morgan Stanley more than £10 million a year. "Would I have been brave enough to do this two years ago? I don't know," admits Robey. But, he adds, "it helped me make the case that we seemed to be heading into a more normal market."

Morgan Stanley's push set off a chain reaction. Goldman Sachs swiped two bankers from Merrill, which moved to rebuild its department by raiding Hoare Govett, the U.K.'s fourth-ranked broker, for two of its top bankers, Mark Astaire and Andrew Osborne. Merrill also nabbed bankers from UBS and CSFB. UBS, meanwhile, has reestablished its own corporate broking team under Renwick, several years after disbanding it and placing bankers in corporate sector coverage units.

Banks are seeking to beef up their U.K. investment banking presence more generally, recognizing that the British market accounts for roughly a third of European M&A. CSFB hired Piers de Montfort, a 16-year veteran of Morgan Stanley and one of London's leading deal makers, to head its U.K. investment banking operation in May. Lehman Brothers lured Anthony Fry, former head of CSFB's media and telecommunications team, to lead a new U.K. investment banking division. The firm also lured Jerome Calvet from Société Générale to head its French investment banking business. "The guys we are attracting are all great bankers," says Lehman's D'Angelin. "They have hardly ever moved in their careers. They want to join an organization that is focused and that has momentum."

The number of prominent job-hoppers, particularly in Europe, where several senior bankers with 15 or more years of experience have recently changed firms, reflects pent-up frustration after three years of cutbacks. Deutsche Bank's recent hiring of nine bankers from the U.S. technology team formerly led by Frank Quattrone at CSFB was a kind of delayed payback for the defection of Quattrone's team from Deutsche to CSFB in 1998, one of the most high-profile team moves of the high-tech bull market. Merrill Lynch's U.K. corporate brokers had felt marginalized and underpaid because of the firmwide cutbacks engineered by chief executive Stanley O'Neal and the retirement last year of Michael Marks, Merrill's European chairman, who took a strong interest in the British market as former head of the U.K. brokerage Smith Newcourt.

One of the biggest instigators of job-hopping is HSBC. The bank has been hiring aggressively since M&A chief Studzinski joined last year to build a top-tier corporate finance business. He recruited former colleague Robin Osmond, a 15-year veteran at Morgan Stanley, as global head of investment banking and David Livingstone, a 16-year Goldman Sachs veteran, as head of European investment banking. Studzinski's two hires describe the chance to build a new franchise as the main factor in their decision to move. "We have a much greater degree of changing and developing the organization and seeing the fruits of our labor than I did at Morgan Stanley," says Osmond.

Studzinski also has hired more than a dozen senior bankers from bulge-bracket firms in recent months, triggering other moves in their wake. When HSBC hired Hugo Heath from CSFB to head its global chemicals team last month, CSFB turned around and poached Alan Norris from UBS to fill his place.

"Everyone gives Studs credit for repricing the market by at least 30 percent," says one senior investment banker.

Bank of America has focused on sales, trading and origination teams in fixed income, structured credit and credit derivatives in expanding its London-based European debt business. It has also has hired investment bankers for its financial institutions group, which covers roughly half of the 200 major corporate customers that the bank is targeting. "We're building our global competencies to provide solutions to our key clients," says Arrington Mixon, BofA's head of international debt.

Like most bankers, Mixon acknowledges the risks of the new hiring boom but insists that BofA will avoid any pitfalls. The bank has been hiring individuals rather than teams and is concentrating on its core strengths in fixed income. "It may be a risk for people who are expanding too aggressively. We're expanding smartly and with focus," she says.

Few have been as aggressive in hiring in recent years as Barclays Capital's Diamond. The bank was able to build its debt-trading and origination business with relative ease in the late '90s and the early part of this decade as the rest of the industry focused on ramping up and then cutting back their equity and M&A businesses. Diamond acknowledges that the competition for talent is fiercer today but insists that Barclays is determined to grow, particularly in the U.S. mortgage-backed and high-yield markets. The bank will continue to expand as part of a four-year growth strategy.

"You have to get the best people in first to build a successful business," Diamond says.

Many analysts believe the debt markets are poised for a prolonged downturn after the unprecedented boom of the past three years. The global economic recovery is gaining strength, rising oil prices are driving up inflation, and the Federal Reserve on June 30 hiked interest rates one quarter of a percent after keeping them at the historic low level of 1 percent for a year.

Diamond says fears about the debt markets are exaggerated. He points out that the fixed-income market accounts for more than 95 percent of all capital raised, and the average maturity of outstanding debt is just three years. He also sees the Fed simply restoring rates to a neutral level that will keep the recovery going, rather than stepping hard on the monetary brakes.

"Corporates are back spending and investing, and that's good for our business," Diamond asserts.

Investment banks are also back in spending mode. Whether it will be good for business remains to be seen.