Magazine article Management Today

Small Change in the City

Magazine article Management Today

Small Change in the City

Article excerpt


Ten years ago if you had asked someone what a typical merchant banker was like they would probably have described a fusty old city gent in a pinstriped suit, taking three-hour lunch breaks and leaving the office for his house in the home counties bang on five o'clock. Two years ago if you had requested an image of a typical City high flyer it would have been a young and thrusting wheeler-dealer, working 16 hours a day for a six-figure salary - the sort of whizz-kid whom Caryl Churchill satirized in her dramatic rendition of the City, Serious Money.

Today, those in the City will tell you that the former breed is fast becoming extinct, while the latter has disappeared as quickly as it came. There is little doubt that the City has seen a lot of shake ups in the past few years. Its profile has been substantially altered by new methods, new people, the Bang of '86 and the Crash of '87. So how does it look at this point and have the people working in the Square Mile changed as much as some commentators would have us believe?

Of all the areas of City activity, corporate finance has been particularly exposed to a diverse set of influences. Not least among these is the environment generated as a result of hostile deals, which has vastly increased the range of opportunities for corporates and their advisers. A glance at the papers reveals a succession of bids - BAT, Gateway, Plessey, Consolidated Goldfields - that would have been quite unthinkable 10, and perhaps even fewer, years ago, when corporate finance was the preserve of a small group of merchant bankers who had been playing cricket since their communal school days and were incapable of ungentlemanly behaviour.

The first major hostile takeover in the UK market was BTR's acquisition of Thomas Tilling in 1983. The Americans, meanwhile, had been in the business of hostile bids and sharp defence strategies for almost a decade, and it is no coincidence that, with its dying breath, Tilling turned to American Goldman Sachs for salvation. By this time it was too late to produce a white knight and the only hope Goldman could offer was a leveraged buyout. Specialists Kohlberg Kravis Roberts were flown in from the US but the idea of an LBO was deemed so outrageous by the Tilling board that it never even met with KKR and the company fell to BTR 24 hours later.

Some important lessons have been learnt since then. People have had to become very much sharper and less complacent as both corporates and their advisers have been alerted to the dangers and opportunities presented by hostile deals. Witness Cadbury Schweppes, for some months the subject of bid speculation from shareholder General Cinema. Aware of the danger, the company has geared up and itself gone on the acquisitions trail (purchasing Bassets, Poulain and most recently Trebor) in order to strengthen its position and dilute the holding of General Cinema.

To fuel these new-found opportunities in mergers and acquisitions new techniques of financing have sprung up, again following in the footsteps of experience across the Atlantic. A striking development has been that of mezzanine debt, a high-yielding paper which takes its name from its position in between senior debt, from the banks, and shareholders' equity. Despite its classical name, mezzanine debt is akin to nothing if not US junk bonds, but those who predicted it would not find favour with UK financiers saw mezzanine make up 50 million [pounds] in the Isosceles bid for Gateway.

The new techniques and types of debt, together with the increased complexity and volatility of capital markets, have required greater technical expertise and professionalism from financial institutions. Opportunities can sometimes present themselves for a very short period of time indeed, requiring fast reactions rather than long negotiations.

At the same time, the globalisation of capital markets and the growth of multinationals and cross-border deals have also played their part in changing the corporate finance scene, creating demand for people with expertise and connections in different foreign markets. …

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