If allowing Lehman Brothers to go bankrupt will eventually be seen as one of the biggest mistakes of the financial crisis, Barclays’ calculated bet on the future of the capital markets may turn out to be a winner.
The collapse of Lehman destroyed the last vestiges of confidence in the banking sector and sent bank credit default swap spreads rocketing, but the real damage was the havoc it wreaked in the money markets. The default of Lehman holdings caused the collapse of the Reserve Primary money market fund. And with that, other money market funds – which play a crucial role in buying the commercial paper issued by corporations to fund their activities on a daily basis – ran for the hills, effectively destroying the short-term paper market.
But for Barclays, it was an opportunity like no other to grab scale and market share in one of the most notoriously difficult markets in which to grow. While US banks have been able to conquer other markets, no foreign bank has been able to take a seat at the American top table. The acquisition of Lehman’s US operations for about $1.7bn – which includes about 10,000 staff, its New York headquarters and selected parts of its trading assets and liabilities – has propelled Barclays into the top tier. According to data provider Dealogic, in the year to October, the combination will lift BarCap from 13th to fourth in the US investment banking league table; globally it takes Barclays Capital from 15th to fifth.
A perfect fit
It was an opportunity not to be missed, says Jerry del Missier, president of Barclays Capital and one of the three Barclays top executives to sit at the negotiating table with Barclays president Bob Diamond. “Lehman’s business is a fantastic fit for ours. It is strong in energy and natural resources banking risk management, which plays very well with our commodities risk management business, and its US franchise is one of the best in the market so it is tremendously additive. We were building out anyway – but 2009 was going to be the big push; this deal propels us to a leading position in the US and gives us geographic balance.”
The cash equity business was particularly appealing. BarCap has done quite well in building its US interest rate and investment grade debt businesses, but competing in equities, with all the investment required in research, trading and origination, is particularly difficult in the US. Lehman gives BarCap the leg-up it required, says Mr del Missier. He denies that losing Lehman’s European business, which was scooped up by Nomura, is critical. “It is much easier to build in Europe, which is still a very fragmented market; it would have been nice to get it, but it is not a problem. There are plenty of opportunities there to build organically. There are a lot of good people available.”
But it is a risk, if a calculated one. Just like when Mr Diamond oversaw the birth of Barclays Capital out of the ashes of BZW, taking the gamble that it could thrive as a debt-focused house, now he and his team are betting that, with the capital markets in disarray and investment banking revenues at their lowest for years, it is the right time to rebuild its equity platform and move seriously into mergers and acquisitions (M&A).
In a conference call discussing the deal, Mr Diamond defended the plan by pointing out that, notwithstanding this disastrous year, the pool of global investment banking and asset management revenues is more than $1000bn. The Lehman deal, he believes, will win Barclays a bigger share of that pool. Mr del Missier agrees, saying that the rebuild will work towards extending the critical mass in equities that the Lehman acquisition brings to its US platform, to Europe and Asia. Moreover, its M&A build-out – already under way with the hiring earlier this year of 47 bankers from ABN AMRO – will continue.
There are big growth opportunities in equities and the financial institution group (FIG) space, says Mr del Missier. “The crisis is not over, but my sense is that we’ve probably seen the worst point. We can see the solutions, and how it will play itself out. Soon investors will begin to get the courage to start picking up cheap equities.”
Moreover, the crisis means that there will be a huge amount of activity in FIG, he says, and he believes that BarCap can more than double the amount of business it is doing in that area. Here, Mr del Missier says that Lehman’s solid FIG business in the US is a perfect complement to BarCap’s European presence: “Banks and other financial institutions will continue capital raising, restructuring and making asset divestitures, so the Lehman acquisition puts our platform in a great position to be able to compete for that business.”
