JP Morgan needs creative thinking to fold in Caz - UKCIG

The US bank is nearing a deal to buy out its UKCIG investment banking partner from their 50-50 joint venture hatched five years ago. But the mooted £1bn price tag – 10 times more than JPMorgan’s initial £100m investment – is far from cheap. Before JP Morgan signs, it needs to be clear it can grow the business while preserving the best aspects of the status quo.

Cazenove’s 1,500 shareholders have more than just a looming UK tax hike as a reason to sell now. The firm’s bumper year in equity issuance provides a strong incentive. Cazenove’s share of the joint venture generated earnings of about £48.5m in 2008. Assume a 50pc uplift this year and JP Morgan would be paying 13 times current-year earnings at the £998m price tag – a rich multiple for any investment bank.

The conventional way to make a pricey deal pay off is to rip out overlapping people and infrastructure. But this is no conventional deal. The joint venture has been a success in large part because Cazenove was able to retain its independent culture. Moreover, duplication is limited. JP Morgan effectively outsourced its UKCIG investment banking business to the JV. The main duplications are in cash equities, which was never integrated because Cazenove’s margins were so much higher.

JP Morgan will need to proceed carefully - as it has done throughout the history of the joint venture. There will be temptation simply to move the best bankers over and shut down the existing Cazenove operation. But killing the Cazenove culture could cut more profit than cost. Equity trading clients might defect, mourning the loss of an independent broker. Cazenove’s corporate broking business is another sensitive subject. It relies on trusted relationships. If customers feel like they are dealing with just another a bulge-bracket firm hell-bent on cross-selling, the franchise will quickly erode.

There are ways to integrate Cazenove at arm’s length. Rather than bring the equities business into the fold, it may be better to let it rent JP Morgan’s technology and expertise in areas such as algorithmic trading. And Cazenove could retain a separate office. Whatever the answers, JP Morgan needs to think imaginatively. Perhaps the journey need not end just yet.

UKCIG Investment News, November 2009