The Campaign for Sustained Leadership

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Where does that leave the industry? "Individual firms will be in lines of business which will at times require high scale and at other times small scale to be reactive [to competition]," Santomero says. "Essentially, one size doesn't fit all. The question every organization has to ask itself is this: What are my core competencies and how do I leverage them in an effective way?"

Finance professor Richard Herring says financial services consolidation is driven in large measure by the expanding needs of the clients the industry serves. "Bigger clients need bigger financial-services firms," Herring says. "If you are an investment bank that wants to offer services to other industries in a meaningful way, you have to have a bigger balance sheet. You have to have enough capital to take the underwriting risk when you underwrite securities for very large firms. Some of these mergers are also aimed at distribution capacity, the ability to deal securities worldwide; the riskier the underwriting, the riskier the distribution."

Garrett Moran, WG'82, vice chairman of DLJ's Banking Group, says the combined CSFB and DLJ entity brings together the complementary strengths of two very different firms.

DLJ brought to the table a large merchant banking business, a successful telecommunications practice, strong high-yield and private-equity businesses, a broad presence with middle-market clients, the DLJ Direct brokerage operation and 500 brokers, says Moran, who plans to begin a six-month leave of absence in March. For its part, CSFB contributed a top-rated technology practice, headed by Quattrone, robust M&A and equity research capabilities, a larger balance sheet than DLJ's, large corporate clients and an international footprint.

According to Institutional Investor Magazine, the combined company last fall ranked first in U.S. equity research, first in high-yield research and underwriting, third in global M&A, third in primary debt issuance and fourth in primary equity issuance.

"It's more and more useful to have a global brand," Moran says. "You might be the best at a certain kind of execution. For example, we are the top high-yield-bond underwriting firm in the world. Now, when the high-yield market begins to open up in Asia, it will be easier for us to build our position there. Brand has advantages."

The Talent Factor

Alumni and faculty agree that cultural issues are important in ensuring that consolidation works.

"When you buy into an investment bank, you're buying people," says finance professor Richard Marston, director of the George Weiss Center for International Financial Research. "If you can't retain the key players, you're not going to have a successful acquisition. That's true of Deutsche Bank buying Bankers Trust or UBS buying PaineWebber. PaineWebber consists of talented people in the investment area. If they were to lose a good portion of those people in this acquisition, UBS would end up with a hollow shell. UBS is aware of that and it is structuring reward to PaineWebber people who stick around."

To illustrate this point, Marston points to General Electric Chairman Jack Welch's decision to call on Geoffrey Boisi, WG'71, to provide advice on GE's bid to acquire Honeywell in October. Boisi, a former partner at Goldman Sachs, left Goldman years before to form his own boutique, the Beacon Group. Chase bought Beacon in July 2000 for a reported $450 million. And Boisi, who is head of investment banking at Chase and will be co-chief executive of investment banking at the combined company, soon began playing a pivotal role not only in guiding the acquisition of J.P. Morgan, but in advising Welch.

"When corporate executives are looking for financial advice, what they really want is a bright individual," says Marston. "They're not always looking for the largest organization. Welch called upon Geoff. He wasn't calling upon an institution but an individual to give him advice. Geoff would have been called upon even if he were with the firm prior to Chase. In investment banking deals, many times the institution helps tremendously, and the resources of a J.P. Morgan Chase will be enormous. It was a coup to attract [Boisi] to the firm. But when push comes to shove, the key players have to be good in their own right, which is why Jack Welch called on him."

Hurst of Goldman Sachs says, "Three things have made a difference in deals that have worked. First, move quickly in terms of the integration. Second, remove uncertainty with regards to people. Third, be very focused on the areas that are strategic and build those up, and prune or divest the non-critical businesses."

Of the three big mergers in 2000, the one that was "easiest to justify in terms of synergy" was UBS's acquisition of PaineWebber, Herring says. "PaineWebber has a wonderful high-net-worth client list and UBS is the preeminent provider of private-banking services worldwide."

In the case of Chase and J.P. Morgan, "success will depend on whether executives can keep the best people," Marston says. "I believe Chase, with the success it has had in the past with mergers, will be careful to keep the best of these organizations. But it's going to be a difficult task, and it will take a lot of time to make the merger successful because there's an awful lot of overlap."

One threat to any successful consolidation is differences in compensation, particularly if commercial banks are acquiring investment banks, says management professor Harbir Singh, who studies mergers and acquisitions. For instance, if bankers at one company know that people in the firm being acquired are earning a lot more than they are, management may find employees bolting for the exits or, if they stay, feeling resentful.

"In the best-case scenario, the acquired firm sees the acquiring firm as having access to customers in international markets, some cross-selling opportunities and maybe depth in financing," Singh says. "But the negative is all the other excess baggage. The acquiring banks often are not used to living that high, so there's a culture clash."

In the "war for talent," Moran says, "people can be over-paid because firms feel they have to over-pay to get people. It's hard to do lateral hires from competitors. Every time you hire someone, you pay a ridiculous figure. You tend to attract the most mercenary people and end up disenfranchising the most loyal people in your organization. Consolidations will succeed only if they are places where people like to work."

"The most important thing to get right," says Quattrone, "is the culture."

It is also true, says S&P's Azarch, that "in investment banking where your assets are your people, you don't do hostile mergers. It would be suicidal."

Size is another hurdle to be overcome by merging firms. "Size offers as many challenges as advantages," says Dave Pottruck, WG'72, President and Co-CEO of Charles Schwab, which last June completed its merger with U.S. Trust. Over the past several years, Schwab has also acquired online and discount brokerages in Canada, Australia and the United Kingdom and has bought a 401(k) administrative firm which now has over $35 billion in client assets. "None of those deals involved layoffs," Pottruck says. "We now have 25,000 people in our company; only two years ago we had 11,000. We are struggling to recruit the kinds of people we need but not dilute our culture."