Bye Bye 'First Boston'

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Bye Bye 'First Boston'

 
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Credit Suisse, Failing to Match First Boston Legacy, Dumps Name

Jan. 13 (Bloomberg) -- When Credit Suisse Group, Switzerland's second-biggest bank, drops the 74-year-old name First Boston from its investment banking unit on Jan. 16, it will be a tough transition for some of the firm's New York employees.

``First Boston'' is how half a dozen traders and salespeople at the investment bank's New York offices answered their phones when called in the week before Christmas. Credit Suisse wasn't even mentioned.

Dumping the First Boston brand is the most public sign of Credit Suisse's plan to reverse the investment bank's slide in rankings and improve profitability, which lags behind that of Morgan Stanley, Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. By removing barriers between the unit and the rest of the bank, Zurich-based Credit Suisse plans to add 1 billion Swiss francs ($778 million) to earnings starting in 2008.

``The First Boston brand has a lot of history and it's a great name,'' says Brady Dougan, 46, chief executive officer of Credit Suisse First Boston, the investment banking division. ``Going to one name is going to help us to run a very integrated business.''

The move is proof the First Boston name has been tarnished by poor performance, says Samuel Hayes, a professor emeritus of investment banking at Harvard Business School.

``The fact that they feel able to drop it means it has lost its luster,'' Hayes says. ``It's much diminished in stature, in how clients would see the firm as a potential vendor.''

First Boston is just the latest Wall Street name to be discarded by a corporate parent, joining the likes of Salomon Brothers and PaineWebber. The trend suggests that the value of storied brands has diminished, says Dieter Buchholz, who helps manage about 3 billion francs in assets at BNP Paribas Private Bank in Zurich.

Wall Street Blue-Bloods

``At one point in time there were three houses that were seen as the blue-blood: Morgan Stanley, Goldman Sachs and First Boston,'' Buchholz says. ``Goldman maybe is still there.''

CSFB has lost ground in some areas to its peers in recent years. The investment bank dropped to 10th in advising on mergers and acquisitions globally last year, from third in 2002.

``M&A has historically been part of the DNA of this place, and we clearly would like to be a top-five player,'' Dougan says. ``We're planning to grow the business.''

In underwriting U.S. high-yield debt, the bank fell to No. 4, with a 10.6 percent market share, last year, as competition in the junk bond market heated up and the volume of deals fell 27 percent, according to Bloomberg data. Citigroup Inc. was No. 3, also with 10.6 percent of the market.

Dougan says revenue from leveraged finance, which includes loans as well as junk bonds, increased.

Dougan's Strategy

CSFB has staged a comeback in arranging initial public offerings under Dougan. The bank jumped to No. 1 in IPOs in 2005 from No. 6 in 2004, beating Goldman Sachs, Morgan Stanley and Citigroup for the first time in five years. Even so, it ranks seventh globally in underwriting all equity offerings, which includes both IPOS and secondary share sales, according to data compiled by Bloomberg.

``We felt where we could add value and where we could compete better than anybody was on the IPO side,'' Dougan says. ``We said we would be focused on high-margin businesses, and this led to a greater concentration on IPOs.''

By focusing on more profitable businesses such as leveraged finance, mortgage-backed securities and IPOs, Dougan plans to increase profit from investment banking to 3 billion francs next year. He's got a long way to go. In the first nine months of last year, the unit earned 744 million francs. Earnings peaked in 2000, when CSFB posted profit of 2.4 billion francs.

``We're absolutely on track to meet our target,'' he says.

Shares Surge

Dougan has a history of setting ambitious targets. In 1996, he took over CSFB's equities unit and pledged to increase pretax profit before bonuses to $1 billion by 2000 from $150 million in 1995. He reached his goal in 1999, a year ahead of schedule.

Credit Suisse shares have surged 55 percent to 73.30 francs over the past 12 months, as investors backed the company's shakeup. In contrast, the 78-member Bloomberg Europe Banks and Financial Services Index gained 27 percent over the same period.

Dougan's ability to deliver may depend on his success in controlling costs.

Operating expenses in the first three quarters of 2005 were 90 percent of net revenue, compared with 69 percent at Goldman Sachs, according to Credit Suisse reports. Its pretax margin, a measure of how much of the company's revenue translates into profit before tax, was 14 percentage points lower than the average for a group of seven competitors, including Goldman and Lehman, Dougan told investors on Dec. 7. That gap has narrowed from 19 percentage points in 2003, he said.

Controlling Costs

Integrating CSFB with Credit Suisse will reduce expenses by combining computer systems and purchasing, helping the bank negotiate better deals with suppliers, Dougan says.

Combining three units under one bank should create opportunities for Credit Suisse's private banking and asset management businesses to do more securities trades and foreign exchange transactions with the investment bank, as long as prices and services are competitive, says Michael Philipp, Credit Suisse's chief executive for Europe, Middle East and Africa.

``I would expect an increase in internal business as a result of one bank,'' Philipp says.

Dougan is also focusing on getting bankers to direct IPO clients to the private bank and help the asset management business win pension fund mandates from corporations.

Breaking down the wall between investment banking and other parts of Credit Suisse is a necessary first step to improving profit, says Andreas Venditti, who worked at Credit Suisse's private bank from 1999 to 2004.

``We just didn't work together,'' says Venditti, now an analyst at Zuercher Kantonalbank in Zurich. ``With the steps they've taken, the synergies might happen.''

Famous Names

First Boston joins a string of historic Wall Street names that have disappeared in the past two decades.

Kuhn, Loeb & Co., which helped finance U.S. railroads in the 19th century, was absorbed into the company that is now Lehman Brothers in 1977, and the name disappeared seven years later.

New York-based Citigroup, the world's biggest bank by assets, abandoned the Salomon Brothers name in April 2003, combining its investment banking units under the Citigroup name.

Swiss Bank Corp., which merged with Union Bank of Switzerland to form UBS AG in 1998, bought SG Warburg in 1995, Dillon, Read & Co. in 1997 and broker PaineWebber in 2000. By 2003, it had dropped all three brands.

It is possible for a name to stage a comeback. UBS is reviving the Dillon Read brand for its new hedge fund unit, which will be known as Dillon Read Capital Management.

Final Chapter

Dropping the First Boston name is the final act in Credit Suisse's ownership of what was once called First Boston Corp.

``Once upon a time, First Boston in New York was considered by many to be one of the finest firms in the business, and it's a pity that it's gone,'' says G. Moffett Cochran, 55, founder and chief executive officer of Silvercrest Asset Management Group in New York, which manages $6.5 billion. Cochran ran Credit Suisse Asset Management until July 2001.

The company was created in 1932 as the investment banking arm of First National Bank of Boston. It became an independent firm after passage of the Glass-Steagall Act, which required commercial banks to divest securities businesses in the wake of the 1929 stock market crash.

Credit Suisse acquired a piece of First Boston in 1978, when the companies exchanged stakes in each other.

Controlling Stake

First Boston sat at the top of merger league tables in the 1980s, thanks to a team led by Bruce Wasserstein and Joseph Perella. By 1987, investment banking contributed half of First Boston's profit and Wasserstein asked the management committee to divert resources to his unit from bond trading. After being rebuffed, Wasserstein and Perella quit and set up their own firm.

Credit Suisse bailed out First Boston after the junk bond market collapsed in 1989 and acquired a controlling stake the following year after putting $300 million into the company. In 1996, fixed-income chief Bob Diamond, 54, now president of London-based Barclays Plc, led a group of bond traders who walked out of CSFB after a dispute over bonuses.

Throughout the 1990s, Credit Suisse was at the cutting edge of derivatives -- securities whose value is based on a stock, index or bond -- after Allen Wheat joined from Bankers Trust with a team of 20, including Dougan. He set up a derivatives unit called Credit Suisse Financial Products, which in 1997 accounted for 16 percent of the investment bank's revenue.

The next year, the bank lost $1.3 billion after Russia defaulted and the value of its currency plummeted. In 1999, CSFB absorbed Wheat's team.

Culture Clash

CSFB reported two years of losses after it spent $13 billion to buy Donaldson Lufkin & Jenrette Inc. in 2000 as stock markets were peaking. The deal led to a culture clash that triggered the departures of key bankers.

``The type of person who joined DLJ wouldn't necessarily want to work for a larger investment bank,'' says Andrew Lowenthal, London-based head of financial services recruiting at Egon Zehnder International. ``DLJ was small, nimble and entrepreneurial, while CSFB was more structured and institutional.''

It didn't take long for DLJ veterans to feel uncomfortable. Herald ``Hal'' Ritch, the co-head of M&A who had worked at DLJ for 10 years, walked out a week after Credit Suisse completed the purchase. He was followed less than a month later by investment banking co-head Kenneth Moelis, 47, who joined Zurich-based UBS.

``There were both business model and cultural reasons why I thought the merger integration was going to be difficult,'' Ritch, 54, recalls. He is now co-CEO of Sagent Advisors Inc. in New York.

Guaranteed Contracts

When other key employees, including the high-yield team headed by Bennett Goodman, flirted with rivals, then-CSFB CEO Wheat handed them three-year guaranteed contracts, swelling costs and triggering similar demands from other bankers. Goodman, now 48, left CSFB in 2004.

After the collapse in technology shares in 2001, Credit Suisse replaced Wheat with John Mack, who was charged with turning around the investment bank. Mack fired 10,000 employees, or one-third of CSFB's workforce.

Also in 2001, the U.S. Securities and Exchange Commission and the Justice Department began investigating how CSFB allocated IPOs of technology companies.

The probe led to the conviction of Frank Quattrone, CSFB's top technology banker from 1998 to 2003. Quattrone was sentenced to 18 months in prison in May 2004, when a jury in Manhattan federal court found him guilty of urging employees to destroy documents after he learned about the investigation.

Boardroom Coup

In a boardroom coup that year, Credit Suisse decided not to renew Mack's contract after he had pushed for Credit Suisse to merge with another bank or sell CSFB. The board promoted Dougan to the top job at the investment bank in June 2004.

Amid the turmoil, Credit Suisse was losing proprietary traders who left to set up hedge funds, loosely regulated investment pools that typically attract clients with more than $1 million in assets. Alan Howard, who as head of proprietary interest rate trading brought in as much as $500 million in 2001, quit in 2002.

In December 2004, the bank combined equity and fixed-income proprietary trading under Bob Jain, who has since increased headcount by 20 percent.

Overall, the bank is still taking on less risk than its rivals. CSFB bet an average of 63 million francs a day in the market in the third quarter, down from 66 million francs a day in the same period a year earlier, according to company reports. In contrast, Goldman Sachs wagered an average of $107 million (137 million francs) each day.

Trading Risk

``They need to increase risk and leverage in areas like proprietary trading,'' says Jacques-Antoine Demaurex, a fund manager at Banque Bonhote & Cie. in Neuchatel, Switzerland, which oversees about $1.1 billion, including Credit Suisse shares.

Dougan says Credit Suisse plans to limit the share of earnings it makes from trading.

``I'm not sure we will ever run as big a proportion of risk as our competitors because we think it affects the quality of our earnings,'' he says. ``We think we can run more risk, but we're going to remain disciplined.''

Dougan says Credit Suisse is taking steps to expand its derivatives business by helping corporate clients hedge risk. Today, Credit Suisse ranks No. 4 in derivatives, behind UBS, New York-based JPMorgan Chase & Co. and Frankfurt-based Deutsche Bank AG, according to a 2005 survey of dealers and brokers by Risk magazine, a credit industry monthly.

``This is an area where we should really dominate,'' Dougan says. ``There's probably more derivatives talent here than anywhere else on Wall Street.''

It's Pronounced `Swiss'

Credit Suisse is working to make sure its U.S. traders break the habit of using the First Boston brand, according to a memo obtained by Bloomberg News.

On Jan. 5, investment bank employees received a 584-word note telling them how to prepare for the name change. Among the 11 steps were instructions on how to update voicemail recordings.

``Record an alternative voicemail greeting to remove references to CSFB and replace them with Credit Suisse (pronounced `Credit Swiss'),'' the memo said. ``Do not activate the greeting until January 16.''



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