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September 16, 2003 Changing of the Guard in Investment Banking
Introduction and description of topic Investment Banking conjures thoughts of highly acclaimed banking institutions and multimillion dollar banking fees. While investment banking has long been the playground for old-school investment banks such as Goldman Sachs and Morgan Stanley so called new school universal banks such as Citigroup and JP Morgan Chase & Co., have begun to enter the landscape and steal market share. Will the brawn of the universal banks win out over the brains of the old-school investment banks? My paper will explore this topic while focusing on the struggle for the title of investment banking champion between the prestigious Goldman Sachs and the behemoth Citigroup. In the news In June 2003 Oracle Corporation launched a hostile takeover bid for software maker Peoplesoft Inc. While Peoplesoft Inc was being advised at the time by Citigroup for their own acquisition of JD Edwards, Peoplesoft still chose old-line Goldman Sachs to handle their defense against Oracle. The takeover-defense assignment was estimated to be worth roughly $33 million dollars in fees and clout. Goldman’s win in this scenario bolds well for their ability to compete with the omnipresent Citigroup. Who’s who Citigroup Inc. is a diversified global financial services holding company whose businesses provide a broad range of financial services to consumers and corporate customers with some 200 million-customer accounts in over 100 countries and territories. Citigroup employs 250,000 persons.1 Revenue per employee in 2002 was $360,000.2 Goldman Sachs is a global investment banking, securities and investment management firm that provides a range of services to a substantial and diversified client base that includes corporations, financial institutions, governments and high-net-worth
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Source: http://quote.yahoo.com Bloomberg Markets, October 2003, “Goldman vs Citi”
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September 16, 2003 individuals. Goldman Sachs employs 18,421 persons.1 Revenue per employee in 2002 was $709,000.2 In 2001 Goldman Sachs dominated the investment banking landscape by taking in $3.28 billion in fees. Citigroup finished 2001 in 4th position with $2.94 billion in fees. However in 2002 Citigroup finished 1st in investment banking fees with $2.37 billion (14% of total 2000 investment banking fees) while Goldman Sachs slipped to 4th with $1.95 billion in fees according to Freeman & Co., a Wall Street consulting firm. Freeman defines investment banking fees as fees for IPO’s and secondary equity sales, block trades, convertible security issues, investment-grade and high-yield-debt sales and completed mergers and acquisitions. Citigroup was able to move past Goldman by being more receptive to the borrowing needs of its clients. Citigroup can offer its client a host of services including commercial loans, insurance, credit default swaps, and the highly publicized “off-balance-sheet-financing”, which was used heavily by Enron to underestimate $2.7 billion in debt. While Goldman Sachs can lend money to its clients it does not have a dedicated commercial banking arm. In practice El Paso Corp, the largest owner of U.S. natural gas pipelines, chose Citigroup and Credit Suisse (two universal banks) to do a high-yield-bond-underwriting assignment worth $27.5 million in fees. El Paso Corp chose these banks because they were willing to offer loans when economic difficulties arose. Goldman’s Resolve To combat the all encompassing portfolio of offerings from the universal banks the Goldman Sachs and Morgan Stanley’s of the world have won over clients by developing relationships of trust with top executives. That is the reason why Goldman Sachs was chosen over Citigroup for the largest takeover defense of 2003. “That’s their tradition,” according to Phillip Phan, Bruggeman Professor of Entrepreneurship at Renselaer Polytechnic Institute’s Lally School of Management and Technology.
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Source: http://quote.yahoo.com Bloomberg Markets, October 2003, “Goldman vs Citi”
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September 16, 2003 Citigroup’s Conflict While the offerings of Citigroup are impressive they have run into conflict with regulatory commissions for wearing the hat of lender and mergers advisor as well as securities seller and stock adviser. Citigroup along with other universal banks have paid upwards of $1.4 billion to settle charges of biased research and violations of securities laws. Conclusion In conclusion size alone will not distinguish one investment banking style from another. While the service packed universal banks may be attractive for their one-stop shop appeal the natural security that comes from relationships built on trust, and experience will be enough to keep Goldman Sachs and other old-school investment banking shops alive and in the fight for investment banking fees and market place dominance. Universal Banks: Citigroup Bank of America Credit Suisse Group Deutsche Bank AG JP Morgan Chase & Co. UBS AG Old School Investment Banks: Goldman Sachs Morgan Stanley Lehman Brothers Merrill Lynch Sources: Bloomberg Markets, October 2003, “Goldman Sachs vs Citi”, George Stein Bloomberg Markets, August 2003, “Credit Swaps High Risks Few Rules”, David Evans Quote.Yahoo.Com TheBanker.com, “Goldman Sachs dominates in emerging markets”