The Weight of Tradition

In the City of London, there are at least two doorways worthy of a visit from anyone interested in finance. One belongs to the Bank of England, an elegant, imposing building on Threadneedle Street, where the men who search the bags of visitors still wear traditional pink uniforms. The other fronts an outwardly modest brick townhouse on Moorgate, just a block away from the Bank's headquarters. One

In the City of London, there are at least two doorways worthy of a visit from anyone interested in finance. One belongs to the Bank of England, an elegant, imposing building on Threadneedle Street, where the men who search the bags of visitors still wear traditional pink uniforms. The other fronts an outwardly modest brick townhouse on Moorgate, just a block away from the Bank's headquarters.

One step inside that door, though, and modesty gives way to the finery and chintz of a bygone era. Until only recently, these stately surroundings were home to the bluest of blue-blood U.K. securities firms, Cazenove, broker to the Royals and to powerful businessmen. The classic furnishings were appropriate, for Cazenove is itself something of an antique: old, beautifully crafted and (to potential suitors) very, very expensive. The firm is perhaps the only stockbroker that retains a mystique of power in London. Plenty of rival investment banks are richer, and some brokerage competitors are quicker and more innovative. But none has the weight of Cazenove's sterling reputation and 181 years of business experience.

But nothing lasts forever, even in England. Cazenove has moved its headquarters from the Moorgate building to a more modern edifice, and this action serves as an apt metaphor for the concessions to modernity that the company must now confront.

Class Distinction

In a market of Mercedes and BMWs, Cazenove is a Rolls Royce — a luxury brand, touched by history, sailing above the rest of the market. Historically speaking, there is no understating the scale and reach of Cazenove's influence. The Queen is one of its clients — and the rest of its customers are just as upmarket. The firm is corporate broker to almost half of the companies in Britain's benchmark FTSE-100 index. In Britain, it has reached the position that every broker aspires to: the advisor of choice to the monied elite, with plenty of capital to put into the market.

But after almost two centuries of climbing to the top of business, Cazenove is finding it tough to stay there. Can its old model survive at a time when London is almost completely dominated by giant American and European investment banks? Does it need to reinvent itself completely, or will some select tweaking do the trick?

The evidence suggests that Cazenove itself has been unable to answer these questions. For instance, for two years, Cazenove has been trying to float an IPO on the London stock market as part of a process of bringing to an end the partnership structure that has served it for so many years. After extensive preparations, the planned float had to be postponed in the summer of 2003. Now the IPO is back in play, though persistent and intensifying chatter of a potential sale of the company has kept Cazenove from putting a firm date on the issue.

Indeed, Cazenove's quest for that financing could well be obviated by a merger. It is one of the few plums left in London, and the British papers have reported that Lehman Brothers has opened acquisition talks. Lazard, the privately owned European investment bank now run by the legendary Wall Street dealmaker Bruce Wasserstein, has also been touted as a possible partner, as has UBS.

Though it's seen as a corporate jewel, Cazenove has lost some of its sparkle in recent years. In total, it employs 1,058 people, about half of them brokers. That's a 20 percent reduction in the past three years. In the financial year ending in 2003, it had sales of $378.2 million compared with $541.6 million a year earlier. Its post-tax profit, before special items, came to $19.5 million in 2003, compared with $71 million a year earlier.

Despite these numbers, it can be a very lucrative place to work. In 2002, the total salary bill divided by the number of staff came to between $266,000 and $500,000, but since many of the staff are secretaries and support staff, the average broker could expect to make at least twice that.

So how much might the firm be worth to one of its suitors? Cazenove probably wouldn't sell itself on the basis of 2003's subpar earnings. If you take a normal year, profits are likely to average around $50 million annually. Put that on a multiple of 15 times earnings, and the price would come to around $885 million. Or it could be valued on sales. Singer & Friedlander, another niche broker, trades on the London market at 2.6 times sales. That, again, would value Cazenove at just about $900 million.

Looking Backward

Anyone buying Cazenove would be taking possession of a unique slice of British financial history. The firm dates back to 1823, when it was founded as a general stockbroker in the City of London (the area equivalent to Wall Street).

For the first hundred years, its business remained remarkably unchanged. It traded shares, brokered for companies and advised private clients on their investments. It wasn't until the 1950s that it branched out at all, and then only into fund management.

The mid-1980s proved the decisive span of time in Cazenove's development. Before the so-called big-bang reforms of that decade, London had brokers who bought and sold shares for their clients, jobbers who made markets and merchant bankers who gave advice and lent money.

The problem is that Cazenove's power still rests on its position as a “corporate broker,” a role unique to the City of London. Corporate brokers act as go-betweens, managing relationships between big companies and the financial markets. Securities law in the U.K. requires that every publicly traded company have a corporate broker, who ensures that all the legal requirements of being a quoted business are met.

Peter Burt, the deputy executive chairman of HBOS, and former chief executive of Bank of Scotland, last year praised Cazenove's abilities as an operator saying, “They know exactly what the institutions want. Their selling point is their ability to read the market.”

Trouble is, it's not a terribly profitable niche. Corporate brokers collect fees, but nobody pays big bucks to a message carrier. Many of its bigger rivals give away the corporate brokering service for nothing as a way of establishing a relationship that might lead to more lucrative advisory work.

“Effectively anyone buying Cazenove is buying a client list,” says one rival investment banker. “The issue is how much money can they make out of that list.”

To address the financial realities of this brokerage business, Cazenove has been rapidly turning itself into a niche investment bank, generating corporate advisory work, arranging IPOs and pushing out into fund management.

But Cazenove is a small-potatoes effort, when compared to the likes of Goldman Sachs, Morgan Stanley or Credit Suisse First Boston. Last year it ranked 12th among advisors on European M&A deals, acting on 33 bids worth a total of $29 billion. That compares with Goldman Sachs' 92 deals, worth a total of $120 billion. Further, Cazenove is unlikely to ever get a sniff at the really profitable deals, because it doesn't have the size to cope with them.

The Value of the Black Book

True, the firm has made other efforts to change with the times. Like most financial players, it has made its pitch for the booming hedge fund business. It hired Tim Russell, a hedge fund manager from HSBC, and started up two new funds last March, and another two last October.

But its contacts still lie at the core of its value, experts say. On this account, Cazenove's chairman, Sir David Mayhew, is its most treasured asset. A chain-smoking old-Etonian, Mayhew is famously reclusive, shying away from the limelight. In the late 1980s, he was one of the figures caught up in a stock-price manipulation scandal involving the Guinness brewery. He was arrested but charges were later dropped.

Mayhew bears a heavy responsibility for the fiasco of the aborted IPO. He transformed the company from a partnership in 2001, allocating shares to partners and staff, and also selling a chunk to institutional investors. The plan was to stage the IPO in early 2003.

That episode undoubtedly tarnished the firm's reputation. After all, if a stockbroker can't smoothly arrange its own IPO, it does little to inspire confidence that it can arrange anyone else's.

For all this, though, Mayhew and his contacts are still invaluable assets for the firm. Can he be replaced? He doesn't seem to think so, as there is no sign of a successor being groomed. In 2001, he hired another senior banker, David Verey from Lazard, who was seen as a potential successor. But Verey left the firm in August last year after reportedly falling out with Mayhew. In his place, Cazenove appointed Robert Pickering. Although he is seen as an effective operator, few view him as a replacement for Mayhew. The attention now is focused on whether Pickering can bring the IPO back from the dead — or whether the shareholders will look to sell out.

A sale to Lehman or one of the other big banks — something that appears increasingly likely — would deliver an immediate big profit to the owners, though many market observers believe the firm missed its best opportunity to get maximum value for itself when it sat out the last round of mergers.

If acquired, the firm would likely disappear within a giant financial supermarket. Other historical London names — Warburg, Kleinwort Benson, Hoare Govett — all vanished after they were swallowed up by American or European banks.

The question, in the end, is this: Does that matter? For all its attempts to modernize, Cazenove remains tradition bound. It clings to its image of a public school crossed with a gentleman's club. If the firm doesn't update its business, it is likely headed for a long, slow decline into ignominy. But if it chooses to fully modernize, it will, in a sense, be disappearing anyway. Not much of a choice for a company with such an illustrious past.

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