November 4, 2022

Breakingviews: Credit Suisse puts “first” back into First Boston

by Breakingviews.

First Boston is an old Wall Street name that’s re-emerging from Credit Suisse with some new features. The Swiss bank has revived the brand to carve out its securities underwriting and merger-advisory business under the leadership of board member and former Citigroup rainmaker Michael Klein. It could be messy, but at least it’s creative.

Credit Suisse Chief Executive Ulrich Körner is reshaping the $11 billion group to put some bad years and big losses firmly in the past. By creating CS First Boston and eventually listing it on public markets, he could unlock some value from an advisory firm that doesn’t obviously belong in a global wealth manager. Soliciting cash from third-party investors, and paying bankers in CS First Boston equity, may help hold the team together and conserve capital while Klein and Körner figure out the final destination.

They’re in uncharted territory. There’s no historical precedent for a global lender carving out and listing an investment-banking unit. True, Blackstone spun off its advisory unit into what is now PJT Partners in 2015. But that business has roughly $1 billion of annual revenue, while Körner reckons CS First Boston could churn out two and a half times that sum in a normal year. That would put Klein’s shop in the same ballpark as rivals Evercore and Lazard. Those firms trade on an average multiple of 1.6 times expected revenue for the next 12 months. Valued on the same basis, CS First Boston would be worth $4 billion.

Even then, the comparison is imperfect. Credit Suisse’s investment banking unit has traditionally focused more on underwriting debt offerings than advising on deals, which explains why it will start life with $20 billion of risk-weighted assets on its balance sheet. Over time, Klein and Körner could shift to a leaner model similar to Jefferies Financial, which co-owns a financing company with insurer MassMutual to fund high-yield lending.

In a way, falling between two stools is the point. Körner hopes to create something that’s bigger and more global than an advisory boutique, but small and nimble enough to steal tasty bits of business from larger outfits like JPMorgan, Morgan Stanley and Goldman Sachs. Few Wall Street bosses dream of being number six or seven in the league tables; Klein might be an exception.

Where things get fuzzier is how a re-animated CS First Boston will interact with its parent. Global banks argue that having wealth management, trading and banking under one roof helps to strengthen all three businesses. Think of David Solomon’s “One Goldman Sachs” mantra, or the fact that Morgan Stanley looks after Elon Musk’s money while also advising on and funding the billionaire’s Twitter takeover. In theory, a lender can manage a wealthy entrepreneur’s fortune, advise on any corporate tie-ups and help them raise money on capital markets. The risk is that, by separating CS First Boston from the rest of the bank, Körner and Klein lose those benefits.

Their proposed solution is to bridge the gap with financial innovation. Credit Suisse is setting up joint ventures between CS First Boston and the parent’s trading and wealth management businesses, according to a person familiar with the matter. These are essentially revenue-sharing agreements for common products and clients. The idea is that private bankers and M&A advisers, for example, have an incentive to team up on pitches for new business, since both sides would get a cut of any fees. The joint ventures could survive even if CS First Boston is eventually set free from the mothership.

That ought to partly smooth the separation. Still, working out exactly how to split revenue will be tricky. An added complication is that CS First Boston bankers could be getting paid in their own division’s stock, rather than Credit Suisse shares. They might just decide to focus on deals where they pocket all the fees, rather than trying to navigate clunky revenue-sharing arrangements.

Joint ventures between financial firms rarely work. One of the few successful examples was JPMorgan’s partnership with UK brokerage Cazenove. That, however, involved pooling the resources of two separate firms, and was effectively the first step in a takeover by the American bank.

Other unresolved issues include the new firm’s leadership. Credit Suisse expects Klein to start as CS First Boston’s chief executive next year. But divisional bosses currently report to investment bank chief David Miller, whose title will be “global head” according to a person familiar with the matter. The division of responsibilities between the two is uncertain. CS First Boston may have to negotiate a takeover of Klein’s eponymous boutique advisory firm before he formally starts, the Financial Times reported. That gives the former Citigroup rainmaker a strong hand to negotiate a chunky slice of CS First Boston equity.

For all its new tricks, CS First Boston has one eye on the past – albeit not its own. The new firm’s leadership’s sees Goldman, which went public in 1999, as an aspirational template. Its assets have quintupled since then, to $1.6 trillion. The reasons that Goldman gave for going public almost 23 years ago – raising capital to grow, sharing ownership among employees, and creating a publicly-traded currency to make acquisitions – could apply to First Boston too. True, Goldman Sachs was stepping down from the clouds, whereas Credit Suisse is climbing out of a hole. Whatever happens next, though, First Boston is embarking on a series of firsts.

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