BUSINESS WATCH

A rich empire built on secrecy

Peter C. Newman April 28 1986
BUSINESS WATCH

A rich empire built on secrecy

Peter C. Newman April 28 1986

A rich empire built on secrecy

BUSINESS WATCH

Peter C. Newman

In the shuffling and shifting that is transforming London’s financial district, one merchant bank is emerging as the British version of Wall Street’s world-class investment houses. S. G. Warburg & Co. Ltd., which has broken most of the rules that govern the cozy British money fraternity, also happens to be the one U.K. financial institution with deep and expanding ties to Canada.

Founded in 1946 by Sir Siegmund Warburg, who escaped the Nazi persecution of his Hamburg-based banking family, the fledgling but aggressive London offshoot suffered severe initial growing pains. Its hardworking staff was ostracized by a financial community whose members seemed more interested in hunting foxes than in hustling new equities. Warburg earned his reputation for eccentricity by, for example, insisting that potential staff members have their handwriting analysed. It was also said that an imperfect knowledge of the novels of Trollope counted heavily against any banker seeking promotion from Sir Siegmund. His other great penchant was for secrecy. His firm’s annual reports, containing minimum data, are still printed on plain paper, and the large City building that houses the bank has no identifying signs or logo.

What turned Warburg into a major player was Sir Siegmund’s notion that introduction of the 1964 interest equalization tax represented an opportunity to create a new kind of international capital market based in London. He moved ahead of competitors by establishing the firm in what has since become the hyperactive Euromarket— and it is his company that is now leading the pack in becoming a newstyle British merchant bank, poised to take on the biggest and the best of New York or Tokyo.

The deals that will make all this possible were consummated this month when Warburg absorbed ownership of the largest stockjobber in London (Akroyd & Smithers PLC), the Queen’s personal broker (Rowe & Pitman) and one of the main firms involved in the distribution of U.K. government bonds (Mullens & Co.). The ultimate merger will double Warburg’s payroll to more than 2,000 and leave it in command of funds under management of $22.8 billion. Warburg is also the first British house to claim a seat

on the Tokyo Stock Exchange, and the firm’s chairman, David Scholey, is a director of the Bank of England.

The company’s connection with Canada goes back to 1951, when it sponsored a Toronto-based investment vehicle called Triarch Corp., run by a lively and elegant mid-Atlantic character named Tony Griffin. It was the first British house to sponsor a Eurobond issue for a Canadian company (Hydro-Quebec in 1969) and has since

managed more than 200 Canadian borrowings. They have raised an astonishing $29 billion since then—though the Warburg name is hardly known outside the tight-mouthed circle of corporate treasurers. Customers have included six of the 10 Canadian provinces, several Crown corporations and 37 corporate clients, ranging from Calgary’s Trizec Corp. Ltd. and Montreal’s Credit Foncier to Genstar Corp. and the Hudson’s Bay Company. Warburg has also acted as an adviser and fiscal

strategist to such Canadian companies as Sceptre Resources Ltd., Harlequin Enterprises Ltd., Edper Investments Ltd., International Thomson Organisation Ltd. and Consolidated-Bathurst Inc.

Its latest assignment was to act as one of the investment firms advising the Mulroney government on how to privatize The de Havilland Aircraft of Canada Ltd., and it is continuing this function in the ongoing (and soon to be resolved) talks for the sale of Canadair Ltd. and Eldorado Nuclear Ltd.

The most interesting aspect of the firm’s Canadian connection has been its long-term policy of accepting ambitious youngsters for training. At the moment, four young Canadians (David Macdonald, Ted Larkin, William Atkins and Michel Fortier) are employed in its international markets division. Three others (Elspeth Paterson-Smith, Geoffrey Barnard and James Donald) work in the investment management side, and Michael Tory is doing well in corporate finance. “They’re not only excellent young people,” says Peter Darling, one of the four men who run Warburg and himself a Canadian citizen, “but because we do a lot of business with Canada, we felt that when they go back and start rising in the business world, they will be friends of ours.”

Darling is less sanguine about the prospects of the Canadian securities industry. “Canada,” he maintains, “is increasingly inward-looking, and thus increasingly becoming an insular backwater. Let there be no mistake that the consequences of this attitude will be that trading in Canadian securities will gradually pass out of Canadian hands.” The banker is especially upset about Canadian restrictions on foreign ownership of brokerage houses and the fact that pension funds here can only have 10 per cent of their assets in foreign securities.

As to the future of his own company, Darling is determined that no matter how large it grows, Warburg will maintain its unique character. “We will continue to work in unostentatious offices,” he told me. “We will try to be a thinking rather than a mechanical organization and operate as a partnership rather than a hierarchy. While we may become more like Morgan Stanley, we will also be slightly different because we will continue to be a bank, which the Morgan Stanleys and Wood Gundys of the world are not.”