UK Starting Business

In the book The Big Bang by William Kay describes the background to the events, the changes they involved and why they were necessary. The book is, however, predominated by an assessment of the prevailing roles of the New British and foreign, particularly American and Japanese investment firms, security houses and merchant banks and expresses scepticism over the future of the British financial institutions.

William Kay describes the ‘pre-Big Bang’ atmosphere as one where merchant bankers welcomed the opportunity to control and use brokers to execute their corporate clients’ strategy.

After a wave of euphoric takeovers where most merchant banks acquired their own stock broking subsidiary, the American investment houses (who had previously been quietly taking away business from the London broking firms) indicated just how seriously they intended to take the British financial services during and after the forthcoming big bang.

The American firms had massive sums on their balance sheets which made even the largest British institutions look small. Just approaching the horizon were the Japanese financial institutions who until now had delayed because of the political arguments about reciprocal treatment for British securities firms in Tokyo; the future for the British firms did not seem pleasant.

Some British firms such as Warburg, one of London’s leading financial institutions, decided that they would adjust their strategic goals to compete with the Americans and Japanese for the business of trading shares in ICI, GEC, British Telecom and other major UK international companies.

The majority of the independent merchant banks, however, were forced to go for specialist niches where the competition would be less severe. These institutions hoped that they could build up a reputation for certain activities such as venture capital, mergers and acquisitions or management buy outs and that the Americans and Japanese would leave them to continue to compete with one another.

The UK Merchant banks faced an unclear future, and possibly the most challenging period in their history. Their most enduring quality was their entrepreneurial ability to adapt in order to survive and prosper.

London’s most powerful stockbroker, Cazenove and Co. which resisted merging with a merchant bank, developed a range of services from corporate finance to fund management this shows the extent to which new strategies were breaking down the old boundaries in their search for success.

They realised that while private investors may prefer to stick with their longstanding contacts, the fund managers or corporate advisers must deal at the cheapest price or give the client or shareholders the reason why not. And all the time there was growing pressure on individuals to try new services that were cheaper and/or more flexible.

The American vision of the way things were going to go in financial services in Britain based on the assumption that the UK customers will want the same as his US equivalent, once he is given the choice. The leading American firms developed an across-the-board range of products covering even the niches which the British conglomerates had hoped were theirs and set about breaking up the British institution’s strong relationship with the companies they invested in. The main selling point centred on convincing these potentially lucrative customers that the old ways had been expensive and inefficient.

The chairman or finance director of one of these companies could all too easily be persuaded that a form of ‘bought deal’ (where the financial institution buy the shares which the company is issuing and distributes them for the company) would make more sense cost wise than an old-fashioned rights issue.

Meanwhile the Japanese securities houses had one or two problems to overcome before feeling at home in London. At a time when salaries in the City were increasing at staggering rates, the Orientals were by far being the most popular employers.

Language was an obvious difficulty, compounded by the Japanese inclination to be somewhat ’stiff’ around the office. But more seriously, the native British staff all too often was told no more than they needed to know for the deal they were working on at that moment, with predictably bad effects on morale.

Some Japanese houses attempted to make themselves more attractive by appointing westerners to senior positions to give other locals a feeling that promotion is possible within the organisation.

Selling themselves to the city’s professional investors had become a top priority for the Japanese. They began by ingratiating themselves with target clients, and had been moving on from the fund managers to industrial companies in search of primary finance, especially those wanting to see their shares traded in Tokyo.

Like the Americans, the Japanese are prepared to play a very long game in London. Profits are not yet the priority. Market share and position is, and the Americans and even more so the Japanese had the deepest pockets.

The ability to mobilize massive amounts of capital was becoming increasingly important. It is the means by which the Japanese, in common with the other big international players, will try to prise corporate clients away from the local investments houses.

KAY W (1986). The Big Bang, George Weidenfeld and Nicolson, London.