Chase Spending Big to Push Investment Banking Ambitions

The latest move nets the financial services giant former Goldman exec Geoffrey Boisi.
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Chase's (CMB) willingness to throw big money behind its often volatile capital markets businesses was underlined Wednesday, when the bank said it was buying the Beacon Group, a small New York-based investment banking shop, and making its chief executive, Geoffrey Boisi, head of investment banking at Chase.

Boisi displaces the current investment banking chief, Jimmy Lee, a proven rainmaker who has turned Chase into the dominant force in global debt markets.

According to analysts and investors, Boisi's job is to unite Chase's fast-growing investment banking operations into an effective whole. The bank bought

Hambrecht & Quist

in September last year, giving it exposure to equities for the first time, and in April it announced the acquisition of the U.K.'s

Robert Fleming

for $7.7 billion. Both firms need to be integrated into Chase's huge private equity, bond and lending operations.

As for Lee, observers expect him to continue to play an important role in the bank, perhaps even leading efforts to make more big acquisitions. Some see Chase next looking at a large e-broker or an old-style brokerage with a big retail base. Such institutions would provide captive demand for the bond and equity issues that Chase hopes its growing cadre of investment bankers will originate.

Money Center

Chase has reportedly paid a large sum -- as much as $500 million -- for the Beacon Group, set up in 1993 by Boisi, a Wall Street veteran who made his name as head of investment banking at

Goldman Sachs

(GS) - Get Report

in the '80s.

Casting doubt on the notion that Lee's shift is the result of a yet-to-be-disclosed slip, the banker will keep a top management position at Chase, remaining on the bank's strategy-setting executive committee, which also includes Boisi, and keeping the title of vice chairman.

Chase stock was down 1 7/16, or 2%, to 71 11/16 at midday, while other large banks, going by the

KBW Bank Index

, were up 1.3%. Chase declined to comment beyond a press release, in which William Harrison, the bank's CEO and chairman, said: "Chase's acquisition of the Beacon Group ... comes at an exciting time in the development of our investment banking business." The Beacon Group didn't comment, either.

No Pasture

"Jimmy Lee is in no way about to go out to pasture," says Mike Holland, president of the

(HOLBX) - Get Report

Holland Balanced fund. "I think it's just the opposite." Holland, whose firm is long Chase shares, says he wouldn't be surprised if Chase has its eyes on a broker.

"This is an opportunity for Lee to focus on some big strategic initiatives in the next year," says Lanny Thorndike, a manager on the

(CENSX)

Century Shares trust, a financial services mutual fund that holds Chase shares. Thorndike would like to see Chase build up its asset management arm.

David Berry, head of research at

Keefe Bruyette & Woods

, also thinks it wrong to count Lee out. He likens the banker's move to a shift made by

Citigroup's

(C) - Get Report

Deryck Maughan, who lost his job as co-chief executive of

Salomon Smith Barney

after

Travelers

merged with

Citicorp

, to form Citigroup in 1998. But Maughan kept his post of vice-chairman in the new Citi, remaining very active with top clients and playing a big part in key strategic decisions, Berry says. "Jimmy Lee may play a similar role at Chase," the analyst adds. (KBW rates Chase a buy and Citi a market perform. It has done underwriting for neither.)

New Thread

Other observers aren't as sanguine about Lee dropping operational responsibility for investment banking. Because he was deeply involved in recent purchases, Lee's shift could "exacerbate the integration risk of H&Q and Flemings," says Mike Mayo, banks analyst at

Credit Suisse First Boston

. (Mayo rates the bank a sell, and his firm hasn't done underwriting.)

Charles Peabody, banks analyst at New York-based

Mitchell Securities

, has long thought Chase overexposed to capital markets, a concern that has looked prescient this quarter as the tumbling

Nasdaq

and higher interest rates are expected to depress earnings. Boisi "will now inherit what Lee created -- both the good and the bad," says Peabody, who rates Chase a sell and whose firm hasn't done underwriting.

However, Boisi is thought by some to be better-suited to the task of sewing Chase's capital markets operations together so that they can more effectively cross-sell products to clients. "He will help bridge the gaps between the debt business, H&Q and Flemings," says Thorndike, who adds that Boisi's M&A skills are something that Chase also lacked.

Big Positive

"Everyone on the Street has been wanting to hire Boisi," says the manager of an East Coast financial services hedge fund that is long Chase shares. "He's about as big as you can get. It's a big positive for the bank." Chase seems to have paid through the nose for Beacon, which Boisi formed with other former Goldman employees. If, as

The Wall Street Journal

reports, Chase paid $450 million to $500 million for Beacon, that works out at around $6 million for each of its 80-or-so professionals. "That's a big price tag," remarks Thorndike.

Boisi, who is scheduled to join Chase July 1, is the latest in a string of well-regarded Wall Street names who have recently joined Chase to spearhead its transformation from a traditional commercial bank into a diversified financial services institution with a strong bent toward the so-called new economy. Berry notes that Neal Garonzik, formerly head of equities at

Morgan Stanley

, joined last year, and Steve Black, previously head of public equities at Salomon Smith Barney, moved to Chase earlier this month.

Chase's CEO Harrison is clearly putting a lot of weight behind Chase's transformation, says Berry. "Bill's impatient. He wants to get things done." In the first quarter, capital markets revenue of $1.7 billion, which excludes private equity gains, accounted for 42% of Chase's noninterest revenue.