When Credit Suisse appointed star dealmaker Michael Klein to its board in 2018, some of the firm’s most senior investment bankers were horrified. They did not doubt the skills of the former Citigroup banker, who had worked on some of the biggest-ever M&A transactions. But they were aghast that a rival would be invited to oversee their business.
Their complaints fell on deaf ears. And for those who remain four years later, a twist: Klein is their new boss.
This is part of a desperate roll of the dice by Credit Suisse, which has been ground down by a series of scandals, tempestuous leadership departures and dire financial performance.
In a radical restructuring announced last week, the Swiss lender plans to spin off its investment bank at the worst point in the economic cycle — and hand control of it to Klein. Over time, Credit Suisse is expected to sell down its stake and outside investors will come in.
Credit Suisse chair Axel Lehmann reassured investors that the board was “very very mindful of conflicts of interest” when it chose to appoint one of its own members to run the new standalone advisory and corporate finance firm, renamed CS First Boston.
Klein had to “abstain from any voting” and was “only allowed to potentially contribute from a more technical perspective helping to create the fact base for decision-making; this is all really well documented and we took really care of that”.
Phew. Yet not only will Klein run the new firm, he is also set to “merge” it with his own small boutique and receive a chunk of equity.
In his work outside Credit Suisse, Klein has been riding the Spac wave, taking free shares in a cash shell in return for finding an acquisition target for outside investors. It is a horrible structure that has now flamed out. Apart from one — CS First Boston is effectively Klein’s last Spac.
This is all quite unusual. Those who want to find a previous point to 2014 when Blackstone spun off its advisory business and merged it with the boutique firm of another star dealmaker, Paul Taubman. Taubman was granted a large slug of shadow equity valued at almost $100mn, equivalent to a fifth of the outstanding stock.
Anything of that size would be astonishing at Credit Suisse, however, whatever the conclusion of a “fairness opinion” that is due to be delivered by Deutsche Bank. CS First Boston is predicted to have standalone revenues of about $2.5bn, six times those of the Blackstone unit.
The other unanswered question for CS First Boston is whether independence from Switzerland removes a deadweight — or a safety net. Credit Suisse believes it is a Goldilocks formula: “more global and broader than boutiques, but more focused than bulge bracket players”.
The pessimistic view is that it will be too lumbering to compete with the agile boutiques but too small to face off against the likes of JPMorgan with their vast balance sheets.
The only close analog is Jefferies, which does boast a $55bn balance sheet, although it has to rent it from insurer MassMutual and other outside financiers. At times of trouble, a balance sheet without the security of bank deposits can look precarious. In the eurozone crisis in 2012, Jefferies was forced to sell itself to a meatpacking concern.
But Credit Suisse bankers are not worrying about that today. Taubman’s PJT Partners today has a $1.9bn market value, with shares liberally sprinkled among the bankers. Other rainmakers that struck out on their own have built bigger firms, too. Moelis is at $2.8bn, Evercore at $4.2bn.
Compare that with Credit Suisse, a global bank with $700bn of assets that employs 52,000 people and has a market cap of only $11bn. It also has a disapproving attitude to the pay demands of “Anglo-Saxon” investment bankers.
Freed from Swiss sensitivities, the New York-based team will be able to pay themselves at what they consider an appropriate level: 50 to 60 per cent of revenues. This, in their view, is the real Goldilocks formula: just the right amount.
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