Stephen Brisby was in Hong Kong just before Chinese New Year to restore morale among his battered Asian troops, after SG downsized its staff by 150 and closed three offices around the region. It slashed its equity research team by 60% and many wonder whether SG will exit the equities business just as Indosuez WI Carr did recently. Brisby, an urbane Englishman, is the global co-head of investment banking and formerly held the rank of vice-chairman at UBS. Best described as unflappable, in this interview he said this was not the first time he'd spoken to a journalist that wrote off SG's strategy. Here he explains exactly what his plans for Asia are:

You've been through a major downsizing and have reduced staff in your Asian equities business. Are you still committed to equities in Asia?

Yes. The process we have been through is part of an overall strategic look we've taken at the whole investment banking business. We've done this in the light of the considerable reductions in business volumes. We took a prognosis of 2002 and 2003 and we've taken a conservative view of what this year will bring. Our view is that we can't expect much better than last year, although the second half of the year may see a pick up in volumes, and we may see more convertible bond issuance.

Intra-regional M&A will continue although I think people are holding fire on inward and direct investments into Asia. However, many things are becoming cheap and I would expect M&A volumes to pick up.

We've taken the view at the highest level of the bank that we can't be absent from Asia. Although we've closed a few countries such as the Philippines, Indonesia and Malaysia, we continue to cover stocks that matter from these three countries from a sector point of view. Our market focus is on Hong Kong, China, Singapore, Taiwan, Thailand and Korea.

We've taken a view that we have to be broadly present in Asia as part of our overall service to clients. We also take the view that if client service is just restricted to the lending business, it will not provide value-added earnings flows. For that you need to be in the equities business, the research product, the M&A business. We've concluded that the economic growth prospects of this region are good. It's a foolish man that discounts what's going to happen in North Asia over the next few years. We have sufficient strengths in structured finance and derivatives to have an important business in Asia. On the investment banking side, we have a number of very strong points, such as our strong research ranking, good corporate relationships, and good, if small, M&A execution team. We also have world class capacities in derivatives and equity-linked products. This gives us a base from which to have a viable business.

We have streamlined our operations so as to be able to exist with low levels of market activity and to be positioned for when the markets pick up.

We didn't want to think about the strategy every six months. This is a positioning that can last us well into the future.

You have cut your research back dramatically, from having a comprehensive team to only 30 odd people. Surely this creates a terrible loss of morale and will mean headhunters will pick off the best people?

First of all, we take a view that sectoral research is increasingly what institutions want. So the concept of a broad pan-Asian coverage is less and less what they want. America started off this chain of events, Europe followed and now Asia. Institutional demand has driven us to sectoral research. Asia may be less homogeneous, but increasingly institutions want a sectoral approach.

So we think there's a logic to our move. We've chosen a few sectors that cover a significant percentage of the liquid capitalization that institutions want to buy.

If that is a viable strategy, and we believe it is, the question then becomes how credible can you be with the resources you have. We think we have the resources to cover those sectors well. It's fundamental, quantitative research. As to morale, it's an interesting question. I've had to reorganise in down cycles before - I've been in this business for 30 years. There is always a destabilizing effect when you make cuts. But on the other side, people believe they can make more money because the break-even point of the business has been driven down. And on the basis that you're left with your best, and if they buy-into the strategy, they see more potential to make money.

Are the headhunters sniffing around? Frankly, good people always have the headhunters sniffing around them, and we no doubt have a period when we will be more fragile than we otherwise would be. But we get a real consensual buy-in to the new strategy. I get the sense people are encouraged because we've taken actions with the view to stay in that business in Asia.

People must sit here looking at the WI Carr experience and wonder if this is not death by a thousand cuts.

Some people might say that. Competitors would say that.

Here in Asia your strengths have been project finance, securitization, and equity derivatives. Do you need the broking business? Is it essential.

It is essential. We are servicing a core group of clients, and in servicing that community we want to be a strategic partner of theirs and in dialogue with them from the board level down. You cannot have that strategic dialogue with corporates if you don't address their equity needs.

 

Being perfectly frank, you didn't do any M&A deals in Asia last year.

We did mainly private deals and it was a slow year for M&A. Quite a number of our transactions from last year carried over to this year and will close in 2002. I take some optimism from our pipeline. It is much better than it was this time last year.

Asia didn't have a bad year in the M&A context.

Well, it's a new business for us in Asia. There's no question about it. The team was only really put together last year, so it's early days. This year promises to be three or four times better.

I didn't even know you were in the M&A business. Are you saying you are serious about being in the Asian M&A business?

Selectively, yes. We wouldn't expect to be very active outside our sectors of choice: utilities, media & telecom and technology.

But they're the same sectors that everyone else is involved in?

They are, but we will do more mid-market business than some of the big houses. We are not counting on doing the multi-billion cross-border deals.

You are talking of deals of less than $100 million?

We will do deals of less than $100 million. We prefer to do deals of several hundred million.

Other firms, such as the old Jardine Fleming, exited mid-market M&A because they couldn't make any money. Maybe they had too big a cost base.

And you?

We now have M&A and ECM execution teams and sector teams in utilities, telecoms and media and tech. The number of people overall is about 30.

Do we think we are going to be in the top five M&A houses in Asia? No. That's not the strategy. The strategy is to have a good overall return on equity in our Asian business. We will make measured progress. You will see us doing transactions this year.

We are targeting more intra-Asian business and have been active in Thailand and Singapore - indeed probably more active in Southeast Asia than North Asia. That's an area where we can add value.

But ironically, the markets where M&A that fits that description will happen is not Korea or Hong Kong. Its Indonesia, Malaysia and the Philippines - the markets you've closed down.

For us, it has been Singapore, Thailand and Taiwan.

For us, the strategy is one of integration to provide customer service. We do find that by being a trusted banker, and provider of balance sheet, we do get opportunities as we bring added value ideas and can demonstrate a knowledge of their sectors. Sometimes it is project finance-linked.

In our M&A business we have done work for European, primarily French names, that have thought about making acquisitions in Asia. However, the flow to date has not been very strong.

But to reiterate, the core market for these mid-market deals are countries like Malaysia and Thailand.

Obviously, in Southeast Asia we are concentrating on Singapore and Thailand, but we haven't excluded the possibility of taking a client into another territory just because we've closed an office there. We still have relationships there. It's just not the primary focus.

 

But you need to be covering them with research surely?

Yes, however we are taking a more sectoral approach and we think there will be opportunities in technology and biotechnology - which we've built up on the research side.

We also think our ability to take Asian names onto the Nasdaq is as good as most.

It's all about choices really, and seeing an overall, satisfactory bottom line, and not having unrealistic expectations.

A less charitable view might be that this strategy falls between two stools. On the research side, if you want to get votes from fund managers, it will challenging to get those from a smaller research base, surely? The centralized dealing desk at those funds then won't channel much flow your way.

That's not necessarily the feedback we're getting from institutions. We're obviously talking to them a lot and the feedback we're getting is that they are looking to us for excellence in the things we've chosen - which is largely where we've been getting our rankings anyway.

Some votes will go for composite pan-Asian macro and micro-economic research, but the tendency now is to give less votes for that and more for value added service, and in depth research.

You can look at this in a global sense. If you take your arguments to their logical conclusion, there will only be about five houses left and everyone else should just give up. I don't think that's the way the world is going. There is clearly a concentration for certain types of business among the bulge bracket. But nevertheless, in just the same way there's always been room for a Fox Pitt, Kelton in financial services, there is room for people that provide excellence in certain fields.

We've set out to be a European tier one player.

But if we accept the world tends to follow America, you could say there are just five to six key investment banking firms in the US. Surely we will move towards this endgame globally?

There are some big question marks. The credit angle and the ability to lend are important. That raises as many questions about US investment banks as it does about us. If you take a five year view, I am sure there will be more marriages. But I don't get the sense walking around Europe that the corporate community wants just five names, and five American ones at that.

And these things move in cycles. If you have only five firms, you're bound to have conflicts. Look what happens in the accounting world, where there are only four big firms.

And these big firms run cost bases that make them unhappy about dealing with the middle market. And in Asia, the middle market is very vibrant. It is profitable, interesting and tends to be below the radar screens of the bulge bracket.

So, in conclusion, you're focused on the middle market?

Yes, although how you define the middle market can be quite broad. But we have chosen sectors that are relevant to France and French corporates, and ones where we have a track record, and where the balance sheet can be leveraged and importantly, where there is a vibrant middle market.

To conclude, we want to be able to service our French clients in Asia, and also have an opportunity to take advantage of the potential for explosive growth over the next few years of the North Asian business.