Investment Bank Layoffs Are Kicking In

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Investment Bank Layoffs Are Kicking In

By Scott Anderson 05/01/01 12:00 PM ET

Mass layoffs are rippling through the economy. Durable manufacturing, technology, media, and telecom sectors have borne the brunt of the layoffs. But until recently, investment banks have been conspicuously absent from the layoff roles.

Now, no longer able to ignore the pull back in equity valuations and the severe drop in nearly every line of business from underwriting and brokerage services to trading, investment banks are tentatively laying off. More ominous for the industry and the economy, if business does not turn around swiftly, deeper cuts are on the horizon.

During previous market declines, the investment banking industry has been quick to shed jobs and consolidate operations. Yet during this decline, the industry has been hesitant to pull the trigger on job cuts. The reasons for the change in behavior are many, but here are the key variables influencing the situation.

The industry from 1995 to 2000 went through a period of unprecedented growth and tremendous structural change. Over the past five years, annual profit growth for the industry has averaged 36% and employment growth has averaged 8% annually. As such, the industry has built up a significant war chest in which to weather a brief cyclical downturn in the markets.

The structural changes that have occurred over this period of expansion are also working to insulate the industry from excessive job cuts. The proliferation of domestic and foreign mergers has created global financial services firms with a broader scope of products and services to offer. Not only do such mergers provide more financial stability from market volatility and cyclical declines in business, they also have married investment banks to larger bank holding companies that are more patient and accepting of short-term losses. This has allowed the industry to focus on the longer term, working to maintain and expand market share as well as global reach. These structural changes will be on-going despite a temporary set back in the equity lines of business.

Also, acquirers have paid a hefty premium for a piece of the lucrative U.S. investment banking business, and are not eager to lose the talent they have just paid top dollar for. This, combined with the fact that three of the top nine investment banks in the U.S. are now headquartered overseas, Deutsche Bank, Credit Suisse First Boston, and USB Warburg, means that investment banks are even less willing to cede the assets they have so recently acquired.

In addition, banks have been holding out hope that this market slide would not be a prolonged decline. Goldman Sachs and Merrill Lynch, in particular, hurt their ability to recruit top talent and catch up with competitors after they laid off significant numbers after the bond market problems in the mid-90's and the Russian Crisis in 1998. In both cases, the markets turned around quickly and the firms were caught short handed.

Despite these longer-term trends and bungles of the past, however, the investment banks can no longer ignore the extent of the short-term carnage. First quarter net income fell 28% from a year earlier at Lehman Brothers Holdings Inc., Morgan Stanley Dean Witter & Co, posted a 30% drop in net income, Bear Sterns Cos. reported that operating profit plunged 40%, and Goldman Sachs' net income fell 13%.

All investment banks have reported significant declines in their merger and acquisition businesses. According to Thomson Financial, global M & A activity in the first quarter fell 65% to $371 billion from $1.1 trillion in the first quarter of last year. The bulk of the decline emanates from the technology sector as M & A activity in this previously prolific sector dropped a whopping 84% to $62 billion in the first quarter from $392 billion in the same period last year.

So far, firms have announced only limited layoffs. Morgan Stanley has announced some of the most far-reaching layoffs to impact higher-level banking positions. Comprising a total of 1,500 employees or less than 3% of the bank's total workforce, the cuts will come mainly from U.S. securities and investment management businesses. Merrill Lynch cut 1,700 positions during the first quarter, and approximately 200 more layoffs or 5 to 10% of staff in Merrill's investment banking division are forthcoming. Job cuts have also been announced at Citigroup's Salomon Smith Barney unit, Bear Stearns Cos., Credit Suisse First Boston Corp., J.P Morgan Chase and Charles Schwab Corp.

Moreover, layoffs are bound to get much worse as technology, media, and telecom (TMT) work has slowed dramatically. The Internet companies that are disappearing will not be coming back any time soon. It was the TMT industry that fed the boom in equity capital markets, M & A activity and by extension, investment banking. According to research by J.P. Morgan, 95% of the growth in U.S. mergers and acquisitions volume over the past three years was TMT driven. Over 90% of the growth in equity issuance was similarly attributable to TMT companies.

If business does not pick up shortly, which does not appear likely, much deeper job cuts at investment banks will be in the offing.

http://www.dismal.com/thoughts/article.asp?aid=1180

-- Martin Thompson (mthom1927@aol.com), May 03, 2001


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