One of Merrill Lynch & Co.'s top financial industry strategists blasted the notion of commercial banks muscling their way into investment banking.
John H. Gay, who advises Merrill on internal planning, criticized the "cult of compatibility" surrounding talk of recent acquisitions of securities firms by banks.
Speaking before a gathering of bank and financial industry analysts in New York last week, Mr. Gay said he doubted there was much potential in a merger between a bank and a securities firm for real "cross-selling," or increasing overall revenues by referring clients between the two.
"Cross-selling is hard to do even within an investment bank," said Mr. Gay, whose title is first vice president of corporate strategy. He would advise a commercial bank that buys a securities firm to keep it as separate as possible, to avoid a conflict of culture.
After his speech, Mr. Gay acknowledged that many in the audience may have viewed his remarks as suspect, since he works for one of Wall Street's largest firms.
But that did not stop him from decrying much popular wisdom about the current strength of the financial services industry.
"While there has been an unprecedented bull market, there has also been an underlying deterioration of margins," Mr. Gay said. Indeed, poor profit margins were behind many recent acquisitions of securities firms by banks, he said.
And those very acquisitions are further helping to push margins down by increasing competition in the securities business. He added that technology, while multiplying the number of financial instruments, has also squeezed profit margins by running up costs.
"Midsize firms are being squeezed out," he said. "You need to either be very large or highly focused."
"There's a shakeout going on in the business," Mr. Gay added. Many of the securities firms that have aligned themselves with big banks in the last year are seeking cover.
Some analysts attending the conference agreed with Mr. Gay's basic arguments, but others said his statements were a bit broad.
Raphael Soifer, who follows banks for Brown Brothers Harriman, said Mr. Gay's critique of the compatibility between commercial and investment banks disregarded the array of styles at individual companies.
Mr. Soifer cited the acquisition of Alex. Brown by Bankers Trust as a good example of cultural compatibility.
"But then Bankers Trust hasn't really been a bank for a long time, except in the legal sense," Mr. Soifer said. Bankers Trust already had a presence in 50 countries and a track record in the securities business when it purchased the Baltimore-based investment bank last fall.
Michael Mayo, a bank equity analyst with Credit Suisse First Boston, pointed out that not all commercial banks are acquiring securities firms for the same reason.
"I think one key distinction is whether banks treat investment banking as a line of business or as one additional product to serve existing customers," Mr. Mayo said. He cited NationsBank Corp., which purchased the San Francisco-based securities firm Montgomery Securities last fall, as a good example of a bank that was trying to better serve its large middle- market customer base.
"If commercial banks try to go head-to-head with Merrill based solely on product," he said, "Merrill Lynch is going to be the clear favorite."
Rumblings similar to Mr. Gay's have been heard recently from other financial industry analysts.
In a report issued last month by Standard & Poor's Corp. research director Charles D. Rauch and two of his colleagues said the entry of commercial banks into investment banking "is creating a situation of too many dollars chasing too few economically feasible deals."
The New York-based debt rating agency is widely acknowledged to be objective on this issue because it has no vested interest in the outcome of these mergers.