UBS and PaineWebber may have captured the headlines with their deal, but in the long run Ford Motor could prove to be the company that last week played the biggest role in advancing financial convergence.
Stacked up against a $10 billion merger, Ford's story is one almost devoid of glamour. However, it represented a critical shift in the source of pressure financial firms are confronting as they race to diversify their offerings and capture bigger shares of high-margin business lines.
The story actually began several months ago, when Ford told its roster of investment banks that they would be expected to make the same kind of capital commitments to the relationship as commercial banks. The price of doing business: credit lines, available to the automaker, each to the tune of about $250 million.
Given the likelihood that Ford would be an important source of investment banking business - the company has issued billions in debt and been a fairly active acquirer in recent years - the company has considerable leverage at its disposal. How the story plays out could spur other corporate customers to similar moves and accelerate financial firms' efforts to cultivate - or abandon - relationships.
Bank of America, for one, has been examining its lending relationships for about a year, since it put all corporate products and services - ranging from merger advisory to straight lending to cash management - on one platform, grouped by industry. Rather than urging its bankers to grow one business line or another, it gave group heads incentives to boost overall returns.
What it has found, said Carter McClelland, head of U.S. corporate and investment banking and equities at Banc of America Securities LLC, is that Ford's stance is not at all atypical.
"What I find very interesting, particularly coming from an investment banking background, is that companies are very focused on having banks be permanent capital providers," he said, speaking from a vacation home in Santa Fe.
Customers' desire to work directly with their lenders rather than with syndicates obviously puts banks, with their far more substantial balance sheet capacity, at a great advantage.
At the same time, Mr. McClelland said, B of A is doing its own customer relationship review. In some cases where it has just a lending relationship with a corporate client, "the returns to us are low enough that we may selectively prune some of those relationships," he said. If the bank, working with the client, can't figure out how to increase its returns by adding higher-fee services such as underwriting or advisory, it may choose to take its balance sheet capabilities elsewhere, he said.
Some of this counts as old news, to be sure. Pitching low-margin offerings to build relationships that lead to higher-margin opportunities is unique neither to this time nor to this industry. But if Ford's approach catches on, it would represent a quantum shift at a pivotal juncture. After five years of a can't-miss stock market that left plenty of room for second- or third-tier players to strike investment banking gold, there are signs that the furious bull market has at least slowed to a trot, and that could spell tougher competition ahead.
Responses thus far to Ford's overture show Wall Street divided: J.P. Morgan & Co., Lehman Brothers, and Merrill Lynch & Co. have reportedly agreed to Ford's terms, but Morgan Stanley Dean Witter Inc. and longtime banker Goldman Sachs turned the company down.
At the same time, brokerages are quickly attacking some traditional banking markets where they see opportunities, with financial firms ranging from Merrill Lynch to American Express to Morgan Stanley (see article, page one) using their sales networks to pitch loans to small businesses, for example.
Mergers or not, convergence is here.
Laura Mandaro contributed to this article.