New strategy, new management for CSFB

Credit Suisse First Boston has implemented a series of senior management changes in Asia, mirroring a global re-organization of the group unveiled at an investor day in Zurich one month ago. This new strategy will see CSFB folded into its parent, Credit Suisse, in the hope of driving down its operating costs, improving its competitiveness and consolidating its position as a top five global player.

As a first step, the group has created a new corporate and investment banking structure that embraces two new divisions: Global Markets Solutions (GMS) and Client Coverage. GMS will incorporate ECM, DCM and leveraged finance. So far, Client Coverage has only been implemented in Asia.

By bringing together the equity and debt capital markets divisions, CSFB is following the example of a number of its competitors. It hopes to improve client penetration by making sure its capital markets and corporate finance bankers work more closely together on a solutions based approach rather than punting individual products.

Globally, this new division will be run by Eric Varvel, the bank's former head of Asian investment banking, who left Singapore for New York at the end of December. In addition to his role overseeing GMS, Varvel will also have a broader and more powerful position as co-head of global corporate and investment banking alongside Marc Granetz.

In Asia (including Australia), GMS will be run by Vik Malhotra, who is moving over from corporate finance and stepping down as regional head of TMT (Telecoms, Media & Technology). Malhotra is an 18-year veteran of the firm and has spent the past decade in Asia, where he has overseen a number of important telecom financings including the recent sale of Excelcomindo to Telekom Malaysia.

His day-to-day responsibilities will have a strong ECM focus - particularly in the wake of Marshall Nicholson's resignation last week. Nicholson has been head of ECM since the summer of 2002 and run a string of key China deals including the IPO's of China Life and SMIC.

The firm has not yet decided whether Nicholson will be replaced, or whether it will hire a couple of senior capital markets professionals spanning ECM and DCM. The latter will continue to be run by Jon Pratt, one of the firm's most conscientious bankers.

To date Morgan Stanley has provided CSFB's most successful role model in Asia. The merger of the US firm's capital markets divisions appears to have vastly improved internal communications and in 2004 produced a string of high fee paying, high yield deals that are believed to have started life as convertibles.

CSFB also hopes Malhotra's banking background will serve GMS well now that the capital markets bankers are preparing to adopt a more pro-active approach to winning and executing business alongside the relationship bankers based in corporate finance.

Malhotra will report to Joe Gallagher, who has replaced Varvel as head of Asian investment banking. Gallagher was posted to Hong Kong last summer in a newly created role as vice chairman, investment banking. However, this was viewed internally as a transitional role until Varvel left at the end of the year.

Gallagher has been at CSFB for 20 years and was most recently head of Credit Suisse Asset Management in the US. But he has had plenty of experience in Asia, having worked in the region from 1993 to 1999 as head of Asian corporate finance.

In addition to his position as head of Asian investment banking (incorporating GMS and M&A), Gallagher will also be co-head of Asian Client Coverage alongside Tony Iliya, who joins the bank this week. Iliya is a CSFB veteran who returns to the bank from General Re Financial Products, where he has been CEO since 1996.

The Client Coverage division has been created to unify all of CSFB's products - investment banking, fixed income, capital markets and equity corporate derivatives - across a single platform. Gallagher will focus on investment banking and capital markets products, while Iliya will focus on structured and derivative products for fixed income and equity.

Reporting into Iliya will be Shen Yan, head of Fixed Income Sales for Non-Japan Asia and David Curtis, head of Fixed Income Sales in Australia. The equities division (broking) will continue to have one functional global reporting line and one regionally to Paul Calello, the firm's personable and charismatic Chairman. Iliya and Gallagher will also report to Calello on a regional basis and globally to their respective division heads.

CSFB's new strategy dates back to the appointment of Brady Dougan as group CEO last summer, replacing John Mack. Former CSFB bankers say that while the previous management team were very good at cutting costs, they were not so adept at maintaining CSFB's league table standing - letting it slip into top ten positions rather than top five.

Speaking at the investor day in Zurich last month, Dougan and Credit Suisse CEO Oswald Gruebel told their audience they hope to boost investment banking revenue from roughly Sfr1.1 billion ($930 million) in 2004 to Sfr3 billion ($2.6 billion) by 2007. In an internal memo released the same day, Dougan spelt this out further.

"The essence of the strategy is straightforward," he said. "Wherever we compete, we want to win. We will do that by leveraging our strengths and delivering a more focused franchise."

He went on to outline five key components to this strategy.

Firstly, he said, CSFB will be, "More disciplined in identifying our most valuable clients and focusing our resources on serving them."

Secondly, he said the firm will, "Zero in on high-margin strategic products. In investment banking, this means focusing on M&A, IPO's, leveraged finance and derivative solutions...... We will maintain our mid-cap leadership and pursue large-cap opportunities in lucrative segments."

In terms of executing this strategy, Dougan said the firm needed, "Better organizational alignment and greater accountability for profitability at all levels: businesses, clients, products and support."

So far CSFB has announced a new organizational structure and is still examining where to position individual P&L's within the bank. Its overriding aim is to incentivize bankers to maximise revenue for the overall bank rather than their respective divisions. In this respect, CSFB may take the model one stage further than forerunners Morgan Stanley and Goldman Sachs.

Fourthly, Dougan said that management wants to foster a performance-based ownership structure, attracting the best people in the industry.

Finally, he said CSFB is in a good position to expand its risk profile in a prudent, balanced manner. This is one area where Varvel, in particular, is felt to have excelled during his time in Asia.

After joining CSFB from Morgan Stanley in 1999, Varvel was posted to Singapore and quickly developed a number of key relationships in Indonesia. At the height of the Asian financial crisis, he consolidated these relationships by persuading the firm to work with its clients rather than (fruitlessly) pursuing them through the Indonesian judicial system.

This led CSFB to increase its involvement in the country through a series of debt for equity swaps at a time when most of its competitors were running for the hills. As Indonesia has recovered from the crisis, these investments are believed to have delivered spectacular returns (even on a risk adjusted basis) and an extremely strong investment banking franchise in one of Asia's highest fee paying countries.

Former CSFB bankers say that Varvel has always had a close relationship with Dougan, himself a huge Asiaphile. In his December 7 memo, Dougan reiterated Asia's importance to the firm.

He concluded that CSFB, "Will expand our businesses in growing markets across Asia, primarily focusing on Japan, China and South Korea. We will continue to explore new acquisition and joint venture opportunities, while also increasing our derivative business in the region."