Mayhew finds a proper partner

A liveried doorman still greets clients, including the CEOs of nearly half of Britain's biggest companies, when they enter Cazenove's discreet offices in the City of London. But behind the scenes, traditions have been changing at the firm, which was founded by Huguenot émigrés in 1823. Last month Cazenove combined the heart of its business -- its corporate brokering and finance arm -- with the U.K. investment banking operations of J.P. Morgan Chase to form a formidable joint venture unique to the City.

As readers of Institutional Investor's April cover story on Cazenove will quickly realize, the J.P. Morgan deal was the culmination of a process of soul-searching sparked by the firm's difficulties during the 2001'03 bear market. Cazenove found itself unable to help many longtime clients shore up their balance sheets, and it struggled to attract the talent to expand from its roots in brokering to become a full-service financial adviser to increasingly global British companies.

"It became quite clear we had to build on our skills and abilities to execute on a scale we couldn't do without a partner," Cazenove chairmanDavid Mayhewtells II. "What we have managed to do with this venture is gain access to a platform that is embedded locally around the globe, while ring-fencing our advisory capability from capital so that we can continue to offer the kind of unvarnished independent advice clients expect from us."

The joint venture appears to be well suited to achieving this objective. Instead of selling out to big banks or firms -- as such rivals as Hambros, Hoare Govett, Kleinwort Benson, Morgan Grenfell, Schroders, Smith New Court and SG Warburg did after the U.K. deregulated financial services in 1986 -- Cazenove retains control over its destiny.

Under the terms of the combination, J.P. Morgan is devoting up to 70 members of its U.K. investment banking staff to JPMorgan Cazenove, as the venture is to be known. For its half of the business, the bank is also giving Cazenove a balancing payment of £110 million ($212 million) to reflect the U.K. firm's larger human contribution to the joint enterprise -- some 740 employees, including the 64-year-old Mayhew as chairman and Cazenove CEO Robert Pickering as chief executive.

Cazenove winds up with the other half of the venture, worth some £340 million, while retaining control of its own fund management arm -- a steward of Queen Elizabeth's riches -- which is worth about £100 million. What's more, Cazenove gets to distribute £340 million of cash (the balancing payment from J.P. Morgan plus surplus capital that the firm no longer needs to tie up in the business) to its partners and investors. All told, Cazenove's value works out to close to £780 million, or 359p a share, the level at which its stock was trading on the firm's internal market in April.

That figure, of course, suggests that no buyer was willing to pay a fat premium for the firm -- not surprising given the generally unhappy history of U.K. investment-bank acquisitions. Nevertheless, at the end of the five-year joint venture, Caze-nove can force J.P. Morgan to buy it out (the price to be determined by a third party); the bank, in turn, has a call option on Cazenove. This should provide the broker with ample incentive to make the deal work.

"The only drawback to the arrangement, some of my colleagues tell me, is that it means I shall have to work a few years longer than they should have liked," jokes Mayhew, who intends to remain chairman of the joint venture until at least 2007.

Contributor Rob Cox is U.S. editor of breakingviews.com, the London-based financial commentary service.