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David Head, co-head of the financial institutions group at Salomon Smith Barney, cut his dealmaking teeth abroad. He worked in Salomon’s London office in the mid-1990s when it was sole adviser in a $20 billion merger between Belgium’s two largest banks, now known as KBC, and last year, he led the team that advised Ripplewood Holdings PLC’s investment in Long Term Credit Bank of Japan — the first acquisition of a Japanese bank by a foreigner. But this year, Head’s Salomon team has been working closer to home. It recently advised New York Community Bancorp on its $802 million buyout of Richmond County Financial Corp. And in a more controversial role, it tried in March to help North Fork Bancorp buy European American Bank from ABN Amro NV, only to learn that Salomon’s parent, Citigroup Inc., had won the bidding. In a recent interview, Head, 39, talked about the walls that exist between his group, which he co-heads with Bob Smith, and Citigroup’s own financial services dealmaking. He also explained his approach to M&A transactions and outlined his expectations for banking deals past, present and future. The Daily Deal: Citibank just bought EAB, which reminds us that Sandy Weill is a very acquisitive CEO. How do you handle the conflicts that might arise from that? David Head: First and foremost there is a complete Chinese wall between our advisory business at Salomon Smith Barney and whatever Citigroup is doing in its principal activities. So whenever Sandy and his team are looking at something, we don’t know about it and whenever we are working on something for a client, Citigroup doesn’t know about it. Occasionally Citigroup does hire us, but when they do, the same policies and procedures are in place as if they were any other client. Q: When you sit down with clients for the first time, are they concerned that they are essentially sharing their strategy with a competing financial institution? A: Occasionally it comes up, and we address the question head on by saying we maintain very strict safeguards around confidentiality. If we are ever seen to be sharing non-public information with Citigroup or anyone else, we will be out of business. We have a professional responsibility to maintain the utmost confidentiality of our client’s proprietary information. Q: Are there certain companies you know you just can’t work for because they’re too concerned about it? A: Not really. We do work for companies that are in direct competition with some part of Citigroup, and they realize that while we’re competing with them in one place, we also provide great services throughout the world. You will increasingly see this in financial institutions as companies become larger and more integrated; they will both compete and cooperate. You can’t tell me that Merrill Lynch (& Co.) doesn’t compete with every regional bank in the United States or that Goldman Sachs (& Co.) doesn’t compete with asset managers, yet they both have large financial services M&A practices. Q: One of your most recent deals was helping New York Community buy a bank on Staten Island. Do you expect more consolidation in the New York market? A: There still is room for consolidation. In the New York market you still have a very large number of banks and thrifts, some of which have shown an inability to grow their earnings as quickly as the others. Ultimately the management teams who show the ability to grow both the lending side of their business and the deposit side are going to be the acquirers of those who can’t. Take the case of North Fork, which has shown the ability to be a successful acquirer and incredibly efficient company. Or take a look at what [NY Community CEO] Joe Ficalora has done. He has been able to really grow both those [lending and deposit] businesses. Those companies that can do that should rise to the top, have the higher valuations, and more capital should migrate their way, enabling them to acquire those who can’t. Q: Why hasn’t it happened more up until this point? A: There has actually been a constant amount of consolidation over the past five or even 10 years. People who run companies don’t generally wake up in the morning and say, ‘You know what, I’m just going to sell this thing.’ They have business plans, they have boards of directors, they have ways of trying to improve their position and trying to make it better. I think people tend to have a positive attitude, and because of it, they try to make a go of it for as long as they can. Q: There’s been a lot of cross-sector M&A in financial services, with banks buying asset managers, etc. But insurers have yet to enter the fray in a big way. Why? A: When you talk about insurance, you have to separate property casualty insurance from life insurance. Life insurance is a savings and investment product for the most part and has at least some links with consumer banking and definitely with asset management. On the property casualty side, it’s really solely a risk transfer mechanism. Banks have bought insurance agencies that focus on commercial business, but you’ve not seen them go into the underwriting business because it is very volatile, and frankly, it’s not been that profitable historically. More recently, valuations have risen for the property casualty companies because there’s a hardening of rates in the sector, but if you looked over the last 10 years, it’s been a pretty lousy experience for investors. On the life insurance side, which I think is more applicable to banks, you haven’t seen end-game consolidation yet because a lot of the major insurers — not all but a lot — are just becoming public companies. For example, Met (Life) and John Hancock (Life Insurance Co.) are undergoing the sea change where their governance is changing dramatically. With increased access to capital, they’re starting to have the ability to think about what businesses they want to be in. You’re also seeing participants from other sectors creep into each other’s businesses, but it hasn’t become clear as of yet who really has the best relationships with their customers. Everyone is trying to put more product onto the customer. I would also note that the banks sell a lot of insurance. You can go into your local bank branch and can figure out how to buy annuities or simple life policies. And because of that, I think most bank managements feel they’re already in the best part of the insurance business, which is selling it, not underwriting it. If you look at the return on equity of a bank versus a typical insurance company, the typical insurance company would have a lower return on equity. An insurance company may have lower volatility of earnings, but the banks have tended to have higher valuations. Q: Has financial services reform led to a lot of activity? A: For the most part, financial services reform codified what had already been happening. Banks had already moved into the brokerage business in one form or another and were already selling insurance in various ways. The reforms have allowed companies unfettered access to products and distribution by owning various companies under a single holding company. Financial services companies have one basic question: “How do I get the product to the customer at the right point of sale and get paid for it?” You don’t necessarily have to own the manufacturing capabilities to do that. Q: What are most of your clients thinking about these days? What is your advice to them during the current volatile market? A: The most important thing is to set and execute strategy and not fall into the trap of following fads or temporary valuation distortions. Those companies that have shown the ability to run a company better than their competition are awarded with higher valuations and examples of that are abundant. It takes a long time to execute strategy, and the market will reward people who do things well as opposed to (those who) follow trends. Q: FleetBoston Financial Corp. saw its stock rise 6 percent last month, when it announced plans to sell its mortgage business to Washington Mutual for $660 million. I know you weren’t involved in that deal, but what’s your take on it? A: That was a win-win transaction for both parties. Fleet had received a lot of questions about its mortgage banking strategy, for example: How they were executing? Was it a business that really fit with their ongoing strategy? And so once they sold it, they could say to the market, “We’re not in this business anymore. It’s highly volatile, and we would have needed a huge capital investment to remain in the top three, so we sold it.” Markets rewarded that. Washington Mutual’s case was just the opposite. They had said that they were going to be a player in mortgage banking in the U.S. This transaction gets them into that realm with economies of scale and national scope. What you saw were investors reacting positively to two companies executing a clearly defined strategy that in each case made sense for them individually and was consistent with a clearly articulated strategy. Q: What do you enjoy most about your job? A: I think for me it’s the challenge of getting a transaction done that enhances a company’s valuation or helps them execute their strategy and working with a company to help them achieve their goals. A great example is PNC (Bank). We’ve helped them buy some businesses, and we’ve helped them sell some businesses. Over time you’ve seen their valuation go from being at the median of super-regional banks to having a large premium valuation over super regional banks. I feel like we’ve helped them do that and have played a role in helping them execute part of their strategy, and that is incredibly satisfying. Copyright (c)2001 TDD, LLC. All rights reserved.

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