Banks cautious of big-ticket hires

The investment did not pay off. Bad timing was to blame: shortly after Phair arrived, the M&A market crashed and the appointment did little to alter Bear Stearns' position on what remained of the league tables. Three years later and just before his guaranteed compensation package expired, Phair left, leaving the bank $15m worse off and no nearer its goal of becoming a presence in European M&A.

It is a cautionary tale and one that banks would do well to remember as hiring picks up. Trying to build a business with high-profile outsiders can amount to little more than scattering money to the wind.

Headhunters say banks are increasingly aware of the risks. "We are being asked to conduct much deeper analysis into candidates' backgrounds before putting them forward for positions," said a partner at one of London's leading financial services search firms.

In the past, it was sufficient for bankers to have a long list of deals behind them, she said. Now banks want to know precisely what they did, how close they were to clients, and whether clients will follow them when they move. Headhunters have taken to calling clients under the pretext of conducting research into what makes them choose the bank they work with and whether an individual or the organisational network supports them.

It is a difficult distinction to make. An M&A mandate or bond launch can be due equally to the bank's capabilities as to friendship between finance director and rainmaker.

Pascal Maeter joined DrKW from JP Morgan Chase as head of the financial sponsors group last September. Since his arrival, DrKW has worked with Bain Capital and Allianz Capital Partners. Both are former clients of his but said their custom was as much to do with the bank's strengths and improved market conditions as his arrival. "The days of expecting new hire bankers to single-handedly bring in business are long gone. It certainly helps that clients know you and that trust has been established but clients typically buy into the whole business, not just individuals," said Maeter.

Nevertheless, big-ticket appointments loaded with expectations continue. Last October, Renaissance Capital hired Chris Baxter, head of energy and power at Merrill Lynch, to lead its Moscow-based investment banking business on a guaranteed package understood to be worth $4m a year over two years. Nearly a year later, Renaissance has yet to make an appearance on Thomson Financial's M&A deal table for the region. But sources close to the company said the bank had completed eight deals this year, compared with six in 2003. Thanks to Baxter, there are more in the pipeline.

Bank of America has attempted to buy its way into the European debt capital markets. It has hired some 70 debt bankers this year on the Continent but by the end of August had scraped just under 1% of new European bond issues. JC Perrig, head of international debt markets at Bank of America, believes it is early days. He said: "You will see more of us going forward in terms of building market share and this will be reflected in the quality and impact of the transactions we are involved in."

Perrig added that external appointments should be made with care. "Not everyone is suited to working on a less established platform. We are particularly keen to hire people with strong client relationships and who are also highly entrepreneurial," he said.

Former bulge-bracket bankers are reluctant to go public with their tribulations at smaller houses. One former Morgan Stanley employee who joined a European bank in 2001, highlighted cultural issues as the sticking point. "Culture is the most difficult thing to change. Where there is internal rivalry and a lack of team spirit, it can be almost impossible to overcome."

If any bank needs to make a success of external appointments, it is HSBC. In the first six months of this year, the UK bank hired 700 people for its corporate, investment banking and markets businesses. Headhunters say many were brought in on generous guarantees. Costs in the division rose nearly $600m.

HSBC's strategy looks to have paid off: pre-tax profits were up 25% in the first half from the previous six months and it advised on some of the largest M&A deals this year, including Wm Morrison's takeover of Safeway and the 417m (€621m) acquisition of Coats, an industrial threadmaker, by a consortium. But sceptics say many of the new appointments have recently been lying on beaches and that the transactions were worked on by bankers, like Rupert Faure Walker, who are well-established HSBC staff.

Successful precedents exist. UBS has climbed the US M&A league tables after hiring a team under Michael Martin, a former deal-maker from Credit Suisse First Boston. For now, at least, this is the exception rather than the rule.