Presentation

CONDITIONS AND TRENDS IN THE INVESTMENT

BANKING INDUSTRY

Presentation to the World Services Group, Inc.

May 7, 2004

William T. Sherman, PresidentSunTrust Robinson Humphrey


1. Industry Consolidation

2. Entrance / Build-up of Universal Banks

3. Increased Market Volatility / Increased Capital Requirements

4. Institutionalization of Markets / Growth and Impact of Program Trading

5. Regulatory Changes and Requirements

AgendaTopics for Discussion


Industry ConsolidationA Decade of Consolidation

Recent trend of consolidation in financial services industry

New landscape is fiercely competitive with fewer, larger competitors

Cultural clashes have resulted in many professionals starting boutiques

Victims of consolidation in investment banking:

• Alex Brown

• Dain Rauscher Inc.

• Dean Witter Reynolds, Inc.

• Dillon, Read & Co.

• Donaldson Lufken and Jenrette

• E. F. Hutton & Co. Inc.

• Equitable Securities Corp.

• Hambrecht & Quist

• Interstate Johnson Lane Corporation

• J.C. Bradford & Co.

• Kidder, Peabody, & Co.

• Montgomery Securities

• Oppenheimer

• Paine Webber

• Prudential Securities

• Robertson, Stephens & Co.

• Salomon Brothers

• Shearson

• Smith Barney, Harris Upham

• Soundview

• Tucker Anthony

• Volpe, Brown, Whelan

• Wertheim Schroder

• Wheat First Butcher & Singer



United States Offering2,500,000 Shares

The First Boston Corporation

Bear Stearns & Co., Inc. Alex, Brown & Sons Dillon, Read & Co., Inc. Donaldson, Lufkin & Jenrette

Goldman, Sachs & Co. Hambrecht & Quist E.F. Hutton & Co., Inc. Lazard Freres & Co.

Montgomery Securities Morgan Stanley & Co. Paine Webber Incorporated Prudential Bache

Shearson Lehman Brothers Smith Barney, Harris Upham S.G. Warburg Securities

Wertheim Schroder & Co., Inc. Dean Witter Reynolds, Inc. Wood Gundy Corp.

Allen & Company Oppenheimer & Co., Inc. Thomas McKinnon Securities, Inc.

Advest, Inc. Arnhold and S. Bleichroder, Inc. Butcher & Singer, Inc. Cowen & Co.

Jefferies & Company Cyrus J. Lawrence Legg Mason Wood Walker Mabon, Nugent & Co.

Morgan Keegan & Co., Inc. Moseley Securities Corp. Neuberger & Berman

The Robinson-Humphrey Company Tucker Anthony & R. L. Day, Inc. Wheat, First Securities, Inc.

Robertson, Colman & Stephens L.F. Rothschild, Unterberg, Towbin Salomon Brothers

1987



1997 1999 2000

Commercial banks became viable competitors in 1997 immediately after the Federal Reserve increased

allowable Section 20 (investment banking) revenue from 10% to 25% of total revenue

The repeal of the Glass Steagall Act in November 1999 spurred more merger activity

The merger mania peaked in 2000 with such mega-mergers as CSFB/DLJ, JP Morgan/Chase

and PaineWebber/UBS

Why consolidate?

Scalability of financial services offerings

Capital requirements have increased

Regulatory environment is more complex and expensive

Driven by market share mentality

Volatile market performance has “forced” sellers and “encouraged” buyers



The largest investment banks have greatly increased their global market share…

Source: Thompson Financial Securities Data* Top Three – Goldman Sachs, Morgan Stanley, Merrill Lynch

20.6%

25.6%

9.1%

19.1%17.3%

23.2%

0%

5%

10%

15%

20%

25%

30%

35%

Underwriting - CAGR: 2.8% M&A - CAGR: 9.1% Total - CAGR: 3.7%

“Top Three” Percentage of Global Fees

1991 2000 1991 2000 1991 2000



Industry Segmentation:

Global Players

Large Industry and Product Specialists

Boutiques and Regionals


Entrance / Build-up of Universal BanksThe Impact of “Full Service” Investment Banking

Since the repeal of Glass Steagall in late 1999, commercial banks have aggressively pursued highly profitable investment banking operations

Commercial banks cited the following reasons for pursuing additional “fee based” businesses:

Compelled to offer one-stop shopping for existing clientele

A necessary step to compete with European banks not restrained by regulations

Cross selling platform appeared attractive

Apparent cost savings available through leveraging existing client and industry knowledge base

As competition intensified – commercial banks could provide credit to win capital markets business



The recent trend to combine commercial and investment banks has been widespread; however, some industry leaders remain solely focused on investment banking

Selected Commercial & Investment Banks

Selected Pure Investment Banks



The impact on market share has varied depending on the platforms of the companies involved in the combination

34.8%

7.5%

-15.9%

-20%

-10%

0%

10%

20%

30%

40%

Regional Acquisitions Industry SpecialistAcquisitions

"Bulge Bracket"Acquisitions

Source: Freeman & Co.* Pro forma market share based on average of 2 years prior to merger versus 2 years following the merger



The following table demonstrates the impact of the Section 20 amendment and the repeal of Glass Steagall

Are we back where we started?

Rk Firm Fee Share Rk Firm Fee Share Rk Firm Fee Share

1 SSB / Citi 9.6% 1 CSFB / DLJ 11.6% 1 SSB / Citi 9.7%2 Merrill Lynch 8.5% 2 Goldman, Sachs 10.4% 2 Merrill Lynch 8.2%3 CSFB / DLJ 8.1% 3 Morgan Stanley 8.3% 3 CSFB / DLJ 7.7%4 Goldman, Sachs 7.8% 4 Merrill Lynch 7.7% 4 Goldman, Sachs 7.3%5 Morgan Stanley 7.3% 5 JP Morgan / Chase 7.2% 5 Morgan Stanley 6.7%6 JP Morgan / Chase 4.9% 6 SSB / Citi 6.9% 6 JP Morgan / Chase 6.5%

Section 20 Restriction Eased Post-Repeal of Glass Steagall

1996 2000 2002



U.S. Fee Market Share of Equity Underwriting

68%

32%

Boutiques, Regionals and Universal Banks

Pure Investment Banks Only (GS, MER, MWD, LEH, BSC)

67%

33%



1996 2002

Source: Freeman & Co., June 2003



Three common considerations for an issuer in selecting an underwriter:

Banker relationships

Equity sales and trading prowess

Research support

Although universal banks would appear to be better positioned given their size and access to capital, pure investment banks have maintained market share since 1996 for the following reasons:

Difficulty for universal banks of integrating and aligning banking / sales & trading / research

Pure investment banks are also well capitalized and are not “handicapped” for lack of capital (i.e. block trades)

Credit relationships can both help and hurt



U.S. Fee Market Share of M&A Advisory

77%

23%



72%

28%



1996 2002




Despite significant historical activity in the M&A advisory arena, universal banks have lost M&A fee market share since 1996

M&A fees generated from deals involving lending have not been significant

Stock swaps were favored in the late 1990’s

However, if equity markets deteriorate once again and interest rates remain low, debt financed acquisitions may return to the spotlight favoring the universal banks

Financial Sponsor related M&A deals are another story

Financial Sponsor related M&A deals now account for approximately 10% of total M&A fees

Pure investment bank market share of financial sponsor related deals has decreased from 33% in 1996 to 20% in 2002



U.S. Fee Market Share of Debt Underwriting

59%

41%



71%

29%



1996 2002




Commercial banks that acquired investment banks immediately leveraged their credit expertise, balance sheet and lending relationships to increase share in fixed income underwriting

Despite increases in share, however, the increased competition has also contributed to the “commoditization” of debt products, thereby pushing down the overall margins

Many “pure investment banks” are willing to let market share go given the profitability proposition

Capital can be conserved for more profitable businesses such as equity, securitized products, structured products and proprietary trading



What does this mean for the service providers?

Collaboration required between corporate and investment bankers (culture)

The best “service” may not prevail

Pressure on pricing when “full suite” of products are offered

What does this mean for the client?

Managers must be sophisticated about range of financial products and the pricing implications of various relationships

Relationships must be carefully managed (how will one decision impact the other?)



RISKS

MARGINS

High

High

Low

Low

Ideal Characteristic of an Investment Banking Client

Ideal Characteristic of a Commercial Banking Client

Capital DeficientCapital Deficient

AcquisitiveAcquisitive

Growth, No Credit History

Growth, No Credit History

Growth, Credit Worthy

Growth, Credit Worthy

Stable Cash Flow, Transaction-Oriented

Stable Cash Flow, Transaction-Oriented

Stable, Cash Flow, Non-Transaction-Oriented

Stable, Cash Flow, Non-Transaction-Oriented



Increased Market Volatility / Increased Capital RequirementsFinancial Flexibility in Today’s Market

Investment banking requires significantly more capital today than in the past

Market making

Surviving volatile markets

Lending capital for corporate clients and to support transactions

Underwriting

Increased fixed costs (technology, regulation, etc.)

Pricing pressure on trades (same capital requirement, less margin)



From 1994 to 2003, we have seen a dramatic increase in the amount of capital required to participate in sophisticated markets:

Universal banks (C, WB, BAC) – Book equity average increase of 616.7% ($25 billion to $178 billion)

Pure Investment Banks (MWD, GS, MER, LEH, BSC) – Book equity average increase of 316.6% ($23 billion to $95 billion)

Regionals (AGE, RJF, LM) – Book equity average increase of 303.2% ($1.2 billion to $3.9 billion)



0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Num

ber

of S

hare

s (M

M)

Average Daily Trading Volume – CAGR: 26.5%

Source: NYSE, AMEX, NASDAQ

Average daily trading volumes have increased dramatically…



3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Listed OTC

Average Institutional Commissions – Cents Per Share

Source: Freeman & Co.

At the same time, institutional trading commissions have dropped steadily…



Equity Underwriting Spreads

4%

5%

6%

7%

8%

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

IPO Follow-On

Fixed Income Underwriting Spreads

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

High Yield Inv. Grade



$0

$50

$100

$150

$200

$250

$300

$350

88Q

1

88Q

3

89Q

1

89Q

3

90Q

1

90Q

3

91Q

1

91Q

3

92Q

1

92Q

3

93Q

1

93Q

3

94Q

1

94Q

3

95Q

1

95Q

3

96Q

1

96Q

3

97Q

1

97Q

3

98Q

1

98Q

3

99Q

1

99Q

3

00Q

1

00Q

3

01Q

1

01Q

3

02Q

1

02Q

3

Domestic Institutional Equities – Fixed Expense Base(dollars in millions)

Source: SIA Large Investment Bank Database and Bernstein Research



0%

5%

10%

15%

20%

25%

30%

35%

40%

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Institutional Equity Margins




0%

5%

10%

15%

20%

25%

30%

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Institutional Equity – Domestic Return on Equity



Institutionalization of Markets / Program TradingTechnology’s Role in Today’s Markets

The emergence and continued growth of institutionally controlled assets have impacted capital markets

U.S. institutional investor assets nearly tripled between 1990 and 1999 from $6.3 trillion in 1990 to $18.6 trillion in 1999

Hedge funds continue to grow in popularity and contribute to the sophistication of capital markets

“Smart money” is changing the ways that investment vehicles are traded (i.e. program trading)

$6.3

$18.6

$0

$5

$10

$15

$20

1990 1999

U.S. Institutional Assets

Trillion

Trillion



$0

$50

$100

$150

$200

$250

$300

1994 1995 1996 1997 1998 1999 2000 2001 2002

Hedge Fund Assets(billions of U.S. dollars)

Source: TASS Research



What is Program Trading?

Program trading usually involves arbitrage between the futures market and the stock exchanges and is a strategy employed by large investors or institutions where orders are placed to buy or sell large quantities of securities and are triggered by prices rising or falling to a pre-determined level as determined by computer programs that are monitoring price changes on certain equities

Large mutual fund complexes having multiple portfolio managers can reduce execution charges by trading securities as a basket (increasingly complex software is available to help institutions bundle trades)

According to the NYSE, program trading accounts for approximately 50% of the trading volume every day



What is the impact of Program Trading?

Reduction in commission dollars for the same number of shares traded

Commissions per share have dropped 34% since 1999 and continue to trend downward

May draw business away from traditional commission business and reduce revenues available to support the core research, sales and trading platform

15%

20%

25%

30%

35%

40%

45%

1999 2000 2001 2002 2003

Program Trading as a % of NYSE Volume



The traditional reasons for trading with full service broker dealers are:

Equity research / access to company managements

Access to deal flow – IPO’s and follow-ons

Liquidity provider

Market intelligence

Each reason is under attack

Equity research: Perceived objectivity has been compromised, buy-side investing in internal research capabilities

Access to deal flow: Enhanced regulatory restrictions and scrutiny

Liquidity provider: Competition has driven cost of risk adjusted capital above compensation opportunities; alternative trading mechanisms exist

Market intelligence: Information technology and sophisticated internal trading desks provide access to market data


Regulatory Changes and RequirementsChanging the Way Business is Done

“Global Settlement” with purpose of separating investment banking from “independent” research departments

Physically separate research from investment banking

Research analyst compensation can not be tied to or dependent on banking revenue

Research analysts are prohibited from soliciting banking business

Sarbanes-Oxley Act of 2002 with purpose of governing corporate compliance in wake of corporate scandals

Audit committees and internal controls

Outside auditing firms and audit independence

Outside directors

Analyst conflict of interests

SEC review and additional financial disclosures



How have these measures changed the way we do business?

Compliance officers present at meetings between bankers and research analysts

Bankers do not influence “drops” and “adds” to a research analysts’ coverage universe

Limitations on research analysts participating in marketing trips with potential clients

Will investors pay for research?



Equity Research

Increased costs due to regulatory scrutiny

Declining investment banking and sales & trading revenues

High compensation

and overall departmental

costs

Disgruntled retail groups



1997 - 20012001 2000 1999 1998 1997 Change

Merrill Lynch $579 $562 $632 $552 $402 44%

CSFB 456 526 411 349 175 160%

Salomon Smith Barney 399 543 440 300 195 105%

Goldman Sachs 321 377 349 251 170 89%

Morgan Stanley 317 387 342 261 163 95%

JP Morgan 308 149 131 98 118 160%

Lehman Brothers 221 228 171 131 87 154%

Bear Stearns 93 122 121 109 83 13%

Total $2,694 $2,894 $2,597 $2,051 $1,393 93%

Research budgets increased 93% from 1997 to 2001

Currently, research departments are being restructured and in many cases – reduced

Source: Bernstein Research



Low Margin

High Margin

Trading InvestmentGrade

Govts &Munis

CommPaper

Clearing

EquityArbitrage

EmergingMarkets

Fixed Inc.Derivatives

MortgageBacked

EquityDerivatives

EquityFollow-on

High YieldUnderwrite

M&AAdvisory

EquityIPO

Investment Bank Products and Margins


Questions and Contact InformationQuestions


Atlanta Financial Center

3333 Peachtree Road, N.E. 10th Floor

Atlanta, GA 30326

(404) 926-5798

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