CS First Boston Inc.
CS First Boston Inc.
Park Avenue Plaza
New York, New York 10055
Incorporated: 1934 as First Boston Corporation
CS First Boston was created in 1988 when First Boston Inc., the parent of the old-line American investment bank The First Boston Corporation, went private and merged with Financiére Credit Suisse-First Boston, a European affiliate it had created with the Swiss bank Credit Suisse in 1978. These two operations and a third, newly created one called CS First Boston Pacific, make up CS First Boston Inc., a holding company that is controlled by Credit Suisse, which owns 44.5% of the new investment bank.
First Boston, today a global leader in the investment banking industry, traces its origins to The First of Boston, the underwriting subsidiary of the First National Bank of Boston. In March, 1933, on the eve of President Franklin D. Roosevelt’s banking moratorium, this company traded in capital markets around the clock to allow banks to meet depositors’ demands.
The Depression spawned a wave of legislation imposing constraints on the private sector. The Banking Act of 1933, better known as the Glass-Steagall Act, required banks to restrict their operations to either commercial or investment banking. In response to the act, Chase National Bank and the First National Bank of Boston spun off their securities underwriting affiliates, Chase Corporation (successor of Chase, Harris, Forbes) and The First of Boston. In June, 1934 the two affiliates merged to create the First Boston Corporation (FBC), with an immediate working capital of $9 million. It was the first publicly held underwriting firm.
First Boston’s leaders, from Chase, Harris, Forbes (CHF) and The First of Boston, included Alan M. Pope as president, Harry M. Addinsell as chairman of the executive committee, John R. Macomber as chief executive, and George D. Woods as vice president. These men were able to reap intangible assets from the good will and client contacts of their former companies as well as their own personal prestige on Wall Street. Profits followed quickly. Within its first six months of operation, the company reported a dividend of $1.50 per share. During its first year of operation the company also established the First Boston, London Ltd.
FBC had a strong foothold in utility and railroad underwriting. It managed its first public offering during 1934 for Edison Electric Illuminating Company for $35 million. The following year First Boston raised $165.5 million for Southern California Edison Company. But, despite this strong start, within three years the company reported a loss of nearly $2.5 million, marking the beginning of a lean period in the field of security underwriting which would last until the early 1940s. It was not until World War II began to place heavy demands on industrial manufacturers that companies turned back to the securities market for the capital they needed to expand. In 1946, First Boston Corporation acquired Mellon Securities. The deal brought in an additional $8 million in capital and access to Mellon’s industrial accounts, among them Alcoa, Allegheny Ludlum, and Gulf Oil.
While the deal with Mellon offered FBC very favorable opportunities, bleak times were just ahead. In 1947 the federal government named First Boston Corporation, along with 16 other companies, as a defendant in an antitrust suit. The defendants became known as “Club 17.” As a member of the club, FBC was charged with the illegal monopolization of securities. The case lasted for six years. By the time it was finally dismissed due to insufficient evidence in 1953, legal fees had come close to $1 million.
In 1954 FBC orchestrated the financing of an oil refinery in Puerto Rico for the Commonwealth Oil Refining Company by arranging for $2 million in bank loans. FBC sold $16 million in debentures and purchased 500,000 shares of common stock in the refinery. This deal soon proved disastrous: by 1956 Commonwealth was losing $600,000 a month.
George Woods, the FBC officer who had negotiated the deal, reorganized the oil-refining company and made himself chairman of the finance committee. For more than a year he devoted most of his time to reshaping the company and recruiting new managers. By 1958 the company broke even, and during the first quarter of 1959 Commonwealth showed a profit.
In the same year, FBC was able to convince the Japanese government of the capital benefits of long-term money markets, resulting in a $30 million bond issue. FBC also managed the public distribution of World Bank bonds and participated with Kuhn, Loeb and Lazard Freres in an underwriting syndicate that placed $85 million in bonds and notes for European Coal and Steel. In the U.S. however, the market cooled in the 1960s as corporate demand slowed and the private sector showed caution in the face of rising labor costs.
FBC President James Coggeshall retired in 1962. Coggeshall had addressed administrative functions and nurtured clients, but he had never held a formal trading or sales position with the company. These skills were supplied by his successor, Emil J. Pattberg. Unlike his predecessor and much of the company’s staff, Pattberg held no Ivy League degree but had dropped his college plans to support his family in 1929 and began working with the First of Boston in the “cage.” Pattberg was promoted to a sales position in government bonds in 1935. After World War II he returned to the company to head up the bond department; in 1949 he moved into a policy making role, and by 1952 Pattberg held the post of chairman of the executive committee.
Although Pattberg’s talents were many, they were no match for slowing markets, and he watched earnings decrease throughout the decade. Between 1968 and 1969, earnings nearly halved and trading volume dropped about 30%. Part of the reason for this was FBC’s tendency to rely upon its conservative image and its contacts. FBC failed to pursue new clients aggressively, which impeded the company’s ability to compete. The creative talents of its executives went astray under poorly structured management.
Another factor that seemed to hurt FBC’s corporate image was the youth of its top corporate-finance officers—their average age was 30. However talented these men were, older clients felt uncomfortable with FBC’s lack of gray-haired executives. FBC’s rank as the number-one underwriter in the 1960s slipped to number three in the 1970s. Profits plunged from $14.4 million in 1971 to $3 million the following year. The company’s conservative financial policies caused it to avoid hostile takeovers and created a weakness in the area of ventures and mergers.
To remedy these deficiencies the firm recruited new talent. Ralph Saul joined the firm in 1971. His role as president of the American Stock Exchange and his seven years with the Securities and Exchange Commission brought FBC expertise in new areas. His recruitment also coincided with FBC’s efforts to gain membership on the New York Stock Exchange. The “Big Board” set a historical precedent when it approved membership for the First Boston Corporation on March 25, 1971—it was the first publicly held investment bank to be granted membership.
Concern over short-term debt brought private industry back into the bond market again in the 1970s, and FBC captured a quarter of the overall underwriting market. The firm participated in $380 million in debt financing and set records in every area of selling and trading. Revenues doubled, to $80 million, earnings jumped more than 10%, and capital funds increased significantly. First Boston’s distribution network, which by 1971 had 105 salesmen in nine cities, bolstered its success. The firm’s strategy was to call on institutional clients in teams, to provide individual expertise on different fields of investment and give the customer many options to choose from.
Recognizing the need to expand in foreign markets, in 1972 Saul recruited Minos Zombanakis to head FBC’s international finance operations. Zombanakis had acquired valuable contacts while working for Manufacturers Hanover in London; he focused on revitalizing underwriting and corporate finance in the European and Middle Eastern markets, hiring Guido Carli, former governor of the Central Bank of Italy, as a consultant. The efforts of these men brought the company into new areas of bond underwriting, such as pollution control.
FBC made some decisive internal changes in the mid-1970s. It continued recruiting talent away from competitors and introduced a major restructuring of the company. The firm hired George L. Shinn from Merrill Lynch in 1975 to become chairman and chief executive, and Alexander Tomlinson from Morgan Stanley in 1976 to become chairman of the executive committee. Their combined abilities provided a cohesive management. Shinn initiated major revisions in salary scales to counter the remuneration offered by competitors, doubled the size of the staff, and streamlined the management system.
First Boston focused on domestic distribution by adding two new offices and paid more attention to smaller institutional investors. Competition remained stiff, though, and an aggressive Salomon Brothers captured an increased share of the underwriting market. First Boston countered with a $750 million issue for the World Bank and the Japanese Development Bank. Despite the reorganization of its management, it did not lose its entrepreneurial talent—it managed, for example, to place $100 million of American Telephone & Telegraph Company notes with the Saudi Arabian government, and to entice Inland Steel away from Kuhn, Loeb.
In March, 1976, the First Boston Corporation became a wholly owned subsidiary of First Boston Inc., but the reorganization did not dramatically alter the subsidiary’s sphere of business. The company remained strong in underwriting, but had trouble with mergers and acquisitions. When International Paper used First Boston as a consultant in acquiring General Crude Oil, unexpected complications led International Paper to seek advice from Morgan Stanley, costing First Boston the deal. In another noteworthy deal, FBC helped the Bangor Punta Corporation to buy shares in the Piper Aircraft Corporation. Bangor’s rival, Chris-Craft Industries, claimed that Bangor violated securities laws and sued the company, and FBC, for $36 million in damages. While FBC was only active in one of the three violations cited, the judgment in favor of Chris-Craft Industries held FBC liable for the whole $36 million if Bangor defaulted. This case changed the way the whole industry looked at the financial liquidity of its clients.
Other deals, however, went considerably better. When Pullman Inc. began to sense unwelcome takeover maneuvers by J. Ray McDermott, FBC was hired to find a suitable investor to purchase Pullman shares. FBC successfully proposed Wheelabrator-Frye, a New Hampshire engineering firm, and FBC earned $6 million in fees.
When Zombanakis left First Boston Corporation in 1978 to chair INA Corporation, however, he took a valuable client, Chrysler Corporation, with him. His departure forced First Boston to look at alternative options in international investment banking. An opportunity appeared when a deal between Credit Suisse and Merrill Lynch to form an investment bank fell through. George Shinn wanted to take advantage of the international leverage Credit Suisse offered, even at the expense of giving up controlling interest. Negotiations began in May, 1977, and in 1978 Financiére Crédit-Suisse First Boston (CSFB), a holding company for a diversified group of European financial enterprises, was born. First Boston held a 40% interest in CSFB.
By 1985, FBC had doubled the amount of risk capital it had in block trades and had gained an edge in the market through the use of computer-orchestrated hedging in index futures and options. The company moved into new product lines—money market accounts, mortgage-backed securities, and risk management. It also designed new techniques for dealing in municipal bond index futures and had made a successful thrust into over-the-counter trading by 1985. With its concentration on improving research and sales, FBC was rated the most-improved company in 1986 by Financial World.
First Boston’s 1978 alliance with Credit Suisse led to a worldwide expansion. Ten years later, on October 10, 1988, First Boston, Inc. announced that it would go private by merging with Financiére Credit Suisse-First Boston to form a new worldwide investment-banking concern—CS First Boston Inc. As part of the deal, Credit Suisse agreed to raise its 24% stake in First Boston Inc. to 44.5%, assuming effective control of First Boston. First Boston continues to operate in the Americas, while Financiére Credit Suisse-First Boston ovesees operations in Europe, the Middle East, and Africa, and CS First Boston Pacific, a new entity still looking for an Asian partner, will cover the Far East and Australasia.
The globalization of private industry makes First Boston’s access to international markets an integral element of its operations. The new CS First Boston Inc., organized as it is to cover Europe, America, and Asia, offers First Boston a chance to operate a truly global financial network, but much depends on a smooth relationship with its dominant European partner and on keeping the politics and infighting that have posed problems in the past to a minimum.
The First Boston Corp.; Financiére Crédit Suisse-First Boston; CS First Boston Pacific.
William, Ben Ames, Jr. Bank of Boston 200: A History of New England’s Leading Bank 1784-1984, Boston, Houghton Mifflin Co., 1984.