Being a 'Global' Bank
brings extra Risks
One has to wonder if being a 'Global' Bank is really an intelligent
business proposition. It requires Superman/woman to manage far-flung
empires and activities that can span more disciplines than any
normal human can realistically be expected to fully understand. And
a particular risk factor are differences in business culture that
senior management - be it located in New York, London, Frankfurt,
Zurich or Tokyo - can hardly be expected to appreciate to the extent
that would be required. Deutsche Bank lending money to build another
hotel/casino in Las Vegas? Citigroup lending money secured by
warehouse receipts in Chinese Ports? An Austrian Bank lending money
to a steel business in Russia? Do these activities make sense or
would concentration on a geographical area one understands and is
familiar with be more profitable in the long run?
Despite favourable market conditions dealing volumes are in steady
decline. Low or zero interest rates make it near-impossible for investors to
find safe outlets for ever-rising amounts of investable cash. In addition,
market professionals are distracted by the never-ending flood of regulations.
These problems can be neglected as long as the sunny investment climate (and
QE2 a outrance) continues. But making money - for investors, their money
managers and securities firms - will be even more difficult and/or
impossible when bond yields start to rise and equity markets enter a bear
focus on Quality, not numbers
I think that
the financial services industry is still in a secular growth period. Large
parts of the globe are still to be included in the world's financial system.
So participating in this growth should be the main emphasis of any financial
business. But any over-expansion and consequent stop-go policy necessitated by
risks that were not taken into consideration when times were good will
endanger this. So I would suggest - as always - to hire (or buy businesses) in
a measured way. Sellers or candidates will always hold out for a careless bid.
Private Equity investing in Asset Managers - a cautionary tale
Private Equity firm
Dearborn Michigan acquired
Nuveen Investments in 2007. Now the
business if being sold to
one source claims that Dearborn managed to sell the business for
roughly the prize it paid back in 2007 some
number crunchers claim that the firm might have made a
potentially quite sizeable loss.
Without taking sides in this argument it should be obvious that
during a period when many leading asset managers did quite well -
despite the financial crash during that happened during the same
time - it is far from easy to pick the winners in the fund
Too much depends on the people running the business and the
decisions they take. Your assets also walk out of the door every
evening and retention and motivation of management and staff is
critical to long-term success.
Pimco's El-Erian leaves - Relying on 'Celebrity' or 'Star' employees
It was never clear to me why Pimco needed
to have another staffer with a high media profile - in addition to
Bill Gross. Clients of Asset Management firms are above all
interested in good performance and safe custody of their assets,
they do not really care to listen to sermons about the problems of
the world and how they could be resolved. And why tell the
competition what you are doing in the markets?
Bank Austria (Unicredit) pays for costly Kazakh mistake
We were concerned about the high price that
BA paid for ATF Bank
in 2007 and our worries about buying an
emerging market bank were proven correct. Regulators in Almaty have asked BA
to inject another Euro 198 million. The lesson should be clear: never buy
such risky assets in a seller's market.
Not all firms can occupy
When a senior executive of
admits that the bank may no longer aim for the top spot in the rankings of
global investment banks he puts the business on a more sensible and
Aiming for the top may be useful to encourage ambition but it can also be
destructive if carried too far. Like in sport, there can only be one winner
in business and being number 2, 3 or even 10 does not automatically brand
you a failure.
BayernLB - Hypo Alpe Adria: no point blaming former CEO
Yesterday's news that the German authorities conducted house searches
connected with an investigation into circumstances surrounding the purchase
of Hypo Alpe Adria by BayernLb in May 2007 demonstrates that Acquisitions
pose a substantial risk and any transactions should be scrutinised
thoroughly. All too often senior management - usually led by the CEO - 'fall
in love' with a transaction and push aside any rational argument against
proceeding with the deal (or at least offering a lower price).
Image Campaigns - do they make sense for Banks?
Both Credit Suisse and UBS have recently launched
advertising campaigns that are aimed to bolster their brand image. But does
the sponsoring of Formula One really help UBS to reclaim lost ground with
the high net worth clientele that must surely be the main target for its
Image Campaigns may well have a role to play for banks that are active in
the mass market but for banks that are mainly involved in the institutional
or high net worth market a more focused approach must be the preferred route.
EFG pays penalty for
Hedge Fund acquisitions
had to write off most of the $813
million it spent on the acquisition of two hedge fund businesses highlights
the need for extra care when investing in the ultimate 'people business'.
Shareholders unhappy with Dresdner Deal
Yesterday's Annual Meeting of Allianz shareholders was used as forum
for frustrated Commerzbank owners that were claiming that Allianz
seduced the bank's management to make a value-destroying purchase
with the sale of Dresdner Bank in autumn 2008.
We have sympathy with the Allianz management as it finally managed
to get out of a deal that caused them headaches for the better part
of a decade.
We have less sympathy with the management of Commerzbank as it
should have been clear at the time that a lot more due diligence
should have been performed before committing to such a large deal in
a period of panic in the financial markets.
This merger demonstrates the need for dispassionate advice that is
not driven by the urge to close a deal at all costs in order to be
able to book a fee.
burns its fingers with BAWAG-PSK
News that the
value of the stake in Austria's BAWAG-PSK bank that the private
equity fund Cerberus bought in conjunction with an investor group
may only be worth a quarter of the purchase price makes sobering
reading. It demonstrates that overpriced acquisitions are not only
the consequence of muddled thinking by the managements of
established banks but can also lead the hard-nosed managers of
private equity funds astray. While traditional managers are often
seduced by the excitement of the hunt the fund managers may be
pressurised by the need to put to work the money they have collected
in the fund.
'Imperial CEO' - costly
lessons of BayernLB / Hypo Alpe Adria debacle
Recent revelations about the role of the former CEO of
the disastrous acquisition of a majority stake in Austria's
Hypo Alpe Adria
bank are an illustration how dominant CEO's can push through mergers against
the advice of their internal planning teams.
Time and again CEO's (not only in the financial service sector) fall in love
with an acquisition idea - often aggressively promoted by parties the are
masquerading as 'advisers' but in reality behave no better than
commission-based door-to-door salesmen.
Failure to heed the warning signs
Management has stubbornly refused to call off the acquisition of
HBOS. The warning was on the wall in CAPITAL LETTERS and for all
to see. We understand that leading a large organisation is a
lonely job but that does not mean that executives have to be
pig-headed to the extend that they doom their companies à la
Fred Goodwin. The defacto demise of RBS as a free-standing
business should have been warning enough and no one can claim
that the extend of the decline in financial markets and the
world's economies could not have been foreseen last autumn. For
an excellent analysis of this debacle read 'Brown
cannot shirk the blame for Lloyds' (The Times,
9 Mar 2008). It is difficult to see how the Chief Executive and
Chairman can remain in their posts.
Common sense still essential in deal making
When ING went on a last spending spree in the first half
of 2008 we had strong reservations about the merits of the
purchases: paying $2.67 billion in cash for Oyak Bank of
Turkey (four times book) and Euro 416 million for the German
Mortgage Broker InterHyp (five times book) looked out
of line with a rapidly deteriorating financial market background.
The 2007 purchase of ATF Bank of Kazakhstan by Unicredit's Bank Austria unit seemed to benefit from better
timing but closer inspection also reveals that the valuation -
approximately 5 times book - was very much in the seller's favour.
New Star Asset
Management - Greed and poor Banking Practices
one learns that different stars have different life cycles. Some become red
giants in later life, others become cold dwarfs.
In Finance, New Star Asset Management certainly provides a good
example of early burn-out, mainly due to greed on behalf of its shareholders
and incompetence (laced with greed?) on behalf of the bankers that were
instrumental in the 2007 deal that leveraged the company to the hilt in
order to pay a 'special dividend' to its shareholders.
What is stunning is the fact that at the end of December 2006 the
company had a grand total of £105 million in shareholder funds and annual
revenues of just £133 million. How sound banking principles made it possible
that a collection of top banks allowed a loan of roughly three times these
key numbers to go through is beyond comprehension.
paid $745 million for Russia's Expobank
This transaction looked extravagant at the time it was announced
in March 2008 as the situation in the financial markets was already
tense. More than six months later one can only call it wildly
extravagant. Small details raised a red flag as a look at Expobank's website at the time
of the deal's announcement revealed that the bank did not seem to be
able (or bothered) to update it's key financial figures on the website.
Purchase of Lehman's US business
sight the opportunistic purchase of Lehman's US business lines looks
like a masterstroke and we certainly are glad that 10,000 people do
not have to fear losing their jobs - at least for the moment. At
second thought we think that taking on such a large contingent
during a time when investment banking faces a difficult - and
rapidly changing - environment may lead to some indigestion.
There certainly will be some major overlaps in fixed income and
derivatives (including equity derivatives). Debt Capital Markets
should also be affected not to speak from commercial banking. So Bob
Diamond has his work cut out and was well advised not to bid too
aggressively for Lehman's European and Asian businesses. While we
think that they could have been attractive additions to Barcap's
line-up in those regions the job of integrating these regions as
well would have called for superhuman management skills.
PS: given the good numbers that
Barclays just has reported for the first half of 2009 maybe there
are superhumans running the bank?
Case Study: How not to buy a
Citigroup announced that it will
close the Hedge Fund co-founded by CEO Vikram Pandit.
The bank paid more than
$ 800 million in July 2007 for the hedge fund business co-founded by
Vikram Pandit. Given the relatively short life-span of the fund we
were surprised about the amount of money the bank was willing to
splash out. Mr. Pandit had only left his former employer Morgan
Stanley in early 2005 and although assets under management had
reputedly reached $ 4 billion since the fund was founded we had
doubts about the wisdom of the transaction. That Pandit in his new
role of CEO of the purchaser Citigroup has to close down his own
child provided a certain amount of irony to the sorry story of an
acquisition gone wrong.
Kerviel Case -
Importance of enterprise culture
While it may not have
been a significant contributing cause for the the huge hit that Societe
in the derivative markets, we have always pointed out to our friends in the
bank that the reliance on a close-knit group of (nearly exclusively) French
professionals with similar backgrounds could be counter-productive in
French education may be able to produce excellent quantitative
minds but a country of just 60 million cannot claim to have a monopoly in
terms of mathematical talent. It may well be helpful to create a coherent
management culture if most senior roles are reserved for French staff but in
a global 24-hour business this will sooner or later become a limit to the
growth potential of any business.
Are bigger banks
The troubles that have hit Citigroup in the past months have
encouraged those analysts that have called for a break-up of the
organisation. At the same time management consultants are still
predicting a steady decline of margins in the banking industry and
pressure to grow in order to reap the benefits of economy of scale.
Can both sides be right? Does it depend on the circumstances of
the individual organisation?
the hard work can begin
Now that the deal has practically been won by the Royal Bank
of Scotland-led consortium the hard work
will only begin. Dividing the corpse into three different parts will
be more difficult than expected and the fact that banks with
different nationalities are involved will provide an added
complication. One way or the other this will become a classic case
study for all aspiring MBA-Candidates.
Coaching and Mentoring
Mergers and Deals