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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?

Regulatory onslaught continues

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 trend.

Expansion should 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 TIAA-CREF. While 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 management space.
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 is risky

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 top position
When a senior executive of UBS 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 realistic footing.
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 marketing efforts?
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
News that EFG International 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'.

Commerzbank: 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.

Private Equity 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 BayernLB in 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.


Lloyds-TSB: 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 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.

Case Study: 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

In Astronomy 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.

Barclays 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
At first 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 Hedge Fund
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 Generale took 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 the long-term.
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 better?
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?


Now 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.




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