|
Privately owned UK bank Robert Fleming has had an awful year. In January, there were allegations of insider dealing. In June Bill Harrison, its head of investment banking, resigned. In August, there was an asset-management scandal at Jardine Fleming that led to the resignation of the Hong Kong-based investment bank’s chairman, Alan Smith. No wonder John Manser, Flemings’ previously unruffled chief executive, is beginning to look rather frazzled. Last month, shortly after announcing a management shake-up in the wake of the Hong Kong irregularities, he warned that the 120-year old bank might be forced to move out of London to avoid overzealous regulators. The fireworks may not be over yet. Manser has called an emergency meeting of senior Flemings executives scheduled for later this month to discuss the progress of the globalization plan he launched in 1990. Over the past six years, Flemings has hired thousands of new employees in a bold bid to transform itself from an asset-management firm with a strong banking presence in Hong Kong into a global investment bank or, as Flemings puts it, a global investment bank except in the US. Revenues have failed to keep pace with the escalating costs involved. Net profits fell from £143 million ($214 million) in 1993/94 to £115 million in 1994/95 and £87.9 million in 1995/96. The current year looks like being another tough one. “Flemings is an accident waiting to happen,” says a senior corporate financier at a rival UK bank. “They have more than 7,000 employees, but they just aren’t doing enough business to pay for them. They need to make some changes.” Manser is likely to come under considerable pressure from the bank’s independent shareholders to reduce costs. Between them they own over 40% of the bank and over the past two years have sat patiently by while Robin Fleming, the bank’s amiable old-Etonian chairman, turned down countless offers from prospective buyers. At the height of the M&A craze that swept UK banking in 1994/95 corporate financiers estimated that Flemings could have fetched £2.5 billion. Generous dividends and brave talk of Flemings becoming a global investment bank persuaded most investment trusts and fund managers with stakes in the bank to go along with a strategy of maintaining independence. But with profits continuing to fall, and the value of the business now half what it was before the embarrassing debacle at Jardine Fleming Investment Management, many will no doubt be wondering if they haven’t made a mistake. They will want to see costs brought in line with revenues. “We have been a very happy shareholder in Flemings,” says Jeremy Tighe, fund manager of the Foreign & Colonial Investment Trust which has a 5% stake. “But if they were forced to cut dividends because they were in trouble, their position of independence might be more difficult to sustain.” A family under pressure The Fleming family, which has the biggest single shareholding around 35% is desperate to avoid this. The bank employs at least 20 family members many of whom are none too bright and might find it hard to find lucrative employment elsewhere were the bank to be sold. There is an apocryphal story that at the opening of Fleming’s South African office, Robin Fleming mistook former England international footballer Bobby Charlton for the governor of the South African central bank. Faced with a revolt from outside shareholders, the Fleming family is likely to take the view that a slimmed-down family bank (albeit a highly specialized one) is better than no family bank at all. They too will want some answers from Manser. Executives such as Peter Jamieson, the bank’s vice-chairman, are likely to argue that it is still to early to condemn a strategy that has only been in place a few years. “You don’t create a powerful market position in the market we are operating in overnight,” says Jamieson. “Every department is excited about the prospects in front of it.” Others such as Bernard Taylor (head of corporate finance) and Tom Hughes-Hallett (European broking), will fight hard to stop their departments being trimmed. All in all, the Flemings executives’ meeting is likely to be fiery. Back in October 1993, the mood at Flemings’ glass-roofed headquarters at Copthall Avenue in the City of London had been one of quiet confidence. Growing pressure on European governments to facilitate the development of private rather than state pension provision was widely expected to lead to a fund management bonanza for the bank, which had set up offices all over Europe way ahead of the rest of the competition. Jardine Fleming, the bank’s Hong Kong joint venture with trading house Jardine Matheson, had had a tremendous year, generating $240 million of net profit in the year to March 1993 on strong growth in Asian markets. The decision to set up offices in countries such as Thailand ahead of rivals also seemed to be paying off as Jardine Fleming picked up a steady stream of Asian equity and equity-linked mandates. Encouragingly for Manser, heavy investment in European investment banking operations seemed to be bearing fruit. In 1992, Flemings had won its first major capital markets mandate outside Asia a £1.6 billion share issue for UK pharmaceuticals company Wellcome, which was later to merge with Glaxo. Ian Hannam, the young equity syndication whizz-kid hired from Salomon Brothers the previous year, had impressed the City with the execution of the deal (albeit at the cost of annoying his fellow lead-managers), and more mandates seemed certain. Convinced that it was only a matter of time before Flemings took its place at the forefront of European investment banking, Manser brought in Bill Harrison, a punchy corporate financier from Lehman Brothers, to run the investment banking division. Brash and aggressive, with a penchant for footballing metaphors, Harrison quickly shook the bank’s corporate finance department into action. Out went the low-margin advisory work for small and medium-sized companies, in came big-ticket, high-margin M&A. “We are going for the big guys,” he told staff. Guessing (probably correctly) that to succeed in investment banking Flemings would need a strong securities arm, Manser decided to go on a hiring spree. Between March 1993 and March 1994, the securities department hired nearly 700 new staff including Tom Hughes-Hallett, a broking specialist from Swedish bank Enskilda, who was appointed head of Flemings’ UK and European securities operations. There was also a rapid expansion in Fleming’s network in 1993/94, with joint ventures signed with two leading foreign brokers Ord Minnett in Australia and Martin & Co in South Africa. The bank now employed over 5,600 staff in 42 offices in over 30 countries. Short-term miracles By March 1994, Manser was being lauded as a miracle worker. His bold expansion strategy had sent net profits soaring to more than £143 million for the year. Earnings per share had increased to a remarkable 299.8 pence, against 149.6 pence the previous year. Shareholders jostled around to slap the great man on the back after dividends rose by 32% to 50 pence per share. Once again, Jardine Fleming was the main driver of profi1ts thanks to strong growth in Asian stock markets. But other areas were beginning to show encouraging signs. The joint venture set up with US fund manager In his 1994 annual report statement, Robin Fleming waxed lyrical about the expansion: “We can look back on the growth of our global business with some pride. We now have 42 offices in 30 countries with over 5,600 staff, of whom 55% are employed outside the UK. This global presence, combined with our financial standing and the diversity of our services, bodes well for the future.” Manser was more cautious, noting that 1993 was an exceptional year and warning that “it is unlikely that this combination of events will be repeated for some time to come”. Nevertheless, he wrote in his review of the year: “The outlook for financial markets seems good.” This proved to be a false hope. In the wake of the US Federal Reserve’s decision to raise interest rates in February 1994, emerging markets crashed. The bank’s enlarged securities division struggled to find deals to do, while falling markets hit asset-management income hard. Owing to some unfortunate asset-allocation decisions, the bank’s investment trusts did particularly poorly, with only three out of 14 trusts outperforming their index benchmarks. Investment banking had a good 1994 and 1995 winning high-profile deals including ING’s takeover of Barings, and Associated British Food’s reorganization. However, a worrying number of Flemings’ transactions ended in failure, such as Enterprise Oil’s failed bid for Lasmo, and the bank still seemed to lack the reputation of its major rivals. It lost out to SBC on the bid to advise Trafalgar House on its bid for Northern Electric (which was particularly galling given Flemings’ strong links to Jardine Matheson, Trafalgar’s owners). The European securities business, meanwhile, was moving very slowly, with a return on costs of 45% during the year. Costs out of control Few analysts were surprised, therefore, when Flemings announced in March 1995 that net profits had fallen to £119.6 million. Market conditions had been very tough after all, and it was to be expected that the new, enlarged group would take a while to find its feet. But the rise in costs was beginning to cause concern. Flemings now had 6,775 staff costing it £351 million a year, way above the £235.1 million target set by Manser the previous year. Manser himself was keenly aware of this. “We are now entering rather a critical phase in the development of our businesses,” he wrote to staff in an internal business plan published in May 1995. “It is vital that we ensure that costs are kept under sensible control.” Nevertheless, he decided to plough ahead with new overseas ventures. During 1995, Flemings set up a joint venture in Peru, Fleming Latin Pacific. Not long after, it formed Electra Fleming, a 50/50 joint venture with UK-based venture-capital firm Electra Investment Trust. Jardine Fleming added three new exchanges to those it covered in Korea, Thailand and India. Staff numbers continued to rise as a result, reaching well over 7,000 by the end of the year. Unfortunately for Manser, the bank’s final push coincided with continued instability in Asian markets. Jardine Fleming was holding on to its dominant position in Asian GDRs and equity-linked deals, but when the markets were this flat it could do nothing. Outside Asia, the bank was going great guns. The investment banking department worked on more than 40 M&A mandates during 1995, including advising Dresdner Bank on its acquisition of Kleinwort Benson. Despite the poor performance in 1994, the asset-management side was gaining clients, particularly in the fast-expanding family of specialist emerging market investment trusts. By the end of year, Flemings had nearly £58 billion of funds under management. The UK pension fund department had finally begun to win back the clients it had lost in the late 1980s, and the move into money-purchase or defined contribution scheme management was looking very promising. Cape in good shape The South African office was doing especially well. It acted as bookrunner on all four major equity issues launched in 1995, and advised two leading companies on South African M&A transactions UK conglomerate Hanson on its disposal of Ever Ready South Africa and French food company Danone on its investment in Clover Holdings, a local milk-products group. But without Jardine Fleming on top form, Flemings found it hard to generate enough business to cover rising costs. Net profits for the year to March 1996 fell to £87.9 million as a result. Not wishing to alarm staff, Manser took an optimistic line, stressing that the expansion strategy was almost complete and that the bank would now “reap the rewards we have made in the last three years”. Sadly, such optimism has proved badly misplaced. So far this year, Flemings has won almost no non-Asian capital market transactions of note except for a $810 million equity placement for UK insurance company Sun Life. The resignation of Bill Harrison in June has left the European corporate finance team without a real big-hitter capable of winning important advisory mandates. Jardine Fleming’s reputation was seriously damaged in August by revelations that a senior fund manager, Colin Armstrong, had been diverting profitable trades away from the bank’s funds into personal accounts. The bank was fined £400,000 by regulator Imro and required to pay compensation of $19.3 million. Early this month a major client of Jardine Fleming’s fund management arm, the Hong Kong Jockey Club, withdrew an account worth an estimated HK$800 million (US$100 million), and other investors had already withdrawn between US$50 million and US$100 million. European savings markets (particularly private pensions) have grown far more slowly than had been expected, leaving Flemings’ expensive European asset managers underemployed. First-half figures for the year to March 1997 have yet to be released, but it is a sure bet that they will show a further decline in profits and an increase in costs. Manser is likely to put two main options to the executives’ meeting later this month: essentially either cost-cutting or pressing on in the hope of an upturn in Flemings’ fortunes. The cost-cutting route would involve taking the knife to loss-making operations such as European broking and, perhaps, European investment banking. Cost savings here would give the bank more management time to concentrate on building up emerging markets businesses, some of which are doing very well. But it would be a tremendous blow to the bank’s collective ego, not to mention a confirmation that expanding into these areas had been a futile move in the first place. Manser’s alternative is to press on as before in the hope that Jardine Fleming will have a good year and generate enough profits to cover Flemings’ loss-making European enterprises until they are strong enough to stand on their own. Given the lethargic state of most Asian markets, and the appalling publicity generated by the fund-management scandal, this seems unlikely. Even Henry Strutt, Jardine Fleming’s new chairman, admits that 1996 is likely to be a tough year. “After two dismal years, we all hoped that we would see a strong market this year. But it has been pretty patchy frankly. Better than last year, but not an unmitigated bull market.” Either way, the future is likely to be painful. Fleming does not have the capital to compete with big US banks in the international investment banking markets and it has shot itself in the foot in Asia, where it did have an advantage. But a future without a European distribution or investment banking arm is likely to make life difficult for its emerging market offices, which rely on placement power to win capital-raising and M&A mandates. Flemings could stick to asset management, picking up fat dividend cheques off Jardine Fleming, but there’s little excitement in that. Perhaps they should have sold out after all. *
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
