“It was driven by the changing demands of the business,” says Alasdair Morrison, taipan of Jardine Matheson. “Globalization has been picking up in recent years.” “All of the business activities have become global in nature,” says Tim Freshwater, deputy chairman of Jardine Fleming. “Clients require a global service,” says John Manser, chairman of Robert Fleming.
In case you haven’t guessed, the agenda was globalization. The decision to merge Jardine Fleming into UK-based investment bank Robert Fleming is being portrayed as part of the inevitable process of globalization in investment banking. The logic of this is hard to dispute.
However, for those who have been watching Jardine Fleming in recent years it is clear that there was another agenda and it was one man’s: John Manser’s. As soon as Manser became boss of Robert Fleming in 1990 the independence of the Hong Kong-based investment bank was always under threat.
The prodigal joint venture is now to be unwound after 28 successful years, its demise largely the result of its own success. In 1993 Jardine Fleming made profits of $202 million profits and in 1994 $211 million. Robert Fleming’s most profitable year was 1994 when it made $212 million – but over $100 million of that came from its 50% stake in Jardine Fleming. To Manser, sitting in London, it must have looked disturbingly like a tail wagging a dog.
Manser is a man with a particular affection for business plans, clear reporting lines and order. Staff who speak of him like to think of his approach as akin to those 18th century gentry who sought perfect order in their English country gardens, as balanced and tidy as a couplet by Alexander Pope. To Manser, Jardine Fleming – Asia’s top broker, fund manager and a leading Asian investment bank – was in contrast a messy, though profitable jungle, complicating his reporting lines and steering its own course.
Its approach was personified in its former boss, now vice-chairman of CSFB Asia, Alan Smith. Easygoing but fiercely independent, Smith was responsible for building the operation into a regional powerhouse in the 1980s. So when Manser suggested in 1993 that Smith’s business should be folded into Robert Fleming, his response was predictable. He suggested that as Jardine Fleming had a better brand name and paid lower taxes, it made more sense to fold the UK-based activities into Jardine Fleming and base the new global bank in Hong Kong.
This was the beginning of the end. But to understand how Smith and Manser had reached that point, a brief history of the firm is required.
Past glory
Jardine Fleming was founded in 1970 as a 50:50 joint venture between UK bank Robert Fleming and Asian trading company, Jardine Matheson. The idea was conceived by Jardine Matheson chairman Henry Keswick who had first approached Hambros and Barings before settling on the Scots bank.
At that time, Jardine Matheson – on whom James Clavell’s novel Noble House is based – was aggressively acquiring assets and the joint venture made sound strategic sense. Why pay an investment bank fees when you can have your own bank? Its -very Asian as we now see – way of thinking was borne out by its takeover of Dairy Farm in 1972.
Dairy Farm – which owns one of only two supermarket chains in Hong Kong – was a prime target in the early 1970s because it owned a large farm in Pokfulam. This prime piece of real estate contained only 60 cows and was ripe for redevelopment. So began Hong Kong’s first hostile takeover and Jardine Fleming began to staff up.
In October 1972 Nicholas Sibley arrived at Jardine Fleming from London and hired Alan Smith, then a law lecturer.
Dairy Farm was being defended by Rodney Leach of NM Rothschild and as Hong Kong did not have a takeover code he suggested the UK’s should be used. Sibley, at once the velvet glove and the iron fist, replied: “No way – that’s like playing mahjong by the rules of bridge.”
Leach lost the Dairy Farm battle and Jardine Matheson got its prize. Ironically Leach later joined the Hong Kong conglomerate he had been fighting and in a coincidental circularity it was Leach who negotiated the Jardine Fleming-Robert Fleming merger in December and will join Robert Fleming’s board.
Sibley’s remark to Leach, however, captured the spirit of the times and an informing principle in Jardine Fleming – to be neither Asian nor British but to reside at the margin between the two. Sibley was to go on to head Jardine Fleming and become one of the Hong Kong’s most venerable lunchers.
Smith’s entry into the firm is one of those great historical accidents that characterized Hong Kong in those days. Unlike the largely Eton-educated Fleming family, Smith went to Dartford Grammar school with Mick Jagger and was over in Hong Kong for a stint at Hong Kong University as a lecturer. However he’d already proven that he was no ordinary academic.
Smith had set up a company to give seminars on aspects of the law. The colony’s brokers paid to hear Smith tell them about the “legal aspects of stockbroking”. He explained that if a client put in an order for a stock at $10 and the broker was able to get it for $9 then the client should only pay $9. A bemused bunch of colonials replied: “Are you sure that’s the law?”
Again this proved an irony. Smith’s final years at Jardine Fleming were plagued by a fund management scandal in which at least one member of staff had forgotten some of the basic rules of the broking business.
But that was a long way off when Smith started his career in corporate finance with Sibley. He was to be the talented protégé to the effusive Sibley and together they concocted the Jardine Matheson/Jardine Strategic defensive cross-shareholding vehicle which has ensured the Keswick family has kept control of Jardine Matheson. Their creation earned them the gratitude of the Jardine side of the joint venture, and gave Smith in particular a lot of independence.
Going it alone
In theory Robert Fleming managed Jardine Fleming. But under Smith – who became managing director in 1983 – interference from London was minimal. A small boutique that originally occupied less than a single floor of Jardine House, it embarked on a hiring spree that diluted the importance of those seconded from London. At its peak Jardine Fleming would hire 3,600, mostly from Asia.
Robert Fleming boss Joe Burnett Stuart was quite happy to remain passive and allow Smith to build a regional business based initially on the Japanese warrant market. Under Smith profits grew from $12 million in 1983 to $74 million in 1990. At this point Burnett Stuart passed the mantle of chief executive on to John Manser.
Manser is not a man easily described as passive. The word ‘arrogant’ is more commonly used by former colleagues. When Euromoney asked him about his comment in the group’s annual report that 1997 would be the year of the emerging markets, he said: “Normally I get my comments quite right.”
Born into a rich shipping family he chose not to go to university, joining Robert Fleming in 1966, running Jardine Fleming between 1975 and 1979 and then running UK unit trust (mutual fund) group Save & Prosper. He says his worst quality is impatience and his best is that he is a fair man.
He admits to a liking for order and is keen on marketing and presentation. Evidence of as much can be seen in the Robert Fleming annual report which he quickly transformed from a bland affair with a one page statement by the chairman to a slick affair with an extensive ‘review of operations’, a ‘history of the founder’ and a ‘five year record’ on the first page.
Save & Prosper started life in 1934 and was bought by a consortium that included Barings and Robert Fleming in the 1950s. In 1983, under Manser, Flemings bought out Barings and took majority control and just before the October crash in 1987, bought the remaining 36% for £80 million.
It enjoyed mixed fortunes under Manser. In 1980 Save & Prosper was number one in the unit trust industry and had 17.56% share of the industry. By 1988 it had slipped to fourth with a 4.88% share of the industry. “It lost its way more in the 1970s,” says Manser. “The 1980s were not a bad time.”
This is not a view shared by everyone involved. At one offsite in a country house near Winchester, one group used Save & Prosper’s loss of direction in the 1980s as a management case study. “It wasn’t a career-enhancing move,” remembers one of those there.
Since then Save & Prosper has changed its image and in a survey this year by UK industry leader Money Marketing was rated with Flemings institutional business as the most consistently successful fund manager of UK investments in the 1990s.
With the integration of Save & Prosper, Manser could look to the other business he ran with the long term goal of eventually integrating Asia too. It would not be simple.
Culture clash
Manser is well aware that a cultural gap existed between Jardine Fleming and Robert Fleming (and still does). “Jardine Fleming was younger,” he says, “and tended to be a bit brasher. It was a doer. It didn’t believe in committees. And Hong Kong people looked down on Britain. They saw it as a bit fuddy-duddy.”
Robert Fleming, which began life in the late 1870s as the first investment trust in Scotland under its eponymous founder, grew by funneling Scots savings into US investments. It is still a family bank and tradition is not abandoned lightly. At 9.30am on Wednesdays and Fridays the receptionist-cum-bagpiper still plays the likes of the Highland Cathedral Slow Air in the atrium of its London headquarters. There are “around a dozen” members of the Fleming family working in the bank, according to a spokesperson.
The leading family member today, Roddy Fleming is the nephew of Ian Fleming, author and creator of James Bond. Roddy is reckoned a first class marketer in corporate finance, while the bank’s deputy chairman, Adam Fleming did much to foster relations in South Africa with local broker Martin & Co – another joint venture that has just been bought out (in November 1998). Adam’s first love is his gold mining company – listed in South Africa – but the relationship with Martin proved a profitable seam too. Flemings is the market leader in southern Africa and has listed several of the region’s companies in London, most recently South African Breweries.
The Flemings are for the most part disarmingly charming and embody the modest approach the bank has traditionally taken to marketing. Valentine Fleming’s son Matthew, an England cricketer, once typically told a fellow party guest at a Hong Kong cocktail party that he “couldn’t even get into the bank” down-playing his own intelligence.
Manser changed this. His approach – from the first – was the antithesis of Burnett Stuart’s. He believed in aggressive marketing and tight-knit integration. “I am a planner,” he says. “When I run a company I have a strategy I hope will last for a very long time.”
He published a five-year plan in 1992 which stated the “strategic intent” that “Flemings will become the most profitable merchant bank and have the best rewarded employees within five years.” He set about bringing in men whom he felt could take Flemings onto a new plane and integrate it – globally.
The key arrival was Bill Harrison in 1993 from Lehman Brothers where he had headed European investment banking. A veteran of oil companies such as BNOC and Tricentrol, Harrison fitted into the old Flemings culture about as well as a piece of Ikea furniture in the venerable boardroom. He has a down-to-earth manner. Rather than say he’d “‘phone you”, he might tell you he’d “give you a bell”.
He arrived with Manser for a tour of China in the same year. Both men became fixated by the potential mandates for H shares and B shares and wondered why Jardine Fleming wasn’t being more proactive. Harrison took it upon himself to shakes things up a bit.
It didn’t take long for this self-styled ‘global’ head of investment banking to irritate the Jardine staffers. It was their patch and the intrusion from London was unwelcome as was his marketing style and his propensity to tell clients about how to do deals in terms of his favourite football club, Birmingham City.
The first blow to Jardine Fleming’s independence arose in 1994 when Liu Chee Ming – who joined Jardine Fleming in 1981 – was asked to share his Asian investment banking job with a new recruit, Miles Armstrong, a Harrison hire. Just over a year later Liu was gone. He was the first of Smith’s allies to be pushed out. (Harrison was eventually headhunted in 1996 to run BZW and is currently at Deutsche Bank.)
Meanwhile there were exchanges of memos at the highest level over the use of Jardine Fleming’s deals in Robert Fleming marketing and in news sources. Why had a $100 million five-year convertible for MetroBank appeared on Reuters as led by Flemings Philippines, and not Jardine Fleming? Why did World Equity magazine produce a league table in August 1995 that showed Robert Fleming as top with 25 issues worth $2.1 billion for equity-linked deals from Asia? A memo was sent to IFR Securities Data requesting that ‘Robert Fleming/Jardine Fleming’ should be used as opposed to simply Robert Fleming.
There were arguments over the management of salespeople in New York. It infuriated Jardine Fleming that they would pick up the phone and say ‘Robert Fleming’, even though they were selling Asian equities and using Jardine Fleming research. Robert Fleming would take 50% of the revenues, while Jardine Fleming would cover the cost of Asia’s biggest research team and pay for their marketing trips. It didn’t seem fair – and the same was true in London.
“Basically Jardine Fleming’s sphere of influence ended somewhere in Iran,” says a former employee. “And any salespeople in London and New York were employees of Robert Fleming.”
In shared businesses such as equity derivatives – where Jardine Fleming used Robert Fleming’s balance sheet and $1.5 billion of capital – it became difficult to see who should pay for what, and there were arguments over where the cost of new systems development should be parked. While times were good, Jardine Matheson remained passive and took little interest in these scuffles. Once profits started to fall, transfer-pricing and cost-sharing began to take up an increasing amount of management time in London and Hong Kong.
At the crossroads
Meanwhile the period 1993-94 were halcyon days for the firm whose Chinese name, Yi Fu literally means ‘happy and content because of being rich’. Jardine Fleming was rich beyond its founder’s dreams – earning profits of $211 million in 1994.
But as one staffer puts it, the firm had reached the size where it faced the exoskeleton dilemma. Insects, he notes, have exoskeletons and some like grasshoppers are able to perform prodigious feats such as jump 20 times their own height – Jardine Flemings’ version of that trick was the 90% return on equity it posted in 1994.
However if that same exoskeleton grows just 2% more the insect’s body plan becomes its greatest enemy. It doesn’t have the muscle power to lift its now too-heavy frame. It is in a boundary state where it must develop an endoskeleton. But when it does, says the staffer, it becomes a mouse – the lowest point on the endoskeleton scale – and must start to grow again in a different way.
The old way of growing was entrepreneurial. Take Taiwan, where Smith originally sent Blair Pickerell in 1985 convinced the Taiwanese were about to lift exchange controls. Like many of the early Jardine Fleming pioneers that were eventually to spread across the whole of Asia, Pickerell was an American. He hired a secretary, Christina Sung to manage the office and spent six months getting a feel for what might happen.
He soon realized that exchange controls would go, but figured that the real opportunity was to sell foreign securities to the Taiwanese not, as he has first thought, selling Taiwanese equities to foreigners. Smith quickly agreed and the whole strategy was reversed. Sung was put in charge of setting up the unit trust business and quickly gained a 60% market share. This was largely because the firm was first – one of its defining qualities. She is now extremely influential in China and is one of Jardine Fleming’s greatest assets in its bid to win one of five prospective fund management licenses in China.
Jardine Fleming’s ‘firsts’ are too numerous to list but include being the first foreigner to gain a seat on any Indian stock exchange in 1994 and being the first foreigner to get a seat in Korea. By 1994 it had built 37 offices in 29 cities across Asia.
Taiwan became one of Jardine Fleming’s most profitable businesses. It was also one of the most innovative, finding a client willing to do Jardine Fleming’s first convertible bond in 1991. The $40 million deal for Tung Ho Steel was a breakthrough for the Robert Fleming family of companies and created a new business line, convertibles, which were to become very lucrative.
Meanwhile the Asian fund management business – the backbone of Jardine Fleming’s profitability – boomed. Funds under management soared from $5.6 billion in 1988 to $10.2 billion in 1992 and $22 billion in 1994.
New broom
However a new broom now arrived in Hong Kong, a man more sympathetic to Manser’s views on globalization and integration. Henry Strutt was made managing director in July 1994 and Smith was pushed upstairs to the newly-created role of chairman. While Strutt had worked at Jardine Fleming for much of his career he returned to the firm as a director of Robert Fleming and was considered a confidante of Manser’s in a way that Smith certainly was not.
If Smith didn’t share Manser’s vision, it became equally clear that he didn’t figure in Strutt’s plans either. One of Strutt’s first actions was to commission a business plan which was produced in 1995 and showed an organogram in which everyone reported in to him. Smith was nowhere on the diagram.
One line from the business plan in particular signals the change: “While our progress has not been haphazard, it has been achieved without much in the way of forward business planning,” wrote Strutt. In future there would be more emphasis on order – in true Manserian style.
Jardine Fleming folklore has it that Manser is so obsessed by order that he once hosted a dinner party and while he was talking to a guest noticed a black mark on his wall. He continued talking but walked over to a cupboard, took out a tiny pot of paint, and while talking, painted out the offending mark.
Apocryphal or not, Smith was like that black mark. And painting him out symbolically on the organogram would soon be followed by a more permanent removal in September 1996 when he resigned as chairman. The scandal at Jardine Fleming Investment Management involving rogue trader Colin Armstrong had given Robert Fleming the opportunity to put more ‘order’ into what it saw as an increasingly wayward part of the group.
Strutt acted quickly to consolidate. He created a group executive committee of seven and a new supervisory board. This replaced the more collegial 23 man board of directors that had gone before – and which incredibly also counted 11 non-executive directors taking the tally to 34 people.
The new executive committee included James Bruce as head of Hong Kong – a newly created role – and only one true Jardine staffer, head of Asian broking, Christopher Rampton. The new head of fund management, Mark White had been with Save & Prosper in the UK for three years and began to integrate Jardine Fleming Investment Management with the London operation.
The beginning of the end
The Robert Fleming-Jardine Fleming operational merger began in earnest in 1996. The exoskeleton was turning endoskeleton and going global. Christopher Rampton became ‘global’ head of Asian broking in 1997, and by 1998 country heads were given a global P&L.
The investment banking group began reporting to Bernard Taylor, the London head of corporate finance. Taylor represented the most senior member of a new Barings mafia in Jardine Fleming/Robert Fleming. Other key members were Mark Dowie (Asian investment banking chief), Russell Julius (head of Asian capital markets) and Duncan Ross (head of Asian sales).
There were departures among the old Jardine Fleming-types. High profile losses included former board director and head of research, John Donald, the son of a former British ambassador to China who left in mid-1998 to write a musical about sex in stockbroking with the working title InFidelity on line three.
The profits at Jardine Fleming began to drop even before the Asian crisis started in mid-1997. In 1995 they stood at $122 million. They fell to $82 million in 1996 and plunged to just $14 million in 1997. The annual reports at the time make excuses about Asian markets but old hands say it had as much to do with taking the Jardine out of Jardine Fleming as bad markets.
The entrepreneurial drive had been exchanged for Strutt’s “forward planning” and Peregrine supplanted it as Asia’s most aggressive investment bank at least until it went bankrupt at the beginning of 1998.
A new finance director, Simon Heale was brought in from airline Cathay Pacific to take a knife to costs. Coming from an industry where, as he puts it, he would literally “count the number of lettuce leaves on a food tray”, he didn’t find it hard to cut costs by 25%, selling two junks, banning biscuits at board meetings and cancelling the staff Christmas dinner at the Furama hotel. Senior management were asked to lead by example, taking business class on long haul rather than first class. Rents on the expatriate housing for very senior management on the Peak which used to cost HK$300,000 a month ($38,461) were re-negotiated. Most significantly, this year’s annual report was the first not to mention how many staff the bank has, because the number has gone down for the first time.
Jardine Matheson had also begun to notice. At one stage Jardine Fleming contributed a quarter of the conglomerate’s profits and paid out 60% of its profits as dividends. A less profitable Jardine Fleming hurt Matheson’s own net income, which has fallen from $414 million in 1994 to $292 million in 1997.
The Asian crisis and Jardine Fleming’s dwindling profitability provided the opportunity to integrate the businesses and the two companies’ shareholdings.
Bargain basement
It has long been known that the Keswicks of Jardine Matheson have considered swapping their 50% stake in Jardine Fleming for shares in Robert Fleming Holdings. The Fleming family – which controlled the bank with a shareholding of 35% – was always concerned about ceding too big a stake to the Keswicks and losing control. When Jardine Fleming earned over $200 million the deal would never have been possible. Valued on a P/E-ratio of 20 times, the Keswicks’ stake would have been worth around $2 billion. A swap at this stage would have given the Keswicks a bigger stake in the bank than the Flemings’ block. That was out of the question.
In the event the Flemings have got a very good deal. Jardine Matheson has exchanged its 50% in Jardine Fleming for 17.5% of Robert Fleming and an agreement that the Keswicks will never own more than 20% of the UK bank. The Fleming family stake in the combined business has been reduced to 30%. The deal is reckoned to be worth £180 million – valuing the whole of Jardine Fleming at just £360 million ($604 million).
“Market conditions played a part in bringing the two parties together,” says Manser. “Change is always easier to put into place in adverse conditions than positive ones. When things are going well people don’t see a lot of need for change.”
A back of the envelope calculation reveals how cheaply the deal values the Hing Kong business. Take the fund management operation. Jardine Fleming has $19 billion under management as well as a 25% stake in Rowe Price Fleming which equates to a further $7 billion. Even on a conservative valuation of 2% of assets – Mercury Asset Management went for 3.4% – that business alone is worth $520 million. At the £360 million valuation thrown up by this deal the Flemings have got the brokerage division for around $80 million. Not bad for a business that last year won Euromoney’s Best Asian broker award and that has been gaining market share this year especially in Korea, Singapore and the Philippines.
It looks like classic example of selling at the bottom, a speciality of Jardine Matheson and the Keswicks. These after all were the guys who sold their special allotment of almost 2% of Hong Kong and Shanghai Banking Corporation (HSBC) for HK$45 million ($5.76 million) in 1975 – a stake that would be worth $1.27 billion today. They also sold May Road in Hong Kong in the mid-80s to Alan Bond who then sold it to the Kerry Group just as the residential property market doubled and doubled and doubled again. In fact, one banker joked over lunch that the Keswick’s decision to dilute its exposure to Hong Kong is a sure sign it’s time to buy the territory’s stocks.
So why have the Keswicks agreed to the exchange now? Certainly their strategic need for an investment bank has been dwindling. And they seem keen to diversify out of Hong Kong from which they moved their listing to Singapore.
Arguably the group has too great a concentration in Hong Kong, the place they founded in the 1830s when they persuaded the British government to protect their right to trade opium. Use a Schindler elevator, rent a property in Central, go to the Wellcome supermarket, buy a Mercedes, have a drink at the Mandarin hotel, buy some furniture from Ikea, fly British Airways, or get a pizza from Pizza Hut and you will put money into Jardine Matheson’s coffers.
But the most significant point may be that firm’s passive stake has failed to pay a dividend in the first half of 1998, and there has been increasing frustration over the way decisions on revenue splits and cost allocations have been taken by Robert Fleming in London.
It also becomes the single biggest single shareholder in the bank should the the individual Flemings ever fragment and decide to vote in different ways – on a takeover for example.
A new age
The deal is said to have been put together by Peter Jamieson, the first chief executive of Jardine Fleming, a school friend of Henry Keswick, a member of the board of the Keswick’s investment arm, Jardine Strategic since 1990, and the second largest personal shareholder in Robert Fleming. The only upside for the Keswicks would be if the bank were sold at a huge premium when emerging markets bounce back. This would seem to be the only motivation for striking the deal at such a low price.
On the other hand, it makes eminent sense to run the business as a global concern. Manser says there are “millions of dollars” of cost-savings to be made. It will mean less management time will be wasted bickering about cost allocations and the like. Clients will be less confused.
But something is sure to be lost. As one former Jardine Fleming man put it, the can-do culture is disappearing: “Every cell in your body is replaced every seven years. So in material terms what is it that is ‘you’ when your body is always changing? There is some guiding spirit that is you even though your body cells come and go. It is the same with broking firms. Jardine Fleming was a very special place to work.”
The name will stay and there are many who will jealously try and retain the vestiges of independence. Amusingly a piece of Flemings’ London-based research on the global cement industry came with some marker pen asterisks (penned in Hong Kong) reading “Indicates clients advised by Jardine Fleming”. This came out in mid-December.
Research is a particularly touchy area because the Jardine Fleming team feel they are better than Robert Fleming, as do the analysts in information technology. In these areas there is a palpable fear of the potential London-centric era to come.
For Smith, the man who built this culture, it is the end of an era. “1998 opened with the demise of Peregrine,” he says, “and it’s closing with the loss of Jardine Fleming – obviously in different circumstances. The indigenous Hong Kong investment banks are gone. To lose one is a misfortune, to lose two is careless.”
In 1994 Jardine Fleming contributed around 50% of Robert Flemings profits, a number which is close to zero today. Returning the Asian operation to profit will be essential for the success of the group as a whole in the new post-merger age.
As for Manser, who has already given many of his executive duties over to chief executive William Garrett, he told Euromoney that he will be 60 next year and will probably retire “to his garden”. The timing would be appropriate. In his 33-year career with the bank he will have achieved his long term goal: integration of the far flung Fleming group. The Fleming’s garden is more orderly and ‘global’ – though perhaps less exotic – today thanks to Manser.
