Here’s a novel twist — an investment banking chief bowing out of his own volition and, moreover, quitting while he is ahead, notes Lex on Wednesday. As the FT reported earlier in the day, Allan Moss is to hand over the reins after nearly 15 years as CEO of Australia’s leading investment bank Macquarie Group.
His departure, according to company forecasts, will coincide with another year of record profits. The trouble is the market does not quite believe it. Macquarie shares plunged 9 per cent on the news, outpacing a 3 per cent fall on the S&P/ASX broader index (although, to be fair, tracking the closest peer, Babcock & Brown).
The fall destroyed A$1.66bn of market cap, noted Stephen Mayne, commentator, founder of Australian news-and-views website Crickey.com and now publisher of his new The Mayne Report, and is the “biggest wipe-out of value that we’ve even seen at a major Australian company after an appointment”.
Still, says Mayne, “Moss deserves to go out as an absolute Australian business legend”. To help that become a reality, he has packaged up a few of his favourite exchanges between the media and the lad over the years.
“Let’s just hope he chooses to write the tell-all book one day because the rise and rise of Macquarie Bank is one of the most remarkable business stories in Australia”, he adds.
Lex, meanwhile, notes that while Moss’ departure is a surprise, with his 60th birthday approaching, it is hardly untimely.
The bank’s performance, however, “is the bigger concern”.
Macquarie reiterated its full year forecast of at least A$1.8bn in net profit, a more-than-respectable year-on-year increase of 23 per cent though a shade below consensus forecasts of A$1.9bn. Although second-half earnings are expected to at least match those of the same period in 2007, all bar one of the seven operating groups expects income to be lower or flat, notes Lex.
Macquarie reckons it can bridge the gap thanks to a A$9bn infusion of capital raised as part of its restructuring. This cash will earn interest and — under the complex formula used for calculating bonuses — result in a reduced payout relative to earnings. That, however, is a one-off fillip, it adds.
Well, FT Alphaville ploughed through Macquarie’s Wednesday operating update (posted on its website) and can see why some investors might harbour concerns – despite the forecast 23 per cent profit increase when Macquarie annoucnes full-year results May 20.
As one hedge fund manager (who, incidentally, is short on Macquarie stock) said Wednesday:
I don’t quite see how they are getting to approximately A$730m for 2H08 results and A$1.8bn for fiscal 2008 based on the weakness seen across its sectors. Four of its seven business units expect profits below 2H07, two expect business in line and only one (financial services group) expects results above year-earlier period. Net profit after tax in 2H07 was A$777m. I wonder if they are anticipating several non intra-Macquarie deals getting done in the current quarter.
In Lex’s view: “Global woes are encroaching on the fabled Macquarie model, despite its focus on the relatively more resilient Asian and Australian markets”.
Credit costs are up to 100 basis points higher compared with August 2007. Real estate holdings are mostly below book value. Performance fees are fast evaporating: nearly all the listed infrastructure funds under-performed their relevant benchmarks in the final quarter of 2007.
In contrast to its global peers, however, Macquarie has enjoyed a series of earnings upgrades by analysts in the past year. Alas, concludes Lex, the so-called “millionaires’ factory” is starting to look a little less unique.
Also making it a “little less unique” is upshot of the recent hoo-hah over the stratospheric bonuses paid to top Macquarie staff. In a separate item, The Mayne Report notes that the big news on Australia’s corporate governance front is that from April 1 this year, the leadership team at Macquarie will be on a “far more appropriate profit-sharing scheme”.
Macquarie has “listened to the protest vote at last year’s AGM and acted,” says Mayne. Excessive cash bonuses based on short-term performance are out and longer term equity incentive schemes are in. See this Crikey report after the AGM for the context.
Rather than only 20 per cent of the profit share being withheld in Macquarie instruments for up to 10 years, an additional 35 per cent will be used to buy Macquarie Group shares that must be held for at least three years. See page five of Macquarie’s Wednesday announcement for the specifics.
The change happens immediately for Moore and will be phased in progressively for the rest of the management committee, notes Mayne, adding: “And isn’t it interesting how the change came after co-founder David Clarke stepped down as executive chairman and become a non-executive chairman on a fixed $680,000 a year from April 1 last year.”
The Macquarie protest vote in 2007 was one of 20 largest Mayne has seen in Australia against an ASX 200 remuneration report, and it has delivered an immediate change of policy that will see more than 90 per cent of shares being voted in favour of this year’s remuneration report.
We’d say Allan Moss’s timing – after a very solid innings – is probably impeccable.