WHEN one is given fresh responsibilities, it is ever so tempting to use them. When the new boy is as young as Andy Hornby, who yesterday replaced James Crosby as chief executive of HBOS at the age of 39, an eye-catching strategic move would almost be expected.
Mr Hornby scotched any such thoughts with virtually his first act as chief executive of the Haliax/Bank of Scotland combination. Displaying maturity that business leaders many years his senior could do worse than emulate, Mr Hornby said that the company he leads would be most unlikely to undertake acquisitions.
His caution is admirable and understandable. It is admirable because acquisitions are loaded with risk. It is said that four out of five deals destroy rather than create value. The caution is understandable because HBOS is expanding organically at such prodigious speed that it does not need to supplement the growth with deals that could divert precious management time and effort. There is irony in the fact that Hornby the Younger is making it his business to attend to nuts and bolts organic growth and cost-effectiveness. But it must also be remembered that the company he leads is the product of a substantial piece of merger and acquisition activity.
The deal that tied Halifax to Bank of Scotland was, according to Mr Hornby, “a match made in heaven”. But will it go unreplicated because Mr Hornby does not want to take on the risk, or is it because the regulatory concerns would be likely to stymie acquisitive intentions? Regulators would probably prevent HBOS buying a UK rival.
For the foreseeable future, HBOS is likely to continue growing at pace. The seeds sown at the time of the merger do appear to have had a certain magic to them. The benefits of scale, coupled with focused attempts to give customers value for money products, means that HBOS is taking heaps of mortgage business. It is well placed to take a good share of savings business, too. It will also be lucrative for HBOS if, as Mr Hornby suggests, Britons are waking up to the reality of weakening occupational pensions provision and rediscovering the savings habit. At the same time the HBOS corporate lending franchise is also going from strength to strength.
There is an ogre lurking, however. The UK market for financial services is not bereft of growth opportunities. But there is a limit to the number of mortgages and savings schemes that the more-or-less stable population will require. The UK is also well-staffed by financial services firms, which puts profit margins under constant pressure.
If the organic growth opportunities start to wilt, HBOS may have to consider taking on a big acquisition. Since the UK option is pretty much closed, Mr Hornby’s eyes may have to veer in the direction of an international deal. For HBOS, aggressive international expansion would bring giant risks.
Must rethink
DEUTSCHE BANK is trying to make itself more like most of the world’s top banks. It has moved more into retail banking back home by buying the Berliner Bank and plans to move its dividend ratio up to half of profits, about the average for banking groups. In other respects, however, the old national corporate trade bank does not seem to have got the hang of things yet.
In the last generation, Deutsche drove hard into the investment and broking businesses after buying Morgan Grenfell in the UK and Bankers Trust in America. But it seems to have brought some old- fashioned habits to its glitzy, market-oriented business.
Some US investment houses are popularly known as hedge funds disguised as banks. That is to emphasise how much of some banks’ business is frenetic speculation on their own behalf, euphemistically called proprietary trading.
The ethos of hedge funds is that they should be able to make a return on funds regardless of changes in the general level of asset prices in any market. These funds do not back business, back Britain, America or anything else. They seek to milk fluctuations and exploit imperfect knowledge.
At Deutsche, however, it does not seem to work like that. The equity “prop desk” makes a mint when share markets are booming, netting almost £270 million in the first quarter of 2006. When the boom came to a grinding halt in the second quarter, however, Deutsche lost £70 million trading shares on its own behalf. That operation needs a rethink.
Yesterday, its loss pushed Deutsche shares down, even though commission income grew rapidly and overall profits were well up and in line with forecasts. Deutsche is also rated at a discount of a quarter to its German rival Commerzbank, a high price to pay for not being much of a hedge fund.
Best value
SHARES in America’s Verizon Communications fell yesterday after its chief executive said that he did not expect to be able to buy out Vodafone’s share of Verizon Wireless, their joint mobile telecoms venture, at least for several years. Shares in Vodafone also fell. Only in the wacky world of share trading could this make any sense. Verizon investors naturally want the lot. The joint venture is the jewel in the group’s crown. In the latest quarter, revenue went up 18 per cent, which is three times Vodafone’s group annual growth rate. And customer losses reached a record low of 1.1 per cent, the envy of an operator in churn-happy Europe.
No wonder that Arun Sarin, Vodafone’s embattled chief executive, told Verizon that he thought that keeping the stake would give the best value for Vodafone shareholders. He is clearly right in this. To sell your best asset when there is only one buyer does not sound like good business.
It makes sense, however, to those whose interest lies in the UK’s top service company not having a corporate future. Selling out would give a boost to Verizon. Then Vodafone would be forced to buy back about £30 billion of stock, a great convenience for pension funds, which as a whole are heavy net sellers of UK equities.
The remaining Vodafone would then be small enough to attract a break-up bid or a private equity scheme, delivering another short-term gain for speculators. But none of that has much to do with long-term value creation at Vodafone, which is what the board and pension funds should focus on.
- THE Bahrainian decision to shift its weekend from Thursday-Friday to Friday-Saturday will make it easier for Western firms to do business in the cash-rich Middle Eastern oil states. But it may be missing the point to think of the added convenience factor for Westerners. The driving force behind the change may be the wish of Bahrain to make it easier to integrate with the global financial system. It certainly represents another sign that Middle East emirates are fast-emerging as financial centres in their own right, rather than just being places where the oil money comes from.
