A new research note from analysts at UBS sounds like bad news for anyone working at Macquarie Capital or Macquarie Securities. Macquarie should ideally close or sell these unprofitable businesses – especially in Europe and the U.S., says UBS. Failing that, it might want to scale them back – considerably.
The idea that Macquarie might want to get out of M&A advisory (Macquarie Capital) and equities (Macquarie Securities) is something of a repetitive meme. The Wall Street Journal flagged problems at the two units last April after it emerged that profits at both had plummeted. It doesn’t help that Macquarie has had persistent problems in Europe, where it lost two European investment banking chief executives in the space of a few years, one of whom (Benoit Savoret) left after only a few weeks in 2010. Macquarie has also been accused of seriously underpaying its investment bankers and was said to be slashing 33% of its jobs in Europe as long ago as 2011.
Now, UBS says Macquarie needs to extinguish its M&A and equities ambitions because they’re having a terrible effect on returns on equity (ROE) for the group as a whole. Back in 2008, Macquarie was generating a ROE of 24% says UBS. Now the ROE is more like 8%, while Macquarie’s cost of capital is 12%. All indications are that both Macquarie Capital and Macquarie Securities are, “highly unprofitable,” says UBS.
This lack of profitability is all rather unfortunate when you consider that Macquarie spent heavily on building its European and US investment banking businesses after the financial crisis. In 2009, it bought boutique financial services focused investment bank Fox-Pitt Kelton, only to see many of the bankers who came with the purchase defect in the years that followed. It’s also hired heavily for its US equities business and added 14 senior US equities salespeople and traders as recently as June 2012.
Macquarie doesn’t have much to show for its enthusiasm, however. According to Dealogic, it ranked only 25th for US M&A revenues and only 17th for EMEA M&A revenues in 2012. UBS says the North American and EMEA equities and investment banking businesses are both sub-scale and that Macquarie has yet to, “fully acknowledge the impact of structural changes” affecting the investment banking industry.
Macquarie declined to comment for this article. However, headhunters we spoke to said Macquarie has acknowledged the new investment banking reality and that its investment banking businesses have already been rightsized accordingly.
“Macquarie’s been scaling back its equities business in the US and Europe for a while,” says Jason Kennedy, chief executive officer of search firm Kennedy Group. “They’ve always been very cautious about adding cost and have a tendency to build up and then retrench,” he adds. Figures for Macquarie’s Financial Services Authority (FSA) registered employees in London confirm that big layoffs have already happened: in December 2009, the bank had 324 FSA registered employees. In December 2012, it had 198. That’s a 40% cut in headcount.
An M&A headhunter confirms the notion that Macquarie is a fickle player in the investment banking world. “They dabble, and then when things go wrong, they pull back,” he says.
However, an M&A banker with close knowledge of Macquarie says the bank has merely been reorienting its strategy to take account of the new reality. “They no longer want to be all things to all people in M&A and are just focusing on key sectors like natural resources and infrastructure,” he tells us. “And in those areas they’re doing very well.” He says key people to work for at Macquarie in London include Raj Khatri, a senior MD in metals and mining, and Daniel Wong, head of Macquarie’s infrastructure and utilities advisory team.
We spoke to Daniel Wong last November. Wong told us his team was hiring and that it employed 50 people across Europe. There was absolutely no mention of pulling out of M&A advisory entirely, however. With luck, UBS has made a wrong call.