MAC'king

Yesterday, we were supposed to play basketball against Mac Bank but it turned out to be another finance company. It’s motivated me to write a piece about them aka The Millionaire’s Factory aka Macquarie Bank Limited. I’ve been meaning to do it since 8 months ago especially when they were in their frenzied acquisition stage.

For many people, the term “Mac Bank” means different things. For graduates it is one of the places to be. For investors, it was a place to put all their hard earned cash as the price skyrocketed from $20 to $75 in the last couple of years. For fund managers, they have been in awe but lately they have been calling for their heads. For companies, it represents a source of capital and advice. For public infrastructure and the government, it has been a godsend.

But for many of us, it is still an impenetrable fortress. And we don’t know exactly how this mysterious place works. A lot of my information is taken from articles I’ve read, internet, conversations with two directors of Mac Bank, their financial report, examining their ASX disclosures to the stock market, reports to potential American and Asian investors and just stuff I know in general.


Background

Without boring you too much, here’s the 411. It started out as an offshoot of the UK bank Hill Samuel & Co in the early 70’s and originally had only 12 people (much less than the current 7000 staff). Back then it only operated in forex. They recognised that deregulation of financial markets was on the government agenda and that forex was the area to be in. In 1985, they changed the name to Macquarie Bank and came to a crucial cross road that faces many SME’s: Do we remain stable or do we grow bigger?

They chose growth and the rest is history.

Mac began in a specific area but broadened its focus to full-service merchant banking i.e. an investment bank now colloquially known as an “i-bank”. It offered the traditional services expected like corporate advisory, M&A, IPO’s, stockbroking, trading, equity research analysis, debt market finance, and private client wealth management.


What makes them different to a traditional i-bank

In the mid 90’s they took a gigantic leap. Laterally. With cash, an entrepreneurial mindset and a bit of risktaking, they bought half of the M5 motorway for $50m. Their first big play was a risky one to outsiders, but a calculated move into the infrastructure market. Now they are one of the world’s biggest players in the public/private infrastructure market.

This lateral move represents the uniqueness of Mac Bank. A lot of i-banks make direct investment and take them onto their balance sheet. But to me, the difference is in their ability to think laterally with an entrepreneurial focus yet still to be able to manage their risks. Mac was able to enter areas which were unheard of for an i-bank, particulary the area of public infrastructure that was being privatised. The difference is in the deals which they invest in.

Their strength lies in its capability to build adjacent businesses next to their core business. For example, I read that they went from one little desk servicing mortgages until someone came up with a brilliant idea about mortgage origination and they built a multi million dollar business out of it. These guys went from one M5 toll road, to owning toll roads in Virginia, Indiana, Isle of Man ferry and in the process of buying the London Stock Exchange. It is said that the executives receive on average one to two new business ideas a day.

Their direct investment formula is to pick unique assets with secure long term cash flows. Allan Moss their current CEO, outlined why they bought airports in a recent article. Each city usually has only one airport. The citizens have to use it to fly in and out and therefore there is a constant flow of traffic. The Isle of Man Ferry is another good example. It is the only mode of transport from London to the Isle of Man. They love to pick assets which hold monopoly positions which minimize their risk.

After buying them, they will bundle them up into a trust and usually but not always list them on the stock exchange. Then, investors, big institutions, fund managers, jump on board like crazy and start doling out their cash.

Some people use the analogy of a solar system to describe Macquarie Bank’s business model. The bank itself is the sun and the adjacent businesses spin around it like planets and moons. Macquarie is a lot bigger than people realise. It is worth about $40bn from memory and is fast making its name in the global market. Originally it just focused on the Australian market but it is fast drying out. They are now scouring the world, noticeably Asia-Pacific and the US for more assets and deals. In terms of size, it is still a lot smaller than your traditional bulge bracket i-banks like Merrills, Goldmans, etc…


Can the solar system ever collapse?

Mac Bank has a very strong risk management system in place. In fact if you look at their business model, it uses concentric circles to explain how it works. One of the inner circles is risk management, and the business is built around that. Although they come up with a lot of new ideas, a lot of time is still spent doing due diligence, crunching the numbers and understanding the broader risks. The risk management people consider worse case scenarios and the downside of what could happen. But even then, mistakes can happen.

I spoke to one of the directors last year during their frenzy stage and asked him “How do you balance the entrepreneurial mindset and the risk taking?” He actually was taken aback by my question, and mentioned that he was a little bit worried himself about all these new deals coming through. He justified it by saying that they assess the numbers and try to understand the risks as much as possible.

There was a very interesting article that came about at the frenzy stage and made the comparison of Mac to Enron: A fast growing business which not many people understand, and the share price just keeps skyrocketing. One of the problems (among many) with Enron, is that many people including stock analysts themselves had an unwavering belief in the company without any grasp of what the company was doing. It was a reflexive growth – the share price went higher, because people believe that it could.

The other similarity is that Enron became one of the most diverse businesses you could ever come across. Enron also took advantage of deregulation. If you look at the success that Mac Bank has had, from its early inception to now, it has been around the ability to take advantage of deregulated markets. The move into PPP’s (Private Public Infrastructure) is a great example. The government has been looking to sell of its infrastructure assets since the late 80’s and Mac was able to be the first mover into that area. It continues to do in far ranging places as governments try to spin off these assets - that is the risk and the financial capital needed to build these things into the private market. Macquarie Infrastrucre Group itself, an offshoot is now worth around $9bn.

I think Mac Bank has a lost of bit of its shine since September last year. I’ve all for risk taking but there are rumblings that the bank entered into too many acquisition deals. The reason they did that? To gain momentum. They were announcing new deals after new deal like there was no tomorrow. Every day, you would open the business section of the newspaper, and there would be multiple stories about Mac. There was so much that the term “Macquisition” was being used. The latest word is that all the infrastructure funds all 25 of them, aren’t doing very well and more assets will be moved off their balance sheet. Time will only tell how big the Macquarie solar system gets.

The Millionaire's factory

Mac takes real good care of their employees. Most of the directors are on some crazy salaries with stock options to boot. And lot of the executives are quite young. I remember seeing a very young guy, 28 years old who was director and was on the Young Rich List. And this dude was on a salary, not an entreprenuer or actor or athlete. They call it the Millionarie's factory because Mac produces more millionaire's than any other company. They reward ability and promote these young guns very quickly. It's either up or out.

I'm out like Mac'king,

DJ Ho.