Hiring is something I spend a lot of my time on. I spend 30%-40% of my time on æpeopleÆ issues û be they hiring, or growing the talent here. Yes, we have been expanding and filling gaps we felt we had in our business.
We are hiring, and investing in our capabilities. For example, we have hired Keith Magnus in Singapore, as well as made recent hires in China and in DCM. Our hiring order has always been country first, industry second, product third. Three years ago we began building the Japan, China and Korea teams, and hired in Indonesia. The second round was building up the industry knowledge, with the hire of [head of Asian investment banking] Sheldon Trainor being a critical part of this. We also hired in real estate, in general industries, in FIG, in financial sponsors, and in technology. The third area was product, and you have seen that most recently with Jon Pratt and the DCM hires. We didnÆt do that first because if we built the product teams without country coverage it would have been the wrong way round.
Additionally, we have improved our capabilities in areas such as financial sponsor and hedge fund coverage. We have built out leveraged finance, and now have these capabilities in Japan, Australia and Asia. We didnÆt have that a year ago. But again we werenÆt going to build leverage finance teams until we had country and industry bankers in place û to give it the flows.
We also changed leadership. We have Sheldon Trainor in Asia, Jiro Seguchi in Japan and Geoff Brunsdon in Australia. Those three people werenÆt here two years ago (in their current roles).
We also had new ideas about improving our core business. We wanted to focus on more strategic deals, understand what the industry trends were and take advantage of them. We wanted to run the business in a disciplined way, so that revenues we gained would drop to the bottom line. I didnÆt want to just create a talent shop where any revenues gained would be blown away by costs or diffusion.
To do this we had to allocate resources to where opportunities are û rather than try and chase every deal and spread ourselves too thin. We therefore spent a lot of time targeting clients and figuring out which ones we should be covering û on a three to five year view. We then tried to figure out what events would affect those clients and the transactions they would produce. And then how we would ensure we won those transactions. We review the mandates we take on meticulously û because in Asia you can take on a lot of mandates that donÆt add a lot of value, but just consume resources.
ThatÆs why if you look at the league tables, you donÆt see Merrill Lynch at the top of the equity league table. But if you strip out blocks, and just focus on IPOs û which is the more profitable business here û we are probably one or two.
The results of all this û and our focus on internal discipline û have been big improvements in our traditional business. This is demonstrated by deals such as ICBC û the worldÆs largest ever IPO û MUFG, the largest ever tier one capital deal; the largest ever private sector IPO (at the time) from China, for Nine Dragons. And some of the largest ever Asian tech deals for Hynix and Elpida.
This leads to the third theme, which is the growth of non-traditional businesses. We are trying to get our bankers to think more broadly and lever the platform. Asia doesnÆt have a single currency like Europe, or have the economies of scale that the US has, so you cannot hub your business as effectively as you can in London or New York. That means you have fragmented capital markets and need to have multiple local presences and it is expensive to maintain such a platform. So we need to lever the platform through leveraged finance, derivatives, private equity, real estate and other forms of principal investments. Examples of that include our investment in Bank of China, and our pre-IPO investment in China Properties. Another great example is the Asia Aluminum deal last year, where we took the company private, got a consortium of investors, and put our own money into the deal. That was key because you have to be able to underwrite that the transaction is going to happen. Then we syndicated some of that risk out to other investors. We try to partner with hedge funds. We try and cede risk to a group of partner investors. We donÆt have third party funds, and we donÆt want to take all the risk ourselves.
Another example of leveraging the platform was Japan TobaccoÆs announced takeover of Gallaher in the UK. We worked on that deal for about three years as an M&A advisor. It is transformational for Japan Tobacco. The good thing about that deal for us is that we have provided multiple services such as a multi billion dollar bridge loan which we were the sole arranger of. And also because it is a yen-based company buying a sterling based company, there is a lot of forex hedging to be done.
Our model here is one where there are no silos. Our bankers represent the whole firm for the client. We take the approach: æIt is my job as a banker to understand the full range of issues impacting a client, and I have a team of experts here who can help tailor solutions for specific client needsÆ. This has helped us to maximise our relevance and sustainable profitability. I donÆt care about being number one in every league table û because it doesnÆt necessarily correspond to profitability.
You may, or may not, be surprised by this, but the story on Margaret RenÆs hire ranks as one of the most read stories we have published on our website this year. Can you talk a bit about the hire and your China strategy?
I have always believed with China it is æhorses for coursesÆ. There are different parts of the China business. ThereÆs covering China firms before they get privatised, and thereÆs covering the listed SOEs û such as PetroChina and the banks. Then thereÆs covering the private sector û such as Nine Dragons û and this requires an entirely different banker with an entirely different set of skills. And then thereÆs covering the government and municipalities for things such as financing and derivatives.
I felt our China team three years ago were generalists, an excellent team who were well connected, but they were trying to do everything. That was not appropriate for the way the market had evolved û especially since China had become more sophisticated. We needed to adapt the strategy, and have different bankers for different types of clients. Margaret Ren is more the SOE type of banker. I felt we were underweight in our coverage of this client base and we needed to become more professional in our coverage û especially since the balance has started to shift away from pre-IPO to post-IPO companies. The latter requires more content-orientated coverage, and with Erh Fei Liu moving over to private equity, we had a big gap. I saw that coming a while back, and I started talking to Margaret about two and a half years ago.
In the case of Rodney Tsang, it was very simple. We were underweight in our coverage of the private sector in China û and probably still are underweight. And our private sector business is now bigger and growing faster than our state-owned enterprise business. Rodney is a great banker. Sheldon [Trainor] is very focused on the private sector and he has been saying for a while that we are underweight and we needed more relationship people. We have good industry support û the private sector coverage is well supported by Mandarin-speaking industry bankers we had already hired. So we wanted to find the right person. RodneyÆs name came up and it was a very quick decision for us. He was a definite add to the team. It was a no-brainer.
Will he be keen on MerrillÆs model of principal investing with ChinaÆs private sector firms?
It is one of the main reasons he came. He wants to lever the franchise. We feel he is a great hire. Plus we will be making more hires û especially China coverage bankers.
Can you discuss the recent moves involving Alex Woodthorpe and Ian Carton?
Ian will now be taking on a new role at his own request. He has done a great job for us. The beauty of this was there was an immediate transition. Alex was the obvious successor for Ian, because of his experience in Japan and around the region. So it has been a big event from the perspective of headlines, but a total non-event for the business.
Just to be clear about the equity capital markets reporting structure. We always had a Pacific-Rim ECM structure. The head was Ian Carton. In Japan and Australia, the local head of ECM reported to Ian. But they also reported to the local origination head. So in Japan they also report to Jiro Seguchi and Australia to Geoff Brunsdon. The only difference before the recent Woodthorpe move, was that Ian Carton effectively had two jobs. He was head of Pacific-rim ECM and head of Asia ECM. And as Ian was in a Pacific Rim role so he reported to me in this function.
Then last year we appointed Jason Cox and Soofian Zuberi to take over the Asia ECM role. Those two reported to Ian on product and Sheldon for coverage. SheldonÆs role as head of investment banking in Asia is to link the business together in Asia and make sure we are serving the clients effectively. One of the roles of the Head of Pacific-Rim ECM is to ensure we have best practice across Asia, Australia and Japan; and bring new products into the region from the US and Europe, where appropriate.
Your strategy always emphasises profitability. But you are hiring a lot in DCM, which is a pretty low margin part of the business. How do you reconcile the two?
ItÆs a very valid question with respect to Asian public markets! In recent years we got a lot of criticism for our lack of presence in DCM. We would be told we didnÆt appear in the league tables. Last year we finished seventh, and while I wasnÆt thrilled, I also looked at it philosophically. I believe the number one firm in Asian debt last year would have ranked around 35 in the European DCM league table. ThatÆs how low public market volumes were. The amount that the number one firm underwrote for the entire year is routinely underwritten by Merrill Lynch each week in Europe. So public market DCM wasnÆt top of my list when we started building. My focus was much more on the private placement business, through banking-led bespoke transactions. Here our volumes were almost the same as what we did in the public markets, but profitability is a multiple.
So having said all that, why have I hired the team. We are a full service firm, serving our clients. We felt we needed to have more capability than what we had. It was a gap in our portfolio. Yes, it is not always the most profitable business. But our DCM people will work on private transactions too, which will help in this respect. And we havenÆt hired a ton of people. We hired Jon Pratt, plus Mike Joo for Korea and Ping Tan for Southeast Asia. We have also let some people go, so yes, our headcount is up, but not dramatically.
In fact, when I look at our overall headcount, and our cost per head, and compare it to Europe, I feel we can afford this, quite frankly. Our revenue growth has exceeded our cost growth for each of the past three years, and as a result our profitability growth has gone up dramatically. In revenue terms we are double year-to-date, what we were last year.
How does the management dynamic work between Sheldon Trainor and yourself?
Sheldon has done a fantastic job running Asia. I am running the overall Pacific Rim region in terms of hiring, paying people, focusing on the big deals, focusing on strategy. I hired Sheldon to do a particular job, which was to lead our Asian business and specifically grow our non-traditional businesses and give ourselves greater industry content.
We run it as a partnership. He is a critical part, but he is one of a few key partners running one geographical area in the region û the other two being Japan and Australia. Asia is our fastest growing business right now, but our largest and most profitable business remains Japan. That is something some people forget.
In terms of where we both focus within Asia, I tend to focus more on the principal side, people issues and I am more of a financial institutions person. I get involved in more of the government and SOE type deals. Sheldon tends to focus more on ChinaÆs private sector, industry content and places like Macau and Indonesia, and obviously he is also very focused on principal investing.
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