You arrived with a mandate to build MerrillÆs business in Asia and have been in charge for a couple of years now. Can you give us a progress report?
These things always take time. But I feel the best I have ever felt - certainly in the last two years. The business is in tremendous shape and our firmÆs ability to capitalise on a favourable market backdrop has never been better.
Two years ago, we said we would do three things. The first thing was to build relevance with the client base and that meant hiring country coverage teams, build our industry coverage, and also enhance our product capabilities û especially in newer areas such as private equity, principal investment and structured products.
The second thing was to accelerate our momentum, and better allocate scarce resources to areas of maximum opportunity û rather than just chasing everything. That meant defining the clients we are targeting and the deals we are seeking to win; and then hold ourselves accountable when we miss those deals. It was also about getting rid of a silo-mentality, and getting bankers to think across the entire firm and our entire product range.
We also wanted to create better connectivity between Asia and the rest of the firm. That meant getting the industry bankers connected globally, so we could bring the best of the world to the region.
Finally, a key part of the strategy, although it sounds wishy-washy and is vaguer, was to build a culture of excellence. We donÆt want to just have short term success. This meant hiring the best people, not just at senior level, but also at junior level. And making sure we retained them. ItÆs about having a meritocratic culture. To repeat, it sounds wishy-washy, but it is so important.
So those were the key pillars of the strategy. So what have we actually done? Well, weÆve made some very senior level hires such as Sheldon Trainor, Andrew Cooper, Roger Suyama and Sung Eun Ahn. The same is true of Japan. WeÆve hired people who are keen to build best-in-class businesses. It has taken a long time and I am really pleased with the results.
Currently, we are reaping the benefits. I really feel we are the house that has the greatest momentum. If you look at the Dealogic studies, youÆll see that we have the largest revenue growth between 2004 and 2005 û both in percentage and absolute terms. Our growth and momentum are faster than our competitors. And we are now on many of the bigger transactions, such as the high profile privatisation of ICBC. We did the Bank of China investment. WeÆre advising Kookmin Bank in Korea, and we have a great M&A pipeline. WeÆre also doing very interesting transactions such as the China Aluminium LBO û which we also supported with a principal investment. We have good quality dealflow from the countries in the region that we feel really matter.
How much is profit up?
ItÆs never an apple to apple comparison, but our core profitability is a multiple of what it was two years ago. I said I would double this business two years ago. We have exceeded that.
How have you gone about getting synergies from principal investing and the private client business?
My partner, Jason Brand and I run the business jointly. My main area of focus is origination, and he is more focused on sales, trading and risk. The shared-ownership means we donÆt get into turf battles about where P&L sits. We want the overall pie to grow. We donÆt have silos, where debt guys just do debt and bankers just do traditional banking. Our model is to make sure that the people talking to the clients represent the entirety of the firm. For example, our bankers have been involved in sourcing principal transactions.
For similar reasons, the private client side is critical. There is enormous overlap between the private client side of the business and the institutional side û both in terms of originating deals from entrepreneurs or offering them pre-IPO investments.
How many people have you hired?
We are up substantially. The headcount has increased by more than 10% in each of the past two years. But our headcount growth is a fraction of our revenue growth.
Let me talk about what we have done. We have rebuilt our China team, hired new relationship managers in China, Korea and Indonesia. We have hired industry bankers such as Shamus Hassan, who has oil and gas expertise. We have also hired people with expertise in general industries, and metals and mining. We moved our global head of M&A for financial institutions to Tokyo û and he is now very much involved in the Asian business û and we have built our FIG team around him. We will be moving Spencer Lake to Asia to run debt origination for the Pacific-rim û he was head of our corporate DCM business in London. So itÆs not just about expanding the headcount, but getting the Asian business better connected globally.
I am very fond of the book æGood to GreatÆ, and one of the things it says is you have to get the right people on the bus and get the wrong people off. So we have let some people go as part of this process too. So our headcount may not have gone up as much as some might think. I believe we have half the number of managing directors compared to some of our rivals in Asia û and that says a lot about our profitability, given we have similar revenues.
Can you talk about the decision to buy control of DSP Merrill Lynch in India. Both Citigroup and Goldman Sachs have decided that it is much cheaper to build organically rather than buy.
We have the best investment banking franchise in India. We had a very long and successful joint venture with DSP, and we would have been foolish to abandon that and develop our own franchise. It was not an option we would have even considered.
Why did we seek to increase our ownership stake? The reason is that the business is changing. As India develops, we are seeing Indian companies seeking a lot more global advice. There is a lot more outbound and inbound M&A. Cross-border capital raisings are increasing. Plus the trading businesses are becoming much more important. And if you are committing capital to trading, itÆs much easier to do that when it is your business rather than a JV. Plus when you are looking at principal investments, it makes sense to do that as one organisation.
So this move was driven by the opportunity India offers and our desire to grow the Indian business. I hope and believe that in five years time, people will look back and say we paid a very good price.