Gordon Dickinson and Chris Mackay run one of the biggest investment banking franchises in Australia. For a few years now, UBS Warburg's name has appeared on every major transaction in the country - most recently a A$1.15 billion hybrid deal for embattled insurer AMP completed last month. We spoke to the persuasive duo about how their success is breeding more success.
How has the Australian market performed this year compared to previous years?
Mackay: On the whole it's performed superbly compared to other markets in the world. There has been a modest decline in equity values, but there has been strong economic growth, continued government reform, a stronger currency and companies have reported solid earnings results. In general, the international expansion of Australian companies has also been successful. These companies continue to be well managed and there has been a renewed focus on corporate governance.
There has been a significant drop in M&A activity, however?
Mackay: Yes, but from a very high base last year. Volumes have dropped by about 30% but the value of transactions has dropped by almost 50%. This is largely because of the mega-deals that were completed last year when there was a constant flow of agreed mergers. Volumes on the stock market have also come off.
Dickinson: Last year was a time when company bosses were more aggressive about their businesses and expanding because they were more confident about the world. Obviously Sept 11 put a dampener on some of this sentiment. But despite this it is still relatively easy for Australian companies to raise capital. Deal volumes aren't really that low when you look at our recent history - we are at about the same level as we were in 1998 and 1999. Offerings have been focused on the secondary markets indicating an ability for companies to recapitalize with relative ease.
Are there any bright spots on the horizon or will next year bring more of the same?
Mackay: There has been a slow pick up in interest from international companies wanting to invest in Australia, and this is an area that will be a focus for next year. Companies with global ambitions are looking at Australian acquisitions as a way of expanding their reach. There will also be a continuation of successful Australian companies acquiring offshore.
Dickinson: It will continue to be possible for the right issuers to raise capital throughout 2003. Australia's compulsory superannuation scheme is what keeps us in good shape while other markets have stagnated. In a lot of other western markets capital has gone to the sidelines, but in Australia these super funds are under an obligation to remain invested in the market. Their focus may alternate from domestic equities and bonds to international securities or hybrids, but they have to be investing in something. This is why the likes of QBE, Qantas and Amcor have been able to present sensible proposals to the market and get deals away.
Australia moved first to raise interest rates this year. What impact has this had on the markets?
Dickinson: This is the main reason why the currency has recovered from about 50cents to the US dollar to a gain of about 10% so that it is now trading at 55 cents. It seems unlikely that the Reserve Bank will follow the US if it decides to cut rates again.
But are higher interest rates good for the equity markets?
Dickinson: On paper no, they don't help. People are not concerned that interest rates in Australia are at an artificially low level and this is a risk that the US is running.
What are the challenges of running an investment bank in Australia at the moment?
Dickinson: The tougher conditions are making it necessary for some foreign banks in this market to decide whether they want to be full-service banks or whether they want to focus on a niche. When conditions were more buoyant they were able to offer more services and there was a general view that Australia was the right place to be building a business and adding value to a global franchise. Two to three years ago most of the global investment banks here had a broadly similar business plan. Only one or two of the US banks decided to establish a niche business from the start. But now almost all of them are reviewing their business platforms after deciding that Australia is not as strategic as they first thought.
Mackay: The regulatory focus in the US has impacted some of the American firms more than others and this is having a dampening effect on these firms. They are pulling back in the region, not only in Australia, but in Japan as well. The problem for these banks is that with reduced operations and services they are not in the best position to pick up new deals whether it is a secondary offering or a complex M&A advisory mandate. UBS Warburg is different because we have operated a full-service bank here for a long time. We have over 800 people in Australia and New Zealand and recently we have started to handle some of our Asian operations from here such as back office and IT activities. Our operations are getting bigger not smaller.
Is there a place for niche players?
Mackay: Yes in the past there have been some very successful niche businesses. But if you are caught in the middle and you are neither fish nor foul, then it is tough to get a successful outcome. Investment banking can be a leader takes all activity.
But leaders have their dog days too. What do you have to say about the troubles that Macquarie Bank has endured of late? It has received a hammering from disgruntled investors over its specialized funds.
Mackay: Macquarie has spent many years building itself into an outstanding organization with a big presence overseas and with many great successes in their businesses. But periodically firms involved in finance confront difficulties and have to deal with issues of public sentiment. Many people would be critical of the way Macquarie handled this period of scrutiny, but our impression is that they have now knuckled down to ensure that their house is in order. We certainly won't be underestimating them as an excellent competitor.
You have been instrumental in structuring hybrid transactions for Aussie issuers. These deals have garnered a lot of support from retail investors. Does this mean you are straying from your traditional institutional investor client base?
Dickinson: Retail investors are an important part of these deals. They certainly price and evaluate paper very differently from institutional investors and this can present opportunities to issuing parties. But the retail area is one that has always vexed investment banks. It is difficult for an international firm to support a large retail sales force and shoulder the costs that they carry. So we have dealt with this by having our own private client department, and then an investment in Sanford and an investment in Bell Potter which is a large retail operation with 240 odd advisors. Having said that, these retail investors tend to be at the sophisticated end of the range. And while they are important to our hybrid activities we are still very much focused on also keeping our institutional clients happy.
Where will the Australian equities index be trading at the end of 2003?
Dickinson: We're forecasting modest gains. There will also be no real change in interest rates, and economic growth rates will be positive but subdued.
What are the sectors to watch?
Mackay: I think it will come down to individual stocks rather than sectors. You will get outperformers in a number of different sectors. These will be the companies that are growing their businesses locally and globally. It is not obvious that there will be one sector that will shine; it will come down to a few industry champions that are very good at what they do.
What is the deal that everyone wants to be working on next year?
Mackay: As our business is very broad we are not reliant on single deals, or a small number of deals. However for the overall market, most investment bankers would say that Telstra III (T3) is the obvious one. Some of the international investment banks need to win T3 in order to justify their existence in the Australian market. But as yet there is no indication if it will happen at all. There is a political process to go through first.
