When cut-backs backfire

Sure, restructuring in hard times seems prudent but there is always a danger that top-notch future earners could end up getting the chop. JAMES THOMSON reveals how the ANZ Bank’s decision to de-risk led it to sell a $4 billion business for less than $1 mi

By James Thomson

Sure, restructuring in hard times seems prudent but, there is always a danger that top-notch future earners could end up getting the chop. The story of how the ANZ Bank’s decision to de-risk led it to sell a $4 billion business for less than $1 million is a lesson for all leaders.

In the coming weeks ANZ chief executive Mike Smith will unveil a new business structure for the bank.

Smith has had a bumpy ride since taking up the top job in October 2007 and at times the bank’s problems must have seemed neverending.

There have been writedowns related to the sub-prime crisis, the disastrous capitulation of margin lenders Opes Prime and Chimaera, troubles at Tricom and exposures to a string of struggling companies, including Babcock & Brown, Centro and Bill Express.

No wonder Smith wants to make some serious changes, and reportedly axe hundreds of executives.

But as ANZ adopts its new strategy, it should think back to the last great re-making of the company under former chief executive John McFarlane in 1998.

The story of how ANZ sold its London-based emerging markets business for less than $1 million, only to see it become a $4 billion investment giant run by a former ANZ executive who is now worth around $2 billion, is a cautionary tale for every axe-swinging CEO.

The story starts back in August 1998. The Spice Girls are riding high on the music charts and audiences around the world are packing out cinemas to watch Saving Private Ryan.

But over in the offices of ANZ’s emerging market business in London, it’s doubtful that many traders were heading to the movies for a relaxing evening. Financial markets were in chaos and their bonuses were going down the toilet quickly.

The team, led by ANZ’s head of markets Mark Coombs, had been caught out badly by the Russian financial crisis, caused by the rapid devaluation of the ruble. The losses were mounting.

Coombs and much of his team were former executives at Grindlays Bank, which the ANZ bought in the early 1980s. Coombs had worked his way up through the bank, establishing the London-based emerging markets division in 1992 and reaching the lofty position of global head of markets in July 1997. The London investment banking division (which included the emerging markets business) contributed 10% of ANZ’s half-yearly profit in 1997.

But the $78 million loss the emerging markets business recorded as a result of the Russian crisis effectively ended Coombs’ career at ANZ.

Chief executive John McFarlane, who took over ANZ in the midst of the Asian financial crisis in September 1997, decided in September 1998 that the bank’s international forays had gone too far. He set about de-risking the bank by selling the London investment bank, withdrawing from ANZ’s emerging market investments and focusing squarely on the relatively stable Australian market.

In March 1999, Mark Coombs led a management buyout of ANZ emerging market funds management business. The division – which Coombs folded into his own vehicle, Ashmore Group – managed around $US500 million at the time.

Although the precise sales price was never disclosed (ANZ would only say at the time that the amount was “not material”) it is believed that Coombs paid somewhere between $600,000 and $1 million.

Whatever the exact amount, it was the bargain of the century. Free of the shackles of the ANZ, Coombs immediately began building Ashmore into a powerhouse.

The business grew rapidly as fund managers’ appetites for some exposure to emerging markets returned. By 2000, Ashmore has started managing emerging markets public equities with the launch of the Ashmore Emerging Economy Portfolio. By 2002, the company had established 20 pooled funds, segregated accounts and collateralised bond obligations. Ashmore received Global Investor magazine’s award for investment excellence in 2001, 2002, 2004, 2005 and 2006.

By 2006, Ashmore’s funds under management had swelled to around $US20 billion and the decision was made to float the company on the London Stock Exchange in October 2006.

Coombs, who sold a quarter of his 57% stake in the float, became an overnight billionaire.

Earlier this year, The Times of London valued Coombs’ fortune at a tick over $2 billion. Despite this, he keeps a very low profile and little is known about the 48-year-old’s personal life. He is a Cambridge law graduate, he lives in Wimbledon with his wife Rebecca and he is widely considered to be a visionary in the emerging markets field.

Ashmore’s shares have fallen around 8% in the last 12 months – hardly surprising given the turmoil on financial markets. But investors are still prepared to back the company and Coombs; during the 2007-08 financial year, assets under management jumped 19% to $US37.5 billion.

Coombs certainly doesn’t seem worried by the ups and downs of the cycle. “Macro-economic, demographic and political factors underpin the long-term growth prospects of the emerging market asset classes,” he said in Ashmore’s latest trading update. “The current market volatility continues to provide attractive investment opportunities.”

ANZ’s decision to exit the emerging markets business was widely applauded by investors and the media back in 1998.

Today – with a healthy dose of hindsight, of course – it looks like a king-sized blunder caused by short-term thinking.

Even if the decision to sell the emerging markets division was the right one, the preparedness of ANZ to accept such a miniscule price suggests the bank acted rashly.

Let’s hope chief executives who are temped to slash and burn during this downturn think carefully before they get rid of tomorrow’s billion-dollar business.

Related story: