eBusiness Weekly
Alfred M Mthimkhulu
Now soulmate, let us travel back in time as usual but not way back to your favourite times of Alexander Hamilton.
I’m enough of horse-carts and unpaved roads and of an ever-throbbing back from tilling the land for bare survival.
I’m enough of being at the mercy of seasons and of having the sun dictate when I can compose and pen my prose. I have seen and I love this light which, at a touch, it comes alive and at another it is off. Let us stay in these times or otherwise fly to the future.
I suggest we go back just a generation, to just before the Organisation of African Unity. But I see wars all over the continent as natives fight to take charge of their destiny.
This is too dangerous for us here for now. Alas, I know of a cosy duplex in London. We will be safe there for the big War is long over; the intrusive Labour regime is out of power; we can look forward to a laid-back time in London and my prose is likely to flow easily on that gentler side of the Iron Curtain.
And now it is July 30, 1961. It is as lovely a Sunday as they come this time of the year. You walk down the stairs. I am sitting over there reading a piece in the Sunday Times, sipping Ceylon tea, or is it Sri Lanka tea? “What are you reading?” you ask. I am reading an article on Mercury Securities, a merchant bank whose proprietor is a star in the City, Siegmund Warburg.
He moved here in 1934 thanks to a terrible regime in his homeland or fittingly, Heimat. His family lost a lot to that regime for his was indeed a banking dynasty in Hamburg. A lot more was lost.
“You know what” I say as you join me, “if a guy bought 100 shares of this bank seven years ago which would have cost £237, guess what it would be worth today? ” You shrug indifferently so I respond reading aloud from the article: “For that money he would now have 274 shares at £18, and his investment would be worth £4,930, (that’s) 20 times the cost . . .
In this period the company’s earnings have multiplied six times, the dividend nine and a half times. This means that the original holder would now have a dividend yield of 42,5 percent on the original cost of his investment, and an earnings yield of no less than 14,5 percent on the same basis.”
Niall Ferguson’s book, “Higher Financier: the lives and times of Siegmund Warburg”, from which the preceding time-travelling narrative and the rest of this piece will draw is “a pleasure to read” as the Wall Street Journal said on publication in 2010.
How did he grow his bank’s capital from £2.75 million in 1949 to £20 million in 1961? … that’s £1 billion in 2008 values!
We have no space to list it all for even the biographer summarised. We can mention how he converted his New Trading Company to a merchant bank after the Second World War and how, aware of delays by regulators in his bank joining the Accepting Houses Committee, he acquired an old firm which was a member of the Committee thus gaining a seat.
Being in the Committee was lucrative because a bill of exchange with the name of an accepting house on it was “acceptable currency at the bank of England” discounted at close to prime rate. The practice of discounting bills of exchange effectively meant that industry was financed without tapping into the merchant bank’s balance sheets “for it was not cash they lent but their name”. Banking after all is a business of trust.
Discounting such bills was merchant banks’ core business but his had more entrepreneurial add-ons: corporate finance and latter asset management. In 1958, Britain witnessed its first ever hostile takeover when British Aluminium was bought by Reynolds Metals and Tube Investments.
Back in 1956, he had identified British Aluminium as weak and in need of restructuring. At about that time he was unrelatedly approached by Hambros Bank, to jointly underwrite a capital-raise for British Aluminium. Hambros believed the capital-raise would solve all problems. Warburg did not think so but kept this to himself and his inner circle. His American client Reynolds Metal and the Canadian Transoceanic quietly participated in the underwriting while a concert of his other clients accumulated British Aluminium shares in the market.
He reached-out to the CEO of British Aluminium suggestive of advice on restructuring beyond the capital-raise but he found the steward “remarkably slow in grasping anything unusual” and concluded that the firm needed new stewards. A hostile takeover was thus definitely on to get rid of management. He won. His peers’ comments on the takeover are insightful.
An ally called it “a David and Goliath affair” with Warburg as David and the establishment, Goliath. His rival Sir Charles Hambro accused him of “behaving extremely badly” while a stockbroker called it “piratical ventures”. The Governor of the Bank of England described his as a “monkey business” while Lazard Brothers chairman resolved to “never speak to that fellow again”.
Morgan Grenfell, a major merchant bank, decided not to deal with him for over a decade. Edmund de Rothschild thought the deal was “a decisive blow … to the unhurried, ‘gentlemanly’ style of business” such that the City was never the same again. Lionel Fraser, a merchant banker, was poetic: “Old citadels tumbled, traditional strongholds were invaded, new thought was devoted to City problems, there was freshness and alertness unknown before … The merchant bankers were on their toes … resulting in more enterprises and competitiveness and less reliance on the ‘old boy’ idea.”
Such is financial innovation. From boardrooms of the financial district, the way business is conducted can change across the country.
We saw this in an article I shared where Carol Galley of Mercury Asset Management lobbied other institutional investor to effect changes at major UK bank in the 1990s. She was just being like her founding proprietor. But such change agents are rarely welcomed by incumbents meaning that the advocate must toe a fine line yet ensure the boat is rocked and rocked thoroughly otherwise status quo will hold and progress be stalled.
We can almost hear the opening bell of the Victoria Securities Exchange now. Will it attract the much-needed capital? Three months ago, an errand led me to the offices of the oldest stockbroking firm in Gaborone which was once a joint venture with a local brokerage at a time when Zimbabwe was leading the drive to develop stock exchanges in the region.
As I sat in the boardroom, I was drawn to the tombstones on the wall — listings and rights issues the firm had sponsored. I rose to tour closely and so did my hosts. It was good to reminisce. As I drove off, the romantic nostalgia waned. Why was that market still so small and so illiquid given its stable environment?
A couple of years ago we read that Seed Co International operates under the International Financial Services Centre regime in that country yet we see little activity in the underlying market. What would make the Victoria Falls Securities Exchange different? Probably the good-old merchant banker and the entrepreneur, even better if the two are one.
Email: [email protected] /Twitter: @mthimz
