What’s next for Davy as Byrne leads cap­i­tal mar­kets divi­sion?

Sunday Independent (Ireland) - Business & Appointments - - FRONT PAGE -

WHAT is next for Davy? Last month’s high-pro­file ap­point­ment of AIB’S Bernard Byrne to its cap­i­tal mar­kets divi­sion once again set tongues wag­ging in fi­nan­cial cir­cles about what the fu­ture holds for Ire­land’s largest stock­broking firm.

Founded in 1926, it is owned by man­age­ment and staff hav­ing been the sub­ject of a man­age­ment buy­out from Bank of Ire­land in 2006.

And while Davy’s 680 em­ploy­ees will have been pleased to see Davy go from strength-to-strength since the re­ces­sion, they may be less pleased about their in­abil­ity to get their hands on some of the wealth be­ing cre­ated, with the busi­ness now worth well in ex­cess of €400m.

Those at the most pow­er­ful player in the Ir­ish stock­broking mar­ket will have paid some at­ten­tion to the wave of con­sol­i­da­tion that has gone on, par­tic­u­larly the buy­out by Chi­nese in­vestors of Good­body’s for €150m.

Can­tor Fitzger­ald has bought Mer­rion Cap­i­tal, while In­vestec has been on the block for sev­eral months, although, to date, no buyer has rushed in to snap it up.

Davy is now the only re­main­ing Ir­ishowned bro­ker and the only fi­nan­cialser­vices firm of scale in Ire­land which is still in em­ployee own­er­ship.

Over the past five years or so there has been spec­u­la­tion that Davy might it­self IPO or sell off some or all of the busi­ness. But Davy has ig­nored all such spec­u­la­tion and main­tained that it is more than sat­is­fied with the sta­tus quo.

Yet liq­uid­ity is a prob­lem ev­ery em­ployee-owned firm needs to face at some stage. Davy does have a mech­a­nism to buy back shares and ear­lier this year bought back 10pc of its reg­is­ter in a €25m deal aimed at en­larg­ing pay­outs for share­hold­ers.

The firm bought the shares at €2.40 to €2.50 apiece, putting a val­u­a­tion of around €250m of the busi­ness.

This par­tic­u­lar mech­a­nism does not an­swer all Davy’s liq­uid­ity chal­lenges, how­ever. The amount Davy can buy back is lim­ited to the com­pany’s prof­its, so €25m or so is about as much as can be bought back an­nu­ally by the com­pany. This will prob­a­bly cover the re­quire­ments of staff re­tir­ing each year but doesn’t give much of an op­por­tu­nity for peo­ple still work­ing in the com­pany to cash on their hold­ings.

Around 200 em­ploy­ees now have stock in the com­pany, some of whom no longer work for the busi­ness. And no one is more aware of the value of the busi­ness than those em­ployed by Davy, many of whom will have lit­tle doubt that their shares would be worth more on an open mar­ket than through any share buy­back.

There has also been a strate­gic shift for Davy. Over the past 20 years fi­nan­cial mar­kets have evolved, fi­nan­cial ser­vices have de­vel­oped and reg­u­la­tion has in­ten­si­fied.

This is re­flected in Davy’s lat­est cor­po­rate bumpf, which clearly states that it is now struc­tured around ‘two core op­er­at­ing di­vi­sions’ — wealth and as­set man­age­ment and cap­i­tal mar­kets.

Those two groups of ser­vices have evolved — in both the in­dus­try and at Davy — into quite dif­fer­ent busi­nesses with dif­fer­ent cul­tures, dif­fer­ent skill sets and dif­fer­ent reg­u­la­tory en­vi­ron­ments. Tra­di­tion­ally the two would have sat to­gether un­der a sin­gle struc­ture but in­creas­ingly they are run sep­a­rately and have lit­tle need to share com­mon own­er­ship.

Does it make sense to have a sub­stan­tial wealth man­age­ment op­er­a­tion, which is one of the largest in the coun­try and with­out doubt one of the most am­bi­tious, un­der the same own­er­ship as the cap­i­tal mar­kets busi­ness, the largest in the coun­try? Not par­tic­u­larly.

Wealth man­age­ment is per­form­ing well and de­liv­ers a rel­a­tively steady line of in­come. Davy is cur­rently spend­ing over €1m on an ad cam­paign pro­mot­ing it. The cam­paign’s tagline is “It’s not just busi­ness, it’s per­sonal.”

As Byrne’s an­nounce­ment pointed out, cap­i­tal mar­kets is do­ing very well too and “is the lead­ing in­sti­tu­tional and cor­po­rate ad­vi­sory fran­chise in Ire­land and has acted for Ir­ish cor­po­rates in re­spect of 75pc of all the funds raised on the Ir­ish Stock Ex­change”. How­ever, it’s in­come is closely linked to the health of the stock mar­kets and is more volatile.

When Byrne was ap­pointed, the com­pany said: “The cur­rent own­er­ship model has served Davy well and we have no plans to change it.”

How­ever, Davy is clearly carv­ing out two sep­a­rate iden­ti­ties for two core di­vi­sions. This will most likely make it eas­ier to sell off one or other divi­sion if it does at some stage de­cide to make a bold move on be­half of any em­ploy­ees, past and present, who have an ap­petite to cash in on the firm’s grow­ing worth.

AIB’S Bernard Byrne is join­ing Davy

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