Tuesday, 9 June 2015

Zen and the art of survival. How to keep your head at Deutsche Bank when the axe falls.

How do you survive a revolution? Keep your head down and say nothing? Make yourself the center of things and be indispensable to the incoming regime? Perhaps pile in with the mob and storm the Bastille in the hope that you're going to end up on the right side of things? Essentially when the first shot gets fired, it's like Darwin's theory of evolution on speed, acid and whatever else you can loot from the pharmacy. There's only one thing for sure; Mr. Kipling said it best:

"If you can keep your head when all about you   
    Are losing theirs and blaming it on you,   
If you can trust yourself when all men doubt you,
    But make allowance for their doubting too;   
If you can wait and not be tired by waiting,
    Or being lied about, don’t deal in lies,
Or being hated, don’t give way to hating,
    And yet don’t look too good, nor talk too wise:"
                                                   (If— Rudyard Kipling)

If you woke up as a senior manager at Deutsche Bank on Monday morning, you were disconcertedly thrust into the maelstrom that was Anshu Jain and his Co-CEO J├╝rgen Fitschen's decisions to fall on their respective swords. It was like Sepp Blatter's decision to resign after carrying the vote at the FIFA AGM. Sometimes battles are won while wars are being lost. Jain and Fitschen's failure to get the full backing of the shareholders at the DB AGM was a battle won (61% to 39%) that was at the same time a war lost. So what now?

Assuming you're an MD at DB you probably spent Monday morning being bombarded by insecure underlings asking questions you can't possibly answer. I'd say a fair proportion of senior managers at DB didn't even know that incoming CEO John Cryan was already on the board, let alone that he stepped up at UBS when others were failing and brought down the axe on the notion of universal banking at the Swiss giant. I don't know Cryan personally, but I've been on the end of the phone to him a couple of times. My only memory was of someone in a hurry who expected me to have the numbers. He wasn't rude, just a bit brusque.

With all this in mind, I wanted to pen a few words on what to expect and how to possibly survive and prosper the brave new world.

1. Know everything about your business

  "Know then thyself, presume not God to scan;
The proper study of mankind is man."
                                   (An Essay on Man: Epistle II - Alexander Pope)

It may sound simplistic, but within the investment banking world you'd be surprised how some managers are in perpetual crisis mode; managing from one mandate to another. Revolutions are dangerous because the bullets start coming from all directions. You're not going to get time to solve each problem or take advantage of each opportunity individually. The only survival plan is to know your business inside out and how it fits within the bank.

Firstly you have to know about Cryan and what he'll be looking for from his team. Unfortunately, he's been on the board of DB, meaning he's all over the business. He has probably already had a plan pre-approved. That's how he got the job; it wasn't because no one else put up their hand.  The board expects the plan to go into action on day one. Therefore, time is not on your side.

a) Understand the metrics of you business.

It's more than just net profit. Do you know your cost/income ratio? Read through the recent annual reports of your bank and it's competitors. What are the hot metrics? Could you produce the numbers at a moments notice? If the bank tried to sell your business area what would it be worth?

Even if your business is underperforming a fresh look at the numbers might throw up obvious opportunities. Too many managers just go for the straight 10% cut in headcount and hope the consultants will see them as constructive and proactive. Think more radically and be prepared to shrink your business to grow. Ask yourself what would your business looks like with 50% less headcount and capacity cuts across the board. Would you prefer to run a business with $500m in revenue and a RoE of 4% or one that brings in $200m with a 20% return? Either way you need to know the numbers to be able to come up with an achievable set of goals when examined.

b) Chose your team wisely and early.

A plan is only so good as the execution. The team needs to be small and focused. The bigger you make the core, the harder it will be to make the changes needed to survive and hopefully prosper. The underachievers need to go. Just because X or Y has attached themselves to a huge line of revenue does not mean that they are untouchable. I once heard a broker tell the head of sales at a bank that he knew the client didn't want to do the deal because he was the fund manager's child's godfather. That is not a reason in investment banking. In fact, that's a reason for summary execution, as it shows that the member of staff in question would be forever unable to find out the real reason for the failure to close.

Draw up a plan and have specific tasks allocated to each headcount. Do not be afraid to be the most radical person in the room. Take to your client or product lists with a guillotine. The only thing you have to watch is where your team is acting in support of another. For example, the biggest fixed income client for the bank may be proportionally one of the least profitable from an equities point of view. In that case, you have to see if you can improve your returns on this revenue without increasing costs or have the existing costs you incur "up streamed" to the business head unit. This is hard to do and will mark you as being a non-team player. The way around this is to make the numbers very clear and allocate either lower cost resources to the client or have someone higher up take it out of your hands. The cheaper up and coming AD might be a better solution rather than sticking with a more senior headcount. Be prepared to defend your analysis and plan every step of the way.

c) Attend every meeting no matter when, where or whatever time.

Absence is an excuse for others to fill in the blanks. If you've followed my advice and knew your business inside and out you don't want others speaking for you. Any shifts regarding the requirements of the CEO and his chosen team will not be sent around in emails for all and sundry to leak and eviscerate. There are going to be times when a nuanced nod or turn of phrase will be better than hours spent going over plans with the inevitable McKinsey type strapped to your shoulder. At these times, you'll also get the chance to change the debate or do some land grabbing. The constructive use of such gems as "why don't we just cover that product with the London/NY/Tokyo team, instead of duplicating the headcount" can often be the start of something more positive. The defender of the status quo better know what they're saying because ipso facto that approach probably hasn't worked up until now.

2. The Big Picture

Do not go gentle into that good night,
Old age should burn and rave at close of day;
Rage, rage against the dying of the light.
                                             (Do Not Go Gentle Into That Good Night - Dylan Thomas)

It's not all doom and gloom. The bank doesn't want to close down; it just wants better returns. No institution with the revenues of a Deutsche Bank is going to go down without a fight. The new CEO has certain levers to pull, and you need to know the order of action.

a) Keep your friends close and your enemies closer.

Read everything you can on the CEO and his team. In Mr. Cryan's case, you'll want to know how he succeeded in turning UBS around. Your first hint is that he was the CFO. That means he wasn't dealing with soft issues, such as culture, marketing or work-life balance. He was dealing with the tangible numbers that impact the business such as capitalization and risk. Everything you do and say has to have cold hard numbers at the forefront.

b) Valuation, valuation, valuation . . . know the focus.

"The economy, stupid." 
                               (James Carville to Bill Clinton)

Currently, DB trades at roughly half of its net asset value. This is a joke and an indictment of the outgoing management. This one metric says that the shareholders don't trust management to realize the value the bank has assigned to assets. There's going to be assets or businesses divested or written down in value. This is without a doubt the biggest opportunity in the restructure. Know what is on the block and contribute accordingly. When others shy, away from the toxic be prepared to take on the impossible. The only caution to this is to have an unambiguous mandate to take action. Remember that the mere fact that some of these assets are trading at a steep discount probably means the odds are on your side that you can turn things around and release value. This might be a one-off situation, but every time you report a revaluation you'll be thanked and set yourself up for success in the future.

c) Risk and the art of survival

"Risk comes from not knowing what you're doing."
                                                                                                          (Warren Buffett)

I'm almost never surprised by bankers who don't understand the way risk capital is allocated. DB and its peers spend lots of time and money producing exquisite risk reports. These reports are available to one and all online . . . gratis.

Ever seen this?
It's your fault if you haven't read them.

A broker tried to tell me over a coffee last week that the equity derivatives market in Australia was being dominated by UBS because they were warehousing the risk. When I challenged him as to where he got this fact, he came back with the usual "gossipy" hearsay quotes. When I pointed to the VaR numbers that the bank published he admitted he'd never seen them. I didn't stomp on him too hard, but if you're at DB and you start making these type of statements to the new management team you'll be in trouble. Here's what to do:

i) Go through the VaR numbers and note the changes over time
ii) Understand the capital allocation process required to support those numbers
iii) Read the Basel committee reports regarding risk as it pertains to DB and the other global banks
iv) What is your current capital adequacy position

Once you have these facts, you can participate in high-level meetings with something more than generalisations.

3. Plan B

It's very likely that things will move quicker than you expected, and you need to know when to stand your ground or retreat.

"It's a very sobering feeling to be up in space and realize that one's safety factor was determined by the lowest bidder on a government contract."
                                                                                                                                         (Alan Shepard, Astronaut)

Around the time of the GFC, a friend of mine was headhunted to Barclays. Happy days, big salary package, a department to run on his terms. Sweet. The bar was low because the Barclays business had been underperforming in his sector. Unfortunately, his feet hardly had a chance to touch the ground. First of all his bank got into a dispute with a headhunter who said he'd facilitated the deal. His salary details got leaked as the dispute escalated. Next Barclays bought a chunk of the old Lehman Bros. business and with it a whole team of managers looking to stamp their authority on the business. No one at Lehman's ever lacked hubris and humility even in the face of total abject defeat was in short supply. Given my friend was probably earning more than his new ex-Lehman's boss he didn't stand a chance. He was a big target, and the Lehman gang didn't like outsiders. He got metaphorically shot.

All this leads me to the sobering fact that you need a "Plan B". It might not be an outsider who causes your demise, but it could be anyone. Even the best brokers, traders or corporate financiers will not be indispensable in a revolution. Look for opportunities to exit with "an edge." A good example might be with an underperforming asset or business. If you can see the sinking ship to port (or in this case asset), it might just be possible to salvage something tangible.  Always consider jumping for longevity. Take a smaller pay packet and survive in a sector you know and enjoy rather than being set adrift at the last moment into the unknown.


The main thing is to remain positive. Constant gloom will kill your profile and your plans in the eyes of the new management. Don't be afraid to engage. Being a small target might seem like the best tactic, but insignificance is a sure way to oblivion.


Tuesday, 19 May 2015

A month of disruptive tech companies . . . Disruptive Lunches, TURF Sports Entrepreneur Night, Maru-D and follow-ups

This edition of the blog has been a long time coming. As an apology I've summarised all the tech orientated events I've been to over the last month.

14 May:

I got an invite to the TURF sports entrepreneur meeting held in Sydney's hipster ground zero Surry Hills.

Disrupt Surfing is likeable but not disruptive to my mind in the purest sense. Essentially they're doing the bespoke design thing on sports equipment. Gary Elphick (CEO) was presenting the business on the night. Their primary product is surfboards though they will offer snowboards and eventually move into equipment categories. It's one of those ideas that will have good appeal to Gen Y / Millenial market where everyone wants to be an individual, even if they all seem to have the same dodgy tattoos and fashion sense (apologies, that's the cranky old man in me coming out).

Disrupt is also part of Telstra Corp's Muru-D accelerator (see below). So I'd already seen the presentation at the demonstration night earlier in the month. I liked the fact that they were very honest about mistakes they'd made in getting their product(s) into production. I'm not sure where this one will go, but I got the feeling that the guys need someone to take them in and shake it up a bit.

The presentation of the Rip Curl Wave watch development process was fantastic for the sports science geek in me. Excellent. We got taken through the development from the start when it was just a waterproof bag of sensors carried down the back of a wetsuit, right through to the social media data sharing website.

At first I though it was just a waterproof Garmin GPS watch, but with the addition of accelerometers it suddenly transformed itself. Think about it this way. A site like Strava cross relies on the cross-checking of GPS with known earth mapping. That is why when you're on abike or a run the meters climbed or ran changes when you get home and upload into your computer. For surfing the problem is that waves are somewhat random, so a standard GPS data dump can't tell you how big or frequent waves were. Add the accelerometer and that changes. The size and frequency of waves can be measured. Now think about the big data aspect and sharing this information correlated with weather conditions and I bet that all sorts of useful information becomes available. The team said they're already observing some unknown surfing spots. The only possible blockage is the secretive culture that surrounds surfers favourite spots. Get them to share as a community and things start to happen.

I don't surf anymore, but would love one of these watches. Surely they can rev it up and make it a triathlon device as well. I'll bet Rip Curl doesn't leverage this. If I were Strava, I'd hire the developers and put them to work. If I were an investor, I'd follow these guys.

12 May:

A two company presentation at a Disruptive Lunch. I went into this without much enthusiasm as prima facie the companies presenting had a bit of a "been there seen that flavour to them". In reality though this was a lot more interesting and once again proves the point that you have to see these companies in the flesh before making a judgment.

More Peer to Peer lending . . . Rate Setter.

Daniel Foggo is the CEO of Rate Setter Australia; he is ex-Barclays Capital. Like many investment bankers, Daniel saw a business he liked and took the leap of faith to establish it in Australia. Rate Setter is the third peer to peer lender we've had present at a Disruptive Lunch, so the audience is familiar with the basic business case.

I would argue that the only differences between the three P2P businesses we've seen is their approach to risk management. Rate Setter is the only one that has introduced a Provision  Fund. The idea is that the borrowers place funds into the fund that can offset default list. Instinctively if you are a lender, that sounds good, but as a banker I don't get it in terms of having a transparent market. Furthermore, I don't understand how it will operate, mainly because we haven't been in a credit environment of escalating defaults. Foggo refers to Rate Setter Europe as his guide statistically but acknowledges that the Australian experience, being devoid of a recent serious recession is skewed away from Europe or the US's experience.

So far, the company only has AUD 3m of loans outstanding. Market leader Society One has just north of 20m according to reports.

I asked a number of questions regarding margin, and while Foggo didn't go into hard numbers he suggested that the margin wasn't a flat line, but rather varied according to credit quality. This suggests yet another level of sophistication in the modelling of the loan book and a nod to the fact that as interest rates have fallen the absolute margin has to have some "curve".

It's still relatively early in the life of the P2P sector to formulate a hard judgement. Readers know I liked the Society One "dashboard" app for lenders. I'll add to this now Foggo's "second level" of risk management implementation. Investors may be best advised to think about a portfolio approach to this sector rather than putting it all on "Red".

Bullet Proof - Cloud Computing (ASX Code: BPF). Great name.

Amongst my generation cloud computing still invokes a certain trepedation. Millenials are less inhibited when it comes to storing data or relying on the "technical hand of god." Either way software and associated data is becoming more cloud-based and for businesses there's certainly value and flexibility in shifting from hard data and application ownership to the cloud.

I'm always skeptical when it comes to companies that are listed on the stock exchange via a backdoor. In the case of Bulletproof, the management used the shell of Spencer Resources. I'll leave that cynicism to one side for the purposes of this blog. The positive side to this is that if you want to look at the hard numbers a quick search of any of the financial specialist websites will get you what you need.

I want to go on record as being a little confused about Bulletproof as a company. Reading back over my notes I thought that the CEO Anthony Woodward was going to hand me the game plan from Louis Gerstner, the brain behind the radical overhaul of IBM that changed it from a hardware company to a fully-fledged consultancy. Maybe that's where bulletproof wants to go, but for the moment Woodward was at pains to emphasise that they're currently 85% a "managed services" group.

So what does Bulletproof do exactly? They provide you with technical assistance for deploying and migrating your environment to the cloud. In short they want all your staff and customers the access, flexibility and speed of interacting through the scalable cloud. Assume you're a company that has lots of variable traffic across your business. Convention says you plan for the peaks because if you fail when business is running hot, you're failing at a time of maximum visibility. To avoid this, you deploy capital inefficiently into racks of servers and capacity that idles for much of its life. With the cloud, you can turn on a tap without the physical restrictions of running a server farm.

Bulletproof doesn't do the hardware side itself. Instead, it relies on Amazon Web Services (http://aws.amazon.com) for this and takes a cost +30% approach to billing. The results are clear for all to see with revenues for FY 14 up 29% to 18.3m and are already running at 11.9m for 1H15. I worry though that the barriers to entry might not be high enough. How hard would be for a dozen middle-level staff (of the current 110) to walk out and replicate what Bulletproof is doing. I don't have an answer to that, but I'd suggest that the management would like to go down the consultancy road, which given revenue growth is not out of the question.

Investors might want to follow Bulletproof as a proxy for business management trends in Australia or better still just as a growth business offering exposure not often found on the boards of the ASX.

 7 May:

Muru- D demonstration night at Telstra Sydney. 4 hours, multiple businesses.

Muru-d is Telstra Corp's accelerator for tech. Start-ups that jump through the various hoops get six-month intensive support, including a workspace. Telstra gives these young companies 40k for 6% of their company in a filtered shotgun-style approach to finding unicorns. It's a great idea for a once monopoly telco to inject some new avenues for revenue into their business.

I got to wander the auditorium and speak to eight of the companies that appealed to me most. I gravitated towards the infrastructure and education offerings and left the social media hipsters to do their own thing. It was an impressive evening. My pick on the night was Freight Exchange led by CEO Cate Hull.

Freight Exchange is one of those ideas that truly could be disruptive. I was telling Cate about the time the hedge fund I was working for in Singapore found out that Komatsu had installed black boxes in their heavy equipment than did more than track GPS. The "brain" could tell Komatsu engineers everything from engine run time to workload. In many ways, it was the first big data I'd seen applied in the real world. I'm not sure Komatsu used it as I would have to bet on economic activity (currencies and bonds), but they could definitely make production line changes to reflect demands in the supply chain.

Hull's idea was to avail fleet owners (at the moment is mostly ground transport orientated) with the ability to source contracts outside of their normal footprint. If 20% of the fleet is idle (or in transit without a load), there's certainly a gap to be filled. The Clever algorithmic analysis we are seeing more of is starting to gain traction in logistics, but there's still a gap. Hull told me at a follow-up meeting that the inefficiencies are especially prevalent in China where the market is highly fractured and in need of a central clearing house function. Normally I try and advise start-ups away from diving into China because of the problems with the intellectual property and cash flows. In Freight Expresses case I'm sure trying the Singapore / Malaysia road transport axis would be successful. Having said that who am I to hold back truly ambitious companies?

6 May:

Investor presentation Moko Social Media (ASX code: MKB)

Moko Social Media on both NASDAQ and the ASX. To be frank, I wonder why they don't axe the ASX listing as it would probably save some money and allow management to skip the flight from the Washington  DC area back to Australia. Just to be clear, yes I know their investor base is dominated by Australians, but as this is the twenty-first century I'm sure they'd cope with a single listing in exchange for saving a nice chunk of change. Enough said.

The revenues of Moko business can be divided into three units. Of the three I thought the most interesting was the REC*IT offering. REC*IT is a facilitator of intramural sports and offers a schedule / social app for college and high school students in the US. Essentially they go to schools and offer the app for free and in exchange get an audience to tap for various streams of revenues.

Moko claim to have access to 900 colleges and through a recent deal into 4,000 high schools. That's significant firepower. They currently have had over 200k app launches, and the users are all in that 18 - 22 group. Though as the high school side gets traction the age average will come down. This part of the business is currently dominated by males, but overall across all of their platforms they skew more to women.

The companion app (for want of a better phrase) to REC*IT is "Speakiesy." This is designed as a kind of antidote to Facebook as it excludes non-students from signing up. They're rolling it out in 120 selected schools this year and aiming for 200k users. This one is not sports orientated, so should have a more immediately better male to female balance.

Other than the school orientated apps they have:
  • Blue Nation Review - a left-leaning politics focused social site
  • Tagroom - which to me looks like a mommy-blogger hybrid (sorry but I couldn't think of a better description)
  • Run Haven - Strava / Garmin Connect with a social side that skews female
Overall they have 5 million actively monthly users comprised of 3.5m for BNR, 1.1m Tagroom, 450k RunHaven and 150k REC*IT. In 2015, they target to double that. Last year revenue declined, but they say this should stabilise and reverse this year on the back of the schools segment.

What do I make of Moko? I like the schools segment for the same reason that the management is investing so much time and energy. I know BNR has their highest "touch", which makes me wonder why they don't launch Red Nation Review and gobble up some conservatives as well. Then again why would I get active on BNR rather than the Huffington Post? RunHaven aside from the strong female skew is in a crowded segment, and yes I'm a Strava bull. Moreover, I haven't had a good look at Tagroom.

The more I look through the Moko presentation, the more I wish they'd just choose one space and focus. This obviously has potential, but I'm not quite there yet.

27 April

A Disruptive Lunch headlined by Black Pearl, an email enhancement app and Aussie commerce, a conglomerate e-business group.

Black Pearl - email how it should have always been

Black Pearl is about email branding. In its simplest form, you have to think about email presented on a professional letterhead with interactive elements. I can't describe it another way.

Pricing starts at US$14.99 per month for first 1-15 users, then US$0.99 per each additional user. You can upload unlimited signature designs, and there is no cap on total users and subgroups. If you're the IT manager you can utilise their Central Management Console and follow, track and trace (analytics) how email is being used. Black Pearl has exactly what I want in any business and I can understand the price.

Nick Lissette is the highly caffeinated CEO, who's already managed to get Black Pearl mail into companies from advertising agencies to banks. The only thing stopping Lissette will be other tech groups adding this feature. I suspect that Black Pearl might get swallowed up sooner rather than later.

Aussie Commerce - Revenge of the bankers

No group at a Disruptive lunch has caused me to procrastinate so much over my blog than Aussie Commerce. If I were to write merely about the 15 e-commerce portals that comprise Aussie Commerce's offering readers would be hitting the "quit" button on their browsers within the opening sentence.

Aussie Commerce is not as much about the business they run as it is about how they acquire them.  There's an adage that says you make most of your money in business when you buy a company, not when you sell it. In other words, if you buy an asset cheaply enough you don't have to worry too much about the rest. That's called value investing and without saying it Adam Schwab and Josh Borenstein were leaving it out there for the audience to connect the dots.

The Aussie Commerce team has built a business with 9.4m members, 3.7m of which are active. Their crown jewel is their Luxury Escape portal that partners with providers to offer vacations to members. Gross turnover per buyer is $344 at the moment, and 84% of buyers are repeat purchasers. Their offerings are desktop-centric at the moment, but they'll have apps by the end of the year.

I wrote in my notes: "these guys are traders". I meant that as a compliment. They say they're not afraid to pay a reasonable price for a business. I'm guessing the management team worked out what they'll pay per user and what synergies they can derive from bringing a business on board. This is far more sophisticated than what I've seen from a couple of Australian based groups recently. They always seem to fall in love with the business rather than the metrics. It surprises me that how few businesses I've seen have been able to value customers in this way. I remember in London, in 2000 at the height of the dotcom/telco bubble attending some of the bankers briefings on Vodafone's acquisition of Mannesmann in Germany. The dominant driver in many of the valuation models was the cost per user. I was always a bit skeptical, but it does make sense. Just consider marketing spend per 100k users versus just buying a customer base.

If you are an investor, who likes trading you could do worse than follow Aussie Commerce. This team at the very least could be a decent guide on valuing a business. Sometimes it's better to be smart than creative.


Many thanks to all those people who invited me to events this month. Apologies again its taken so long to get a post out. I look forward to following-up with as many groups as possible and as always I can be contacted through the IBCyclist Consulting website.