Monday 18 February 2019

Samantha McCaughren: 'What's next for Davy as Byrne leads capital markets division?'

AIB’s Bernard Byrne is joining Davy
AIB’s Bernard Byrne is joining Davy
Samantha McCaughren

Samantha McCaughren

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 Irish-owned broker and the only financial-services 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.

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