markets and an insight into potential trading that night. He soon changes channels to see if there is any sport on. Fortunately, the Gunners are playing. It's a replay of their game against Spurs. A goal feast and one Arsenal won by 1 goal. Ro is tired, he doesn’t really feel like spending more time with Sam and Clint at dinner. Maybe he can have a quick dinner with them and head back to the hotel. He considers declining dinner and ordering take-in. Probably not a good career move given the nature of this business is changing rapidly. It could all easily pass him by and declining a social dinner engagement might not keep him in the team. Clint sends a text message saying to meet him and Sam at the hotel restaurant in fifteen minutes. At least that way Ro can extricate himself sooner rather than later. He decides to go to dinner.
Dinner conversation with Sam and Clint is all work. Talk about the deal, the fact the bid is looking somewhere in the order of $80m. Ro nearly chokes on his wine. The other bidder is an international futures trading company looking to establish a presence in the local market and buying a local broking business in the process. Sam thinks that whilst the bid is highly competitive its not an ‘all-in’ or ‘get it at all costs’ type of bid. He does think that Jonathan will be prepared to accept a slightly lower bid from Mason Thompson compared to accepting an offer from the international futures trading business. Ro chews on his steak eagerly listening to the intricate details of the deal.
Sam pours from the water jug and takes a sip to quench his thirst. He’s got more to say. He leans forward to grab a warmed dinner roll from the basket.
‘There’s another suitor who has been in touch. I’m keen to talk with them. Oakbank are interested in looking into a merged operation of their broking business’.
Oakbank is the largest investment bank in the country. It has an esteemed reputation for doing deals and making lots of money especially when M&A markets are flying. Oakbank is the undisputed champion of mergers and acquisitions.
Sam continues, ‘they’ve recently recruited some technology talent to help build out their platform but they’ve realised this is a scale game and they need customers to make the platform margins meet expectations’.
These days broking has a lot of high fixed costs. The need to maintain cutting edge technology and integration with exchanges means much investment is required. Increased automation and moves to screens away from people standing in pits simply means that increased trading volume leads to disproportionately higher profits. The easiest way to increase volume is to increase the number of clients, active clients.
‘I’ve initiated discussions just today and I expect we’ll engage with them in the next week or two once legals are in place. Franc is open to exploring this option as well. We’d probably get a better quality client from Oakbank than we would from Jonathan Forest.’ He says. ‘I’ve engaged Pridman Partners to look into the market for other potential prospects. I think there may be more suitors, others keen to take the opportunity to deal with a major bank. This is getting interesting’, he grins.
Ro wonders who would realistically be a potential seller. Sure, there may be several small broking houses but they don’t have the technology platform that could support the business going forward. Mason Thompson isn’t just after scale its after technology to achieve that scale. There may be one or two smallish niche technology platforms with small ultra high clients but their custom platform probably wouldn’t pass the in house technology and security reviews and their client base, whilst appealing, doesn't suit a high street bank looking for low risk, high margin deposits.
The sticky date pudding and botrytis wine go down a treat. Ro feels bloated. It's time to finish up.
‘See you at the offices in the morning. I think we can sit down at eight thirty.’ says Clint, reminding all at the table of the task at hand.
‘I’m meeting with Alfie for breakfast so I’ll see you in the offices later on’, adds Sam, ‘ maybe start framing up your findings ready for your final report and advice to the deal committee. I want to see a draft before we leave tomorrow’.
Ro still has much to sift through at the offices of Everton Marks tomorrow. He now wishes he didn’t indulge in so much red wine. At least the steak will have soaked much of it up.
One of the few hotel perks is the ability to watch tv in bed. Ro props up on the full choice of inhouse pillows and tunes in to see the international markets open. Looks like a dull day. No corporate news or economics news out.
Breakfast at a nearby cafe always appeals more to Ro than the hotel buffet. It costs less than half the price and avoids any awkward interactions. He likes his eggs over easy, the bacon crispy and from a regional farmer, not supermarket rashers; garlic mushrooms, roasted red tomato and spinach with lemon juice all neatly presented on crusted sourdough bread. The coffee is not great but he can pick up one from a better barista near the office on the way. He reads the local paper and keeps the deal committee draft report ticking over in the back of his mind. His phone rings. Its Roland Baker, the contract manager from Atkins Robertson. He has become a good friend to Ro. They talk regularly about arrangements between Mason Thompson and Atkins Robertson. He has called to let Ro know that John Ruth has resigned. He has another role to go to but will not say where. It's in the same industry so he has to be walked out. He must leave immediately. Ro ponders the thought of where John may be going. He suspects Roland knows but will not say. He won’t press Roland today.
Chapter 6 One Door Closes
Day two is a day not unlike day 1 on due diligence. Ro is seated at his desk at ten thirty in the morning. Sam and Clint have spent more of the last two hours outside the office than. in. Ro’s been going through the compliance policies, the management supervision document which outlines how the business governs itself and the risk and compliance committee meeting minutes. The technology platform struggles with spikes in volume. This occurs when significant geo-political, market impacting events happen or when major economic events occur such as the central bank lowering or raising interest rates. The contact centre also struggles with spikes. However, spikes in call volumes coincide with the technology platform issues. Reading the meeting minutes, it's clear these technology issues are not rare. He’s read issues listed in four of the last twelve reports representing four major technology issues over the last twelve months. It generally means customers are unable to login. This system cannot handle the load.
Ro crafts an email to Sam and Jarryd from technology. Jarryd has joined the deal team and will lead the technology review. The email outlines the issues he has identified and suggests that Jarryd look at these in more detail. From what Ro could read, the platform infrastructure is managed in-house. Buying new servers would cost close to $1m. Load balancing applications need enhancing, the databases need improved indexing and the integration points are too many to handle the multitude of data requests to present to the clients’ browser.
He doesn’t include this in the email, at the end of the day its Jarryd who will make a more informed view. Suffice to say, this will need to be moved to the cloud which provides more elastic server availability to handle the sort of spikes that are causing client issues. Ro also notes that average trading volume drops 20% for the 5 trading days post one of these issues and some clients probably leave altogether. Given that 80% or more of a broking house trading revenue comes from its top 10-15% of clients having one to two leave when there are outages is far from ideal. All the marketing revenue to attract new clients, about ten per day is wasted in terms of profitability. It costs about one hundred and fifty dollars to acquire each new client per day. These numbers, both client acquisition and trading volume, are small in comparison to the size and nature of Mason Thompson’s broking business. Its likely that buying the Jonathan Forest Discount broking business for $80m will result in spending much more than that to integrate it with the Mason Thompson broking business and migrate its business from Atkins Robertson. Ro starts to think this deal is a lemon. Maybe Sam has already sensed this too which is why his ears piqued to the Oakbank deal.
The frosted glass office door burst open and Sam steps in. He glares at Ro like he has just seen a dead person. That’s how Ro feels. It's like he has forgotten to breathe. His chest tightens and he feels pain. He breathes deeply to release that pain.
‘Where