Management teams at banks should bid for assets

OPINION:There is a way to create hundreds of jobs from the banks' reduction of their balance sheets

NEARLY 20 years ago, through a combination of absent financing and a sceptical financials community, Guinness Peat Aviation (GPA) failed to secure its future. There began one of the most successful salvage operations in Irish corporate history.

General Electric bought the assets but real value creation came through the establishment of several successful aviation finance businesses in Ireland. Today, half the world’s leased aircraft is managed from Ireland.

GPA is not the only instance; when Digital Equipment in Galway retrenched in the 1990s, its demise spawned many entrepreneurial businesses.

Much can be taken from the GPA experience. After all, leasing companies and banks have lots in common; at their core they both lend money.

Our banks today are showing signs of obsolescence, teetering on the edge of bankruptcy and being forced to sell assets to reduce their balance sheets.

In the midst of the chaos, the Government could take one small but significant action which has the potential to create hundreds of high-value, export-led jobs at zero cost to the taxpayer. Indeed, it could generate substantial receipts to the exchequer and might, one day, be a legacy of which this Government could be proud.

Essentially, this involves encouraging existing management teams to bid for and run assets that are being sold by Irish banks such as AIB, BoI and Anglo (which we can refer to as the “national banks”). These teams should be encouraged to present proposals to acquire the businesses to be sold by the national banks.

Once these proposals have been initially approved by the selling bank and an independent assessor, the assets can then be offered to the general market.

To be successful, the management team will have to offer at least the same value as the next best bid. The value of the management team bid can include cash, an equity interest retained by the selling bank in the business, additional rights to participation in future profits in favour of the selling bank and the benefit of any remuneration foregone by the employees in the business.

The selling bank’s participation in the future earnings of the business aligns several interests.

If the management team’s bid is successful and agreement in principle is signed, it resigns from the selling bank and negotiates the purchase with commitment by both parties to a swift execution and closing.

There may be up to 15 sub-business lines, or loan books, that could be demerged in this way at no cost to the exchequer and potentially great gain to the country. As well as the GPA example, one just has to look at the success that Harbourmaster, Avoca, Merrion Stockbrokers and Key Capital have enjoyed through independence. A sophisticated domestic asset management market would provide work for a wide range of services.

Lloyds Bank in Ireland is doing something similar. The sale of Goodbody Stockbrokers is an example of what can be done.

The test for a management team in acquiring a business is a great measure of a team’s ability to be successful elsewhere. If it fails to be competitive in the process then the assets will be bought by others and its opportunity dies. If the team succeeds, it can grow. It will find it easier to win business abroad as the winds of change blow across other European markets.

These teams will become magnets for similar-minded European banks facing similar demands. Ireland will gain the benefit of first-mover advantage – some reward for all the pain.

One could easily imagine that several new firms could develop to become extremely substantial, with tens of billions under management. This would mean that financial roadshows would come to Dublin again; hotels would fill up; conferences would be hosted; centrepieces sold and so on. It would also enhance the reputation of the country in international capital markets. This would have positive knock-on effects for our borrowing costs.

There will be howls of protest that we are offering opportunity to “bankers”. However, it’s time to look to the future. The people that will come forward are not those who led policy at the banks in the last decade. Teams will be led and manned by those who were slogging away in difficult circumstances.

The temptation for the Government in these circumstances is to sell the asset quickly to the “safe option”. The safe option though does not always create value for the longer term.

We spend thousands of euros to develop each new job in this country. With this model, we have the opportunity of generating new head office jobs at no cost. It is time to look to the future, to make sure our young people have a shot at being great, at home.

The politics of the situation does need to be dealt with. Middle managers in their 30s or early 40s who were not policy formers in the past decade should be encouraged. Loyal and long suffering, they deserve a chance to go it alone. This approach will create high-quality analytical jobs for graduates in Ireland and, by being first, we give our people the chance to win business overseas.

The national banks, and possibly the Government’s investment bank advisers, may not like this because it is not a generic solution for this asset sale.

However the Government needs to be firm and not be fobbed off by the very people that caused much of this heartache.

Our young professionals deserve a chance to show that they can succeed where their leaders came up short.

Conor Killeen is chief executive officer of Key Capital