Читать книгу Speak to the Man Called Hope - Lawrence Hall - Страница 5

Ro gently pulls the front door shut. He can’t turn the handle to make sure there is no noise, the snub needs to lock and so it makes more noise than is ideal. Its only four twenty five in the morning and he doesn’t want to wake his mum. She is staying the few nights to take care of the dog, Ruby.

Standing on the porch holding the handle of his two wheel pull along, cabin size suitcase, Ro patiently waits for his mate Brick to arrive. Ro, Brick and his brother Stuey are frequent visitors to the races. Stuey works for a competitor stockbroker on the trading floor. They used to work together. Stuey, or ‘Mad Dog’ as his nickname became, enjoys a drink with the lads. Sometimes he gets a little out of control but he’s good fun, good company and enjoys horse racing as much as Ro. They’ve become good mates and knowing that Brick is a cab driver means that the awkward hour long drive to the airport is less so. Brick knows its really early so doesn’t say too much for the first half hour of the drive until Ro wakes up. Then the two catch up before arriving at the airport terminal. As usual, Brick arrives swiftly at four thirty. Luckily he doesn’t live too far from Ro so he doesn’t need to rise much earlier. Ro usually gets Brick to stop via a drive through for a couple of coffees. They know a great barista whose cafe is conveniently on the way. Brick pays and adds it to the bill. Ro then pays a 10% tip on top at the end. He pays with his corporate card so it costs him nothing.

At this time of the day the domestic airport terminal is mostly full of business types in their suits trying to get to the business lounge as quickly as possible. Unlike infrequent or holiday travellers, this journey is no longer a novelty. There is nothing exciting about the screening process, the queuing to get on the plane, the tight squeeze getting to and into one’s seat, the narrow gauge seating between seats and the urgency to alight the plane at the other end. Although, Ro, like other frequent travellers understands the benefit of travelling light, not checking in luggage and hence not having to wait to collect baggage at the destination.

Sometimes, Ro will leave home earlier and shower in the business lounge but not today. A quick piece of gluten free toast and a copy of the local financial newspaper is all he is after followed by a seat at the window with a tarmac view.

Ro is not really sure what to expect with this two day trip. He’s never been involved with a corporate due diligence before. He needs to think about what he wants to look for. Sam commented that he and Clint will focus on validating the numbers. Sam wants Ro to focus on the risks and compliance of the business - make sure there are no issues, no red flags. ‘Hmm’, Ro thinks to himself, ‘how am I going to do this?’

Generally, the key risks with a broking business lay with its trading book, its balance sheet and working capital.A broking business typically intermediates between their client and another broker to make a trade. The risk is that the client doesn’t pay for a purchase but the broker still needs to pay the other broker. This issue may occur if a client buys at a certain price and the price falls, especially if it falls substantially. Trades are done on credit. The trade, or contract to buy and sell between two brokers settles three days later. The obligation is therefore set before settling. If a stock price falls substantially between the time and day the trade occurs and prior to settlement occurs, the client may decide they won’t pay. This creates a debtor position but also impacts the brokers cashflow. Ro decided this is the first thing he will check. He will look for how many failed trades and resulting debtor positions and subsequent unpaid or debts (losses) occur. He will present the findings in terms of total trading numbers called turnover. If the percentage of losses is higher than what is typical for the industry then this will present a red flag. Further investigation is required. This means looking at how the business determines which new customers, which new accounts it will open. What assessments are done on the quality of the customers financial position. Also a look at what sort of securities (stocks) does the broker trade in. Higher volumes in lower quality companies would also present a red flag especially if the broker is not actually known for trading in that area. For example, a broker might be renowned for providing corporate advice on health companies because it has ex-healthcare specialists in its team. So trading in these types of securities would be expected. However, if the broker trades in risky junior mining companies but has no specialists in geology or engineering on its trading desk or corporate department then this may warrant further investigation. Often when commodity prices are rallying trading in junior mining companies increases significantly and can be lucrative in terms of brokerage revenue and trading fees. However, many of the junior miners are actually explorers meaning that they generate little revenue, are losing money and are speculative in nature. Traders and investors speculate on potential mineral deposit finds.

Next, Ro thinks to check the brokers balance sheet and capital position. Like banks, brokers need to hold a certain amount of capital. The amount of capital required is related to the outstanding settlements and exposures of the business at any point in time. Basically, the amount of capital must be several times the overall exposure of the business, known as the risk of the business. If this ratio is lower than the industry average then this may also be an issue. The broker may be undercapitalised or may have excessive risk exposure which may be due to many options positions or ‘house’ positions; these are trades where the buyer is the broker not the client.

Finally, Ro will turn his attention to compliance. This is a broad topic but is generally designed to ensure the broker is complying with laws which govern them. An example is related again to trading but is more focussed on maintaining the integrity or honesty or trust in the accuracy of the market. Brokers need to work to ensure clients are not trading on knowledge the market does not know, this is referred to as insider trading - perhaps a client knows that another person is buying shares with an intention of making takeover offer for the company. The broker needs to ensure that orders they place do not manipulate the current price; for example by pushing it higher than it would otherwise be. They need to check the orders and consider the affect it will have before it is placed on the market. There are many laws that a broker needs to comply with. Ro decides he with the public information and reports which outline the fines, the reasons they were issued and the broker they were issued to. He will also need to review all the recent compliance reports, risk and compliance committee minutes and reports and internal reporting mechanisms and frameworks the company has in place. This will at the same time provide an understanding of the quality of compliance systems in place and if they are operating effectively. Sometimes, the framework or policy exists, but the executives are not responding to the issues raised, meaning it's not operating effectively. Ro recalls the coroners report from the Lehman Brothers collapse and how some systems were in place but no actions were taken by executives when issues were raised. It's why these days risk, legal and compliance staff will report almost directly through to the CEO or Chief Risk Officer (CRO) rather than internal executives. ‘Mental note,’ Ro brainstorms to himself, ‘check the org structure to see the reporting lines.’

After the hour long flight and a thirty minute taxi ride into the city, Ro arrives at the offices of the investment bank Everton Marks at 8am. Sam and Clint are waiting in the foyer.

‘Can't access the books until 830’, Sam says disappointingly. ‘Let’s get a coffee’.

Sam outlines the rules that will be in place. They will be locked in a room with access to the ‘Black Box’. This mysterious sounding term is just a a folder on the Everton Market network which Sam, Clint and Ro will have access to. There will be nothing else on the laptops supplied by the investment bank. They will not be able to copy any contents to any flash drives nor email any content. There is no internet access. They can makes notes in the notepads but that is all. They have two full days to look up the information they need. They can request further information over and above what is in the black box but there is no guarantee they will get it and it will only be available for the term of the due diligence process. Sam proceeds to quiz Ro what he will be looking for. Luckily, Ro has given this some consideration and talks about reviewing the trading book, the capital position and compliance information.

‘Let me know as soon as you can if you find anything and try and identify any requests for additional information early otherwise we won’t have time to look at it.’ Sam explains.

‘Ok’ replies Ro, ‘have we contacted the regulatory authorities about the deal? We might need to let them know’

‘No’ Sam says gruffly, ‘ we’ll worry about that later, ‘let’s head in’.

‘Hi Alfie’, Sam says excitedly with a broad grin, ‘ good to see you.’

‘Thanks for coming’, Alfie says. He’s the lead on this deal for Everton Marks, ‘ let’s meet the team’.

The advisory team introduce themselves to Clint and Ro. Sam has obviously already met them in a previous meeting. Todd, the CFO from Jonathan Forest is also there for any queries.

‘Shall we?’, Alfie motions down the narrow walkway between several meeting rooms. It's time to get to work.

Sam dives straight into validating the data to support the business case for the deal. One of the key items is to understand the profile of the business. How many active customers are there? Jonathan Forest might have 50,000 clients but many of these may be dormant or inactive; meaning they haven’t generated any income for the business in the last twelve months. This may be an issue if these clients hold cash or securities with Jonathan Forest as there will be a risk that these clients choose not to move to Mason Thompson. This will impact the bid price which Sam ultimately decides to put forward. He is desperate to make the economics work so the deal can proceed and he can focus on getting the Mason Thompson brokerage business setup.

Clint begins to focus on the financials. How profitable is the business? What is the cost structure? Would there be room to cut costs? How much has Jonathan Forest invested in the platform and the technology and how much ongoing cost is to maintain the existing platform? One key driver for profitability in any broking business is the margin between the cost per confirmation and the brokerage charged for each confirmation. A confirmation being the contract of record to reflect the details of the trade which has been effected. So if a client bought 10,000 Apple shares the confirmation will show the client’s name, the security name, Apple, how many shares were bought, 10,000, the price paid or sold at, the brokerage charged and when the money is due to be settled. A good technology platform will keep this cost down and maximise the profitability, the difference between the cost and the revenue on the confirmation. Clint knows this information is critical to getting Mason Thompson to agree to the final offer price for the Jonathan Forest business. His heart races.