Macquarie Group Ltd., trying to win business in North America from mid-sized companies, risks being caught in an unsustainable position as it’s “squeezed” between Wall Street giants and smaller advisory firms, UBS AG said.
Macquarie’s approach, after at least $766 million of acquisitions in the region in less than two years, entails high costs without the guaranteed or diversified income to deliver adequate returns, UBS analysts led by Jonathan Mott said in a report yesterday. They cut their rating on Australia’s biggest investment bank to “neutral” from “buy” after a share rally.
“This is a challenging proposition,” the analysts wrote. “Few competitive industries are likely to sustain ‘middle-market’ players, not least investment banking, given the short life cycle on perceived competitive advantages.”
Sydney-based Macquarie, which yesterday cut its second-half earnings forecast, has become increasingly reliant on the U.S., Canada and Latin America after acquisitions in the past two years. Tim Bishop, head of the U.S. business, said yesterday it’s a challenge to differentiate Macquarie from its largest rivals and to raise the bank’s profile in a region where it’s poorly known.
Macquarie today fell 3.3 percent to A$39.75 at the 4:10 p.m. close in Sydney trading. The stock yesterday lost 0.3 percent after the bank said profit in the six months to March 31 will drop about 5 percent, reversing a forecast for growth.
Macquarie’s workforce in the Americas almost doubled to 3,732 people in the two years ended Sept. 30, helped by takeovers including Fox-Pitt Kelton Cochran Caronia Waller LLC. In that period, the proportion of group income from the region more than tripled to 27 percent, company filings show.
New York-based Bishop said in an investor presentation in Sydney yesterday that while it takes time to generate revenue, the bank is making progress.
“The traction we’re getting with the client is real,” he said. “It’s now coming through in terms of the revenue and the pipeline of mandates we have.”
Bishop said the largest U.S. investment banks are focused on the biggest companies, while boutique firms have a narrower range. Macquarie is targeting companies worth $5 billion or less, he said.
“The opportunity that we see is to wedge ourselves in the middle,” he said. “We’re not walking into the Americas and saying we want to compete with the bulge-bracket firms head-to-head. There is a significant market that exists just below those bulge-bracket firms.”