Macquarie's Merger Focus Hasn't Clicked Yet

A few years ago, Macquarie Group (MGU) was one of the best-performing players in global finance. Helped by its infrastructure unit, Australia's biggest investment bank strung together 16 years of continuous profit growth by buying and then running everything from wind farms in France to the elevated, six-lane Chicago Skyway toll road. Then came the financial crisis that began in 2007 and cut off the flow of cheap credit that had financed Macquarie's investment strategy.

Macquarie Chief Executive Officer Nicholas Moore has tried to reposition the bank by spending at least $778 million on acquisitions of smaller banks in North America in 2009. The bank has pulled back from listed infrastructure investing and is focusing on merger advice, energy trading, and equity underwriting. So far the strategy hasn't paid off, given the slowdown in global mergers and share sales in the wake of the credit crisis and a tough climate for investment banks seeking fees generally. Moore, who declined to be interviewed, has said the new strategy will take years to yield results.

That became clear when Moore recently disclosed that the bank's profit in the six months ending Sept. 30 is set to slump 25 percent, to about $359 million Australian ($452 million), the lowest for that period since 2004. "They're in a bit of a quandary," says Wes Nason, an analyst at Citigroup (C) in Melbourne. "Investors expect more than they're seeing at the moment."

Macquarie has been aggressive about snapping up assets in the wake of the financial crisis. Among them: London-based investment bank Fox-Pitt Kelton Cochran Caronia Waller, Philadelphia-based asset manager Delaware Investments (DDF), Calgary-based energy advisory Tristone Capital Global, and Constellation Energy Group's (CEG) Houston-based natural gas trading unit.

While Macquarie was able to pick up assets at attractive prices, the bank still faces challenges, says Lee Mickelburough, who helps manage $3.5 billion at Perennial Investment Partners in Melbourne. When Moore started buying companies, "It was the bottom of the market and all his competitors were basically bankrupt," says Mickelburough. "But they [rival banks] have come back to life within 12 months, and they're bigger and uglier than before."

In Australia, which accounts for almost half of Macquarie's income, U.S. rivals are providing stiffer competition as Moore uncouples the bank from the listed infrastructure-focused model he helped pioneer during more than two decades at the company. That strategy involved buying assets such as the 407 ETR highway near Toronto and the Indiana Toll Road, listing them on an exchange, and charging fees for managing them. "The model provided the investment deals, which kept the investment bank business fully occupied," says Mickelburough.

The bank is losing ground on several fronts. Macquarie ranks 13th this year in Australia when it comes to advising on mergers, a market now dominated by Goldman Sachs (GS) and Bank of America (BAC), according to data compiled by Bloomberg. In North America, Macquarie has slipped to 38th among takeover arrangers in 2010 from 23rd last year. Shares have slumped more than a third from last year's peak in Sydney trading. With profits set to fall, pressure is mounting for Macquarie to cut its 14,600-strong workforce. "They're starting to look like a normal investment bank where you're subject to boom-and-bust cycles like everybody else," says Citigroup's Nason. "And in the bust, you've got to cut people to try and maintain a bottom line."

The bottom line: Macquarie's shift away from infrastructure deals and to advisory work hasn't generated the rebound investors had hoped for.

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