Macquarie's master plan

Reports that Macquarie Group is one of the three short-listed bidders for Royal Bank of Scotland's majority interest in the big commodity trader RBS Sempra, in a deal approaching $US4 billion (see Macquarie bids for RBS Sempra unit, January 8), tend to confirm the view that Macquarie is in something of a race against time. A coincidence of necessity and opportunity is pushing it to accelerate an already aggressive expansion program.

Already, Macquarie has made a string of largely modest acquisitions in the post-crisis period to build its global presence in large niches within the global financial system. It has concentrated on energy trading, capital markets, funds management and its advisory businesses, where it has had a particular focus on building its financial institutions capabilities.

In energy, the acquisitions of Constellation Energy's gas trading business, the Canadian advisory firm Tristone and, in the final days of last year, Integrys Energy's electricity wholesaling, marketing and trading business has made the group a major player in US power trading.

The possible acquisition of RBS Sempra, a joint venture between the troubled RBS (51 per cent) and Sempra Energy of the US, has been made possible because the European Commission has directed RBS to offload assets, including its stake in RBS Sempra, as the price of its UK Government bail-out.

If successful, it would be easily the largest of Macquarie's post-crisis acquisitions, particularly if Sempra Energy were to opt to sell its interest. With Deutsche Bank and JP Morgan Chase also in the bidding, however, there is serious competition for one of the major players in the UK metals market and in US energy trading.

The crisis-induced shake-out occurring within the global financial system has provided Macquarie with a succession of opportunities for incremental expansion in its preferred niches. Its strategy is to build global positions and capabilities in specialist areas where it can avoid head-on collisions with the major banks and investment banks. If it wants to be a major player in commodities trading it does, however, probably need a sizeable acquisition.

Macquarie has the capital to fund acquisitions – at last report it had about $4.5 billion of capital beyond its minimum regulatory requirements and it is still releasing capital as it is paid to exit its listed infrastructure investment satellites, as well as creating capital with the changes it made to its executive remuneration scheme late last year.

Its need to expand is also driven by its efforts to distance itself from the former, very lucrative, listed fund model. The exit payments it is receiving as it relinquishes management of those funds, and the fee income streams they have generated, represent the last gasp of that model.

Macquarie is now racing to replace those streams of profit, building more traditional advisory and trading business earnings as rapidly as it can (see Macquarie to take on rivals in 2010, January 2).

The crisis destroyed the listed fund model but has thrown up a string of expansion opportunities because of the impact it has had on other investment banks and financial institutions around the world. Macquarie emerged from the crisis in far better shape than most of its global counterparts.

Whether it acquires RBS Sempra or not, both Macquarie's confidence in its revised strategy and its ambitions appear to be growing. It has a history of exploiting downturns to accelerate its growth by making significant acquisitions. History does appear to be repeating itself.