Friday, 13 April 2012

NBNK, who are they?

Lately I have had a number of people (and trust me on my blog any number is considered ‘many’) coming from Google with search words such as ‘NBNK’, ‘Gary Hoffman’, ‘Co-op and NBNK’. I can’t recall ever having written anything about NBNK or Hoffman, but in order not to disappoint my next guests, I have decided to dedicate a post.

So to start from the beginning. Banks lent to a bunch of low grade private and commercial customers who couldn’t pay them back, had overvalued the collateral and suddenly the whole world was in the shit. The governments around the world got very busy intervening in different ways. In some countries they put up giant guarantees, in some they lent (freshly printed) money to banks, and in some they bought their shares and therefore partly or fully nationalising them.

A particularly crappy UK bank was Northern Rock, famed for is extremely aggressive lending policy, they were the first to sink and marked the beginning of the UK financial crisis of 2008. After failing to find buyers for it, the government had to take it into public ownership. Gary Hoffman was given the dubious honour as new CEO, tasked with getting the most out of a very poor situation. It was clear from the start that the governments plan for Northern Rock was to sort of clean it up, separate the good bits from the bad and then sell what they could get rid of.

Next up was HBOS, Lloyds offered to rescue HBOS by merging with it, regulatory approvals were rushed through and they formed a new banking giant. Shortly thereafter Lloyds announced that they now were in trouble, the balance sheet of HBOS was worse off than previously thought and they now needed a bailout, so the government essentially nationalised them too by taking a majority stake. However EU was looking at what was going on and said ‘wait a minute’ (should be read with a French intonation) that sale of HBOS, indirectly subsidized by the UK government and against all common sense, constitute many breaches of merger rules and you must therefore divest a large part of Lloyds (more than 600 branches and billions of savings, loans etc.) again. That asset sale, which is by no means concluded yet, is what is known as the Verde project. Apparently what could be bought over a few days and subsequently quickly integrated into the core business, is now so difficult to separate that it require several years and several hundred people to do. Bizarre. It didn’t improve matters much that Antonio Osorio, Lloyds newly appointed superstar CEO, suffered a mental meltdown and was rushed to a celebrity rehab centre, leaving mess to people that had either just arrived (parachuted in by Antonio) or didn’t really want to be there. There were other banks and building societies too, RBS for example, but they are irrelevant for this story so I’ll just keep it at Northern Rock and Lloyds.

Many senior people in the banking industry were looking at what was going on and knew that naturally somebody has to buy these assets and there must be some opportunities here. Companies from other industries, private equity firms etc. considered getting into banking and some investment vehicles were formed with the unilateral purpose of bidding for the banking assets. One of the companies was NBNK. Established by Lord Peter Levene and Sir David Walker, some formidable characters. NBNK then went on to hire Gary Hoffman, the former CEO of Northern Rock.

NBNK, it seemed, was particularly interested in scale and it was widely expected that they would bid and win the sale of both Northern Rock (why they had hired their former CEO) and Verde. NBNK hired a number of other heavy hitters and seemed very confident they would win. Then the first disaster struck, Virgin was picked over NBNK to buy Northern Rock. Undeterred NBNK shifted focus on Verde which after all is the much bigger fish. However it wasn’t long till NBNK suffered a second and much more devastating blow. Lloyds announced that they had selected Co-op as the preferred bidder for Verde. Looking at the press releases following the decision it was hard to tell who was more surprised Co-op or NBNK. The former issued a very lukewarm statement saying along the lines if “thanks, now let’s see if we can agree terms” and NBNK were pretty discontent (probably also a bit embarrassed that the only thing they had achieved for their investors was to pay themselves some generous salaries).

Anyway over the last few months, the Co-op bid has become ever shakier. The regulator has expressed strong concerns over Co-op boards ability to credibly lead a major bank and just about everyone (including Co-op's own CEO) are asking ‘do they have the money’, So a few days ago NBNK launched a PR shock and awe campaign, registering a fresh bid for Verde, even though that’s probably against the bidding process (remember a preferred bidder has already been chosen) but as the Co-op might not be able to conclude the deal what NBNK is trying to achieve is to make sure that Lloyds won’t have an excuse to spin-off the Verde assets in an IPO.

One key point though is that by all accounts NBNK’s plan is to run Verde pretty much as is, they don’t seem to have any radical plans for it and given the choice it is difficult to understand why investors (remember NBNK have to attract a couple of billon pounds to fund the purchase) would want to give their money to NBNK if they could wait for the IPO, buy the shares directly and get it cheaper (I’m assuming that NBNK would also want to be paid). NBNK are however offering existing Lloyds shareholders, including the government, shares in the new bank and claim that they are able to wholly-fund the demerger which will sound very appealing to Lloyds (slightly complicated to explain but because of imbalances in asset/liabilities in Verde, Lloyds could end up lending a large amount of money to the purchaser). Very interesting to follow and I suspect we haven’t seen the end of the soap opera.

Wednesday, 11 April 2012

Delicate negotiations - telling your Business Partner you want more

Is it business, or is it personal? The truth is when you partner with somebody to start a business no matter how you start it will invariably become a bit of both.

If you ask for a bigger share, your partner will often see that as coming out of his or her own pocket.
The trouble is this. You are approached by somebody who says to you 'I have a great idea'. I have it defined, have established all the relevant relationships, and I can sell it, the only piece missing is YOU, I need you to build a prototype that I can sell, for that I’ll give you a share in the business and a exec role when it kicks off.

You say, yes that sounds great, you build the prototype but of course realise that the big customers won’t agree to anything before there is a proven case, you therefore build a production system to pilot with some smaller companies. You realise they have different requirements, you need more functionality to support them and that growing organically will take a lot longer to generate a substantial income.

One day you wake up and say to yourself 'wait a minute, I have delivered far beyond our original agreement, and I am now working for free'. As an investor you think, the founder hasn’t delivered her plan, and this must be funding round two, you want more for the additional risk. As a friend you know that anything extra that you ask for will dilute the founders shareholding and that they will be very upset, as an individual you are finding yourself between a rock and a hard place, because you know you are critical to the success, the founder assures you again that she is 'extremely hopeful to land a big deal soon' but you can’t pay your rent with a wish or a promise.

Delicate indeed. What do you do? I truly don’t have the magic formula. I think it is very important to be clear about what you are doing and for what in return. Failure to do that (and we all fail because nobody starts a business thinking it will be unsuccessful) I think you will just have to check your moral compass regularly. Make sure that you are not being taken advantage of and also that you are not exploiting your own position. It can only work in the longer term if you are both thinking you are getting a fair deal. The really hard part is that you might not be able to find a compromise in which case you should cut your losses (or winnings) and walk. The feeling of injustice is like a cancer that will only get worse. Be prepared to compromise but only agree to a deal you are truly happy with. That’s what I think anyway. I’m certainly not an expert but I’m right at the centre of it on a number of initiatives, so any word of advice is definitely appreciated.

Tuesday, 3 April 2012

The best customer is a desperate customer

I have found that I can only sell to two kinds of people, the egocentric and the desperate. I sell essentially the same thing to both, "help". These days the in-thing is to talk about 'intrepreneurs', the idea being that you find somebody truly excited about your product or service inside the company you are trying to sell to. For me it has worked much better to seek out the person who is under preassure and take their troubles off them. To stick with the theme, let's call him the despreneur.

Have a look at the despreneur on the left. I've met him several times in the last two months. Ask him a couple of probing questions about how things are going and the eye rubbing begin. It was such an obvious case of non-verbal communication and it happened in exactly the same way with two different people only days apart, so I decided to Google it and figure out what it means;

'When a person is feeling uncomfortable, the eyes may water a little. To cover this and try to restore an appropriate dryness, they person may rub their eye and maybe even feign tiredness or having something in the eye. This also gives the opportunity to turn the head away. The rubbing may be with one finger, with a finger and thumb (for two eyes) or with both hands. The more the coverage, the more the person is trying to hide behind the hands.'

Really interesting. So that's the point where we start talking about how we can make his life easier, not in detail of course because we know he really just want to hide from the problems, we just make it clear that we know what we are doing, 'we have done it a million time before, so just leave it with us', and unsurprisingly, if it's not his own money he is spending, he is interested.

To rent or buy, that's the question

It’s been a while since I blogged. With two family members in hospital and a pregnant wife, it’s just been a little hard to give a toss about banking. However prompted by news that our lease can’t be extended, landlord went bankrupt and I assume the receivers want to try to sell it, I have regained some interest in the property market. As I posted about previously, I like renting and being completely debt free, yes I don’t reap the rewards of property price inflation but conversely, I haven’t seen my personal finance completely implode with property price crashes around the world in the last few years. I suppose my careful approach reveal my continental working class background.

But anyway, being a retail banking expert of sorts and now homeless, I must care a bit about property prices. I guess if we were looking at a recovery in house prices one should consider buying something. Many analysts and several of my colleagues are indeed expecting a recovery, citing 'pent up demand' as the key reason. Their predictions are based on the fact that a lot of people haven’t been able to get on the housing ladder, mainly because of strict lending criteria. So the argument goes that when lenders start relaxing their lending criteria, more people will be in a position to buy and therefore prices will increase, it seemingly doesn’t matter that these people will be stretched beyond the maximum they can afford to repay, where there is a will there is a way, is the argument.

My view is this. We might see another short period of house price inflation followed by a long period of deflation. When government finally abandon the idea that increasing house prices are in some way good for the economy and give up subsidising it in every way possible, when Bank of England starts to increase the interest rate, and when the small private property investors (and by that I mean people with little or no knowledge of macro economics or property) start to realise that bricks and mortar are no longer a sure thing. I could be wrong, of course, but for me continuing to rent seem by far the safer option.