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What to say about the union of City brokers Liberum and Panmure Gordon?

We could start with an observation that talks must’ve happened very quickly indeed, given the strength and regularity of denials from people familiar with things to us last year that a merger was in the works.

The Times eventually secured the scoop just before Christmas, reporting advanced talks, by which time the specific rumour had been circulating for at least nine months. Careful management of sensitive information whose publication might stall M&A transactions is an art as well as a regulatory obligation and in that respect, Panmure Liberum is already off to a blinding start.

The second thing to observe is the nil-sum nature of domestic investment bank consolidation.

Immediately after its Qatari-backed takeover by Bob Diamond’s investment group in 2018, Panmure set out to double its headcount. The strategy worked in one way, with Panmure adding 57 net new broking clients between 2019 and 2022. But even during good years its sticky annual operating cost base of about £40mn was spectacularly mismatched to revenue.

Panmure boss Rich Ricci said after posting a £3.6mn profit for 2021 that its growing client list meant “the company is at a tipping point in terms of its operational leverage”. It tipped the wrong way, with Panmure posting a £15.5mn loss in 2022. That followed a £3.5mn loss in 2020, a £27.4mn loss in 2019 and a loss of £24.3mn in 2018.

Liberum too has a £40mn-ish annual cost base but has been a bit more proactive with the P45s, reducing its 2022 operating expenses by 20 per cent. The process has been helped by Panmure paying handsomely to eat its lunch, with Liberum adding just 13 net new corporate broking accounts between 2019 and 2022.

The pair say today that Panmure Liberum will have 250 retained corporate clients (DX and City Pub Group were the only quoted overlaps we could find). Using the City’s oversimplistic rule of thumb, a mid-tier boutique bank needs one employee per account so that’s 50 or so jobs at risk, or 16 per cent of the total. With perfect execution, therefore, you’re looking at maybe £10mn off the combined operating cost base.

It’s all pub beermat maths of course. But assuming synergies are that sort of level, and with no incremental improvement to revenue (because why would there be?), it’s difficult to see how Panmure Liberum hits break-even with any more regularity than Panmure has.

And it goes without saying that the job cuts will be easier where there is obvious overlap, such as in the research departments. For a flavour of what we might lose, here are a couple of columns from Joachim Klement, Liberum’s head of strategy, whose Substack is highly recommended:

Hold my Beer (2021)

CEOs aren’t the kind of people that are commonly known for their humility. Instead, many CEOs are type-A personalities who are extremely competitive. But in some instances, competitiveness can go too far and CEOs in an effort to outdo their peers start to make poor decisions. It’s the classic ‘hold my beer’ moment, where one CEO sees some other guy do something stupid and then decides he can top that.

Nowhere is this reaction more dangerous than at the high stakes game of M&A. The sums involved are large and the impact on a company’s fortunes equally so. Yet, because these are events that often attract a lot of media attention, the temptation to outdo your peers is extremely high for some CEOs. So, instead of acquiring smaller companies that may be a better fit to an existing business and can more easily be integrated into the existing corporate structure (and adopt the existing corporate culture), they are going for fewer but larger mergers and acquisitions. That might end well, just as sometimes a drunk at a bar says ‘hold my beer’ and then performs some amazing feat. 

But usually, giving a CEO a lot of liquidity to spend on M&A is like giving a drunk a barrel of beer. You know exactly what is going to happen, you just don’t know which wall he is going to hit.

A narcissist signs a report (2022)

In 2017, Charles Ham and his colleagues examined the performance of US-listed companies and compared it with the size of the signature of their CEOs. They found that CEOs with larger signatures overinvest and overpay for M&A but not in capital expenditures. They are clearly more interested in the flashy news headlines from major takeovers than running the existing business. Firms run by such narcissistic CEOs experience lower profitability and operating cash flows, yet those narcissistic CEOs enjoy higher salaries and compensation packages than their less narcissistic peers.

Ricci, Panmure Liberum’s CEO designate, is pictured above. An example of his signature is included below.