a balanced view

http://www.iht.com/articles/2006/03/27/bloomberg/bxbank.php

TUESDAY, MARCH 28, 2006

SYDNEY When Allan Moss arrived at Harvard Business School to join the class of 1977, he found himself competing against some future corporate luminaries: Rick Wagoner, now chief executive of General Motors; Alan Lafley, head of Procter & Gamble; and Lukas Mühlemann, former chairman of Credit Suisse Group.

"Allan was very low-key and unassuming, but he stood out even in a group of intellectual heavyweights," recalled a classmate, Desmond Wong, now a partner at Ernst & Young.

Moss returned to his native Australia and prospered as a banker. Until last year, however, few outside Australia had heard of him or his company, Macquarie Bank. That is when Moss, the chief executive, decided to go on a $14 billion acquisition spree.

Now, Macquarie seems to engineer a new international deal every month - most of them purchases of public facilities. Among its acquisitions over the past three years: a string of airports from Brussels to Rome to Hainan Island, China; roads and bridges across Australia, Europe, Asia and North America; and the explosives company, Dyno Nobel, based in Oslo.

Last year, Macquarie and a partner, Cintra, which is based in Madrid, paid $1.83 billion for the Chicago Skyway, a 7.8-mile, or 12.6-kilometer, elevated highway that runs from downtown Chicago to the Indiana border. And in March, Macquarie and Cintra got final approval from the Indiana Legislature for their $3.85 billion bid for the 157- mile Indiana Tollway.

Perhaps Macquarie's boldest move came in December, when it made a $2.6 billion hostile bid to buy the London Stock Exchange.

Moss has made himself an international business figure by creating a most peculiar financial institution. Macquarie's strategy is to buy up normally state-run operations, like roads, bridges and water companies, and then take them public, usually by bundling them into funds that are then listed on various stock exchanges.

Macquarie manages the funds and retains a stake, earning fees at every stage. The plan has helped the bank deliver 14 successive years of record profits, 12 of them on Moss's watch, and a 10-fold increase in shareholder returns.

Macquarie's success has also lured much bigger investment banks, including Goldman Sachs and J.P. Morgan Chase, into planning their own multibillion-dollar infrastructure funds. "There will be room for many participants in the market," said Mark Weisdorf, chief investment officer of J.P. Morgan's new Infrastructure Investments Group.

"Macquarie came from nowhere with a brilliant idea and beat the competition," said Marc Faber, whose fund management firm in Hong Kong hold shares in Macquarie MEAG Prime REIT, a Singapore-listed real estate investment trust.

As of Sept. 30, Macquarie had 112 billion Australian dollars, or $83.6 billion, in assets under management, up 36 percent from a year earlier. In addition to toll roads and airports, Macquarie owns a port in China, radio and television transmission towers in the Australian outback, Hawaii's largest natural gas company, real estate in the United States, Mexico, Canada and New Zealand, water utilities in Britain and 192 parking lots in New York City.

In 2005, a Macquarie-led consortium and Macquarie's client, Orica, the world's largest explosives maker, paid $1.7 billion to buy Dyno Nobel, a 141- year-old company that traces its origins to Alfred Nobel, inventor of dynamite. Orica and Macquarie then split Nobel into two parts. Maquarie and its partners took the Australian and North American operations, which they plan to list on the Sydney stock exchange April 7.

Now, Faber and other investors are wondering whether Macquarie has peaked. In February, Moss and his team told investors that investment banking income would be "significantly lower" for the six months ending on March 31, because of a fall-off in performance fees from its public works funds.

And then one of the bank's funds, Macquarie Airports, said profit for the year ended Dec. 31 fell.

All of the bad news contributed to a slide in Macquarie Bank stock that began in October, when Goldman Sachs JBWere, a brokerage firm based in Melbourne, downgraded Macquarie stock to "neutral" from "outperform," saying Macquarie funds were underperforming their indexes amid increasing competition in the sector.

Macquarie Bank stock fell 24 percent to a nine-month low of 58.80 Australian dollars on March 8. It has since bounced back and was down 12 percent for the six months ended March 24.

The ubiquitous bank from Down Under suffered a blow to its prestige last month, when it abandoned its bid for the LSE after attracting just 0.04 percent of London Stock Exchange shares.

What's gone wrong? "A good idea can soon become one of excess," Faber said. "A lot of people are copying them." Faber is by no means writing Macquarie off. "The verdict on Macquarie will come when there's an economic downturn," he said.

Asked whether the new skepticism about Macquarie was justified, Moss said: "The Macquarie Bank business is in very good shape. As usual, changes in general market conditions impact on our share price."