I have been reading the semi-biographical account of the Wall Street Powerhouse: Lazard Freres & Co. and it has been very interesting, informative and educating. It has given me an insight into the evolution of Investment Banking over the last century and traces the company's roots from its birth as a San-Francisco dry goods store to its role as , probably, the inventor of the M&A Advisory business as we know it today.

I have always been interested in Lazard as it was one of the firms that stressed Intellectual Capital over financial capital. It was for the greater part of the 20th century an advisory firm and executed very few financing manadates. It had a lot of confidence in the knowledge, insight and contacts of its key partners and in their ability to offer useful and strategic advice to major corporations and governments.

Such partners such as the famed "Great Men" of Lazard such as Andre Meyer, Felix Rohatyn ("The Saviour of New York") and now, probably the last "Great Man" in Investment Banking, Bruce Wasserstein. In the era of full-service firms or "financial supermarkets", firms like Lazard are fast becoming endangered species. Though I believe that the need for pure-play advisory firms has never been greater; corporations, governments and financial sponsors need knowledgable and insightful advice that is not clouded by conflicts that may arise from potential financing businesses.

An advisory firm with a well developed bonds operation may steer its client into raising debt financing, even if that is not the best option for the client, in order to bring in business for its bond desk. A firm with a substantial equity capital markets operation may also do the same, all these scenarios raise possible conflicts between interests of the adviser and the client.
However, Pure advisory firms should have none of these conflicts and should be able to access their clients' position and positions in a relatively unbiased manner.

"Corporate Social Responsibility": A fad or Sound Business Practice

It seems every decade must have its own managemen buzzwords and "Crporate Social Responsibility" or its shorter and sexier form: CSR may just be the one for the current decade.

However, to think that CSR is just another buzzword is to be overly cynical or even worse: naive.It is clear that many businessmen are ignorant or unmindful of the massive importance of being socially responsible. Even when major corporatons decide to be mindful of the role of CSR, they often do not do so in a holistic way. The fad now is to have CSR departments within the company or to have the CSR function performed by the Corporate Communiations or public relations departments.

I believe Corporate Social Responsibility should be a company-wide effort and should not be restricted to a department or unit. There should be a company-wide effort by management and staff to be socially reponsible and this effort should be shared by everyone, from the most junior employee to the C-Level executives. The need to be responsible to society and the community should be factored into most operational and strategic decisions. A good part of the Chief Executive's time should be spent on ensuring that workers imbibe the culture of social responsibility.

An Oil Company's drilling engineers should be aware of the Social and environmental aspects of their work, they need not wait for an "all knowing" CSR department to tell them so. Human Resource professionals should know that they have to seek a diverse workforce and hire, as much as possible, from their local communities. In essence CSR should be part of the employee's knowledge base and this knowledge should help to shape his everyday decisions.

Why is it so necessary for companies to be socially responsible? The answer is that it helps profitability in the long-run as sound and ethical business practices will most likely result inmore sustainable business model. The fate of a business or corporation is closely tied to that of the society in which it operates, to achieve long-term prosperity businesses must ensure that the society in which they operate is equally prosperous. A business model which degrades the environment or impoverishes the citizenery, cannot be a sustainable one. Henry Ford, who I believe was an early believer in CSR, when he decided to pay all the workers in his a factory a decent wage.

Henry Ford's action ultimately led to more profits for his company, as he had helped in creating a middle-class in early 20th Century America. The members of this class served as the bedrock of the demand for the automobile in the 20th Century. For a company in Southen Africa to contribute towards fighting the HIV/AIDS Scourge is a sound business decision and not a "nice thing" to do. If the HIV/AIDS andemic continues is not effectively tackled, it will drastically reduce both the labour force and the pool of potential customers.

Therefore, it may be that the surest way to long-term profitability is for a company to be mindful and responsive to the communities in which it operates. Because it is in the sustainable development and prosperity of those communities that its own prosperity and long-term profitability lies.

A sustainable business model for the Lagos Bus Rapid Transportation (BRT) Scheme

Residents of Lagos cannot help but notice the Long Red Buses, popularly called "BRT Buses" that ply dedicated routes in the metropolis. The buses are modeled after BRT Schemes in operation in cities around the world, and are meant to serve as a temporary solution to our traffic problems until a more lasting solution, such as the metro line, can be designed and implemented.

I believe the scheme holds a lot of promise, as many people should willingly keep their cars at home if they can be assured of a traffic-jam free ride on dedicated lanes in a decent and well kept bus. I believe the challenge lies in finding a sustainable and self-sustaining business model for the scheme. The buses are currently being run by a company called "LAGBUS Asset Management" in which the state government holds a substantial stake. The state through LAMATA, Lagos Metropolitan Transport Authority, also owns and maintains the dedicated corridors that the scheme's buses use.

As a result, the same entity serves as the beneficial owner, at least to a large extent, of both the Infrastructure and the sole service provider. The model I propose will lead to a separation of the infrastructure: the dedicated bus lines, and the service: the Rapid Bus scheme. I believe it will be more efficient for the government to sell its stake in LAGBUS and concentrate its efforts, through LAMATA, on maintaining the Infrastructure on which the Scheme will run. The current system,whereby LAGBUS is virtually a monopoly, will not augur well for the consumer.

The government should set minimum standards that would be operators of BRT buses have to maintain. These standards may include the use of brand new buses,regular safety training for drivers and a minimum capacity for BRT buses. The government could then issue an Expression Of Interest (EOI) advertisement in the media, for organisations that intend to participate. The state government could then offer four (4) licenses for example, for organisations to operate the scheme. The state government would then conduct a public auction to award these licenses to four(4) organisations to carry on business as BRT buses. The auction will provide the government with some revenue to be used in expanding the infrastructure.

LAMATA will then serve as the regulator of the scheme, ensuring that the licensees meet stipulated standards. The presence of multiple operators will infuse competition into the marketplace and ensure consumer choice. Each operator will strive to differentiate its service, either through price or some other metric, from those of its competitors. This will lead to greater customer satisfaction and free the government from the burden of operating and maintaining buses. Furthermore, the government could charge a fee, say 1% of each operator's revenues, to help to maintain the dedicated bus lanes and improve associated infrastructure such as streetlights etc.

I believe this model while not perfect, is an improvement over the current system that clumsily bundles a service with the infrastructure that enables it.

Irrational Exuberance?

The troubles in the US sub-prime markets and the woes it has unleashed on financial markets all over the world, have become part of my daily consciousness since I started an internship at an Investment Management Firm. The credit crunch is indicative of the effects of unbridled optimism and excessive risk-taking that has gone bad. The granting of mortgage loans to people who would normally not qualify for such loans, i.e. who have subprime credit rating, is a very dangerous business. Nevertheless, these people were still granted the loan, and they went on a spending-party. While the party lasted, the markets benefited,because sub-prime loans provide greater returns than normal loans do. Homebuilders also benefited, as these loans unleashed a feverish pace of home-building and -improvement activities across the United States.

These "dangerous" loans were then securitised, repackaged and sold to gullible "alpha seeking" investors. And it was fine while the party lasted, new financial products were created,home-builders stocks soared and asset managers earned fat fees. Every investment firm rushed to create a sub-prime mortgage fund, and to provide a basis(or raw material) for these funds, more loans were parceled out to even riskier creditors. However, when the "shit hit the fan", this precarious arrangement collapsed like a pile of cards. and the result was chaos across various sectors and markets all over the United States and the world at large.

This "sub-prime fiasco" brings my mind to the Nigerian stock market, which has been growing at a dizzying rate and generating fabulous profits. The banks are on a capital raising binge, having developed almost overnight a glutonous appetite for capital. And everybody from the man on the street, to "alpha seeking" foreign emerging markets funds have been pouring money into the market. Stocks have been appreciating at a pace which is out of synch with prevailing economic circumstances. Looking at the valuations of the stockmarket, the paper frofits and the very optimistic statements of people who should know better. The words spoken by Alan Greenspan, at the height of the US dot-com boom, come to mind: "IRRATIONAL EXUBERANCE". I don't want to sound like a spioi sport, but I feel a major market correction will take place to "burst our boom". The fact that it is unlikely for us to have the capacity and ability to withstand a market meltdown,makes the situation very scary.

Reflections on Tinapa

Tinapa which has been tagged "Africa's Premier business resort" by its promoters, has been commissioned earlier this month by no less a person than the President of Nigeria. It has been estimated that the project has so far gulped Fifty(50) Billion Naira, with a substantial portion of that being in the form of loans from commercial banks (such as UBA) and equity infusion from the Organised Private Sector. The project has been billed to serve as a business cum leisure hub for the West African Sub-region, in essence providing for West Africa, the niche filled by the Emirate of Dubai(part of the UAE).

I must say that I respect and salute the courage of Mr. Donald Duke (outgoing governor of Cross river state) for daring to dream in a society that views governance only as a mechanism for the payment of civil servants salaries and the unfailing "lining of politicians pockets". However, before this project can live up to its promise and justify the high expectations of Cross Riverians and Nigerians at large, certain limiting issues must be discussed and if possible mitigated.
The success of the Tinapa project is dependent almost entirely on the ability to generate and attract business and leisure "traffic". People must be willing to come to Tinapa for business and be willing to stay for a little more time than is absolutely necessary to conduct business, in order to relax and take advantage of the leisure facilities present in the resort. For this 'traffic" to materialize, people must find it convenient and safe to visit Tinapa from any part of the world. Secondly Tinapa must have what they are looking for, it must have high quality merchandise and services for sale at a rate that is very competitive (which has been Dubai's Unique Selling Point).

It is this "traffic" that I am doubtful Tinapa can attract, the Socio-economic status of the country is a key militating factor against this. The peculiar security situation of the surrounding Niger-Delta region, with incessant kidnappings, vandalisation and arson, will probably serve to scare potential visitors from outside the country. Although it can be argued that Cross-river state is itself is relatively peaceful when compared with the surrounding delta region. Apart from the peculiar situation of the Delta region, the uncertainties in the country as a whole has resulted in various travel warnings to European citizens.

More importantly, the pertinent question is: Can Tinapa attract the "big name" multinational retailers and corporations that will serve as a magnet to attract the traffic of people. The Calabar airport is not comparable to Dubai's airport, it is not even in the league of Nigeria's Murtala Mohammed International Airport. The Port at Calabar will need to be dredged to accommodate larger ocean-going vessels, which "pile em up, sell them cheap" retailers such as Wal-mart so greatly depend. If big name retailers are to be attracted they will be expecting near first world infrastructure in terms of reliable power, communications, financing and human capital. These infrastructure though achievable will probably come at great cost, which will increase the cost of doing business and with it a reduction of the expected competitive advantage of Tinapa.
Though I might be accused of being (or at least sounding like) a "prophet of doom". I still think it is important to view the "infectious" optimism that pervades the Tinapa project through the lens of our current socio-economic realities.

Accidental Investment Banker

I just spent the christmas break, reading the book: "Accidental Investment Banker: Inside the Decade that transformed Wall Street" by Jonathan Knee, a former Goldman, Sachs and Morgan Stanley banker, who is now a partner at a boutique advisory firm. I really found the book to be entertaining as well as informative, as the author wrote about investment banking, from the ringside view he had, while working in arguably the two most prestigious firms(Goldman & Morgan Stanley)on Wall Street. He gave a very entertaining account of his time at both firms, in two major financial capitals (London & New york).

I found very enlightenining his description of the conflicts inherent in the new found penchant for Investment Banks to act simultanously as advisers and principals on various deals. This is bound to raise certain suspicions on the part of Clients as they will always be unclear as to what the intentions of their bankers are eaxactly. Are they giving honest impartial advice or are they working to gain certain information, that the bank may use to win a deal somewhere as a principal.

It is not uncommon nowadays to see Investment banks compete head to head with their established clients in their new found role as Investing principals. One of these occasions prompted Vodafone to replace their longstanding adviser: Goldman Sachs. These conflicts were discussed in a report of The Economist on Goldman Sachs published in Mid-2006. With Investment banks having to rely more and more on profits generated by proprietary trading and principal investments, it is clear that the interests of both client and banker may not always be in alignment.Furthermore, with Investment bankers turning into Financial Supermarkets, "selling" all sorts of financial services. It is unclear if the advice provided to clients, is just that: an honest advice or a marketing ploy to sell other financial products.

It is self evident that this situation provides good grounds for the emergence of "pure advisory" firms that would be free from the conflicts itemised above. And the past few years has seen the emergence and growth of such firms such as: Greenhill & Co., Lazard Freres, Evercore Partners. If there performance in the past few years is an indication, we might be at the threshold of a new enduring and above all profitable business model.

However, the book spent a little too much time, discussing the history of Goldman sachs, that was not exactly material to the discussion in the book. Considering that I had read "Goldman Sachs: A culture of Success" by Lisa Endlich, the portions of the book seemed like a repeat performance and I had to skip a few pages. However as a whole, the book was a wonderful read and I recommend it to anyone interested in both the past and future of Investment Banking.