MARKET ACITIVITY/TRADING NOTES FOR DAY ENDING WEDNESDAY, APRIL 15, 1998 (2)
MARKET WATCH
Gordon Capital, Con't
But that was long ago. Externally, the banks bought other brokerages; as a result, their capital bases, breadth of services and the troops of workers hired to sell those services grew exponentially. Internally, there was a front running scandal and a bond debacle that stomped on the firm's capital. In 1993, Connacher was banned from trading for 90 days, which, from a regulatory point of view, seemed a mere slap on the wrist. Still, those who knew Connacher said he was never the same again. That he had led the firm in a virtual vacuum, that he had failed to move the magic to younger partners spawned a succession crisis. In 1994, it was announced that Gordon would be steered by committee, with Connacher, Ron Lloyd and Jeff Green at the helm.
Committee rule was a disaster. There were complaints that in this "inverted pyramid of greed," as one ex-Gordonite puts it, the younger partners were not getting their fair share. There was talk, too, of selling the firm (ScotiaMcLeod and Midland Walwyn were two that came forward). There were dire predictions for the future. "People were wondering how Gordon was going to continue to prosper in the new environment," says Cameron. "I was of the view that we didn't need to make a big change. We just had to do what we were doing better."
In the fall of 1995, Richard Li, one of two scions of the multibillion dollar Hong Kong based clan, picked up control of Gordon. It seemed a somewhat romantic purchase. After all, Li had worked at Gordon in the late 1980s, when he was barely in his 20s and Gordon was riding high. He had a small piece of the firm, 15%; the fall acquisition increased it to 50.1%, majority control that comes with a so-called golden vote. Now it was Li who would determine Gordon's future, and it was Li who would take the company there. He spoke of merchant banking and of how Gordon could be a point of light in Asia. The firm's traders, who thrived on short term investing, balked, as did its senior partners, for whom the absence of a controlling shareholder had been part of the firm's appeal.
For Brad Cameron, it was an emotional and stressful time. There were offers, which he passed on. Instead, he headed out on his own, advising OMERS, the mighty Ontario pension fund, before joining Lehman. The Li purchase, says a Gordon insider of the time, "didn't look smart. It didn't give us anything." Cameron will only say that "Given the background, I think we basically had no choice but to do the deal."
Gordon continued its rudderless course for a time. Finally, in March of 96, Li presented the man who - at least, this is the way it was seen at the time - would lead Gordon to a new land. He held a small press conference, speaking in his oddly guttural tones, sipping tea poured by his girlfriend. He described this firm that he would control but would not steer - how it would become a "beachhead," as he termed it, for growth abroad. His presentation seemed discordant with the Gordon crisis, ignoring the crippling troubles at home.
To Li's left sat the new head of Gordon: not Moses, but Ken Davidson, just out of the CIBC, where he had put out fires on such corporate files as Olympia & York and Edper. Davidson knew risk, but he did not know the brokerage business, so he took a pragmatic approach: Study the business, steady the firm and lure top talent to carry out a new strategy. The trouble, according to some who became disillusioned with Davidson's stewardship, was that he didn't have a clue what that strategy should be. And it was difficult, in a bull market, to persuade the street's top talent to come to Gordon and give Davidson a strategy. The first and most obvious issue was corporate finance.
In December, 1996, Davidson named Dennis Dewan, partner in a small brokerage that Gordon had swallowed that year, as the new department head. Dewan was presented, says a former co-worker, as "the man with the plan." That same month, Davidson hired Ted Cape, who is rumoured to have negotiated a big-figure, no-cut contract before he would walk through Gordon's doors. (Neither Dewan nor Cape would agree to be interviewed for this story.)
Dewan believed, or came to believe, that Gordon was disturbingly dysfunctional. From corporate finance types who did not connect with clients often enough, to friends of Jimmy who remained in Gordon's employ, to out-of-control expenses, changes needed to be made.
Before Dewan arrived, there had been missteps. Gordon bailed on a $674-million debt issue for Sherritt International, Ian Delaney's play on Cuba. Gordon had been lead underwriter on Sherritt International's first share issue, in 1995. The relationship with Delaney was Jeff Green's, and Green did the architectural work on the subsequent deal. Then, Davidson pulled the plug, citing nervousness about the Helms-Burton Act and potential retribution. But against whom? The Li family has extensive investments in the United States. Davidson sits on the board of Richard Li's Century Pacific Group and is his point-person on matters far more wide ranging than the brokerage business. In the end, Griffiths McBurney served as underwriter. Aside from the way the Sherritt affair looked on the street, there was the disappointment of the big five-figure cheques that the people in corporate finance did not collect - not at all the Gordon of old.
Davidson tried, as he says, to "be out there, on file and available" to the country's business elite. Laidlaw? "I met with [Jim] Bullock several times." Husky? "John Lau is a friend of mine." But Davidson had other matters to attend to, including alliance discussions in the United States with brokerages Bear Stearns & Co., Jefferies & Co. and Donaldson Lufkin & Jenrette Inc. The U.S. firms were eager to get access to Asia, and Gordon, through Li, could offer that.
So the job of rebuilding corporate finance fell largely to Dewan, who quickly learned what Davidson already knew: It was difficult to lure "proprietary brains," as they say within Gordon. The firm was messily run. Everyone knew that. It had fallen lower and lower in brokerage rankings. In the mid-1980s, it was third in underwriting. Now, it isn't in the top 10. Its market share in trading, once in the double digits, is now a soft six. Make it five. Its corporate finance revenues, at roughly $50 million in each of the past two years, could have been better. Much better.
It is not clear when Ken Davidson decided that Dewan's efforts were inadequate. Sometime in the summer of 1997, he says. So what was it, precisely, that wasn't working? He prefers not to use names, but he will say there were two possible directions for the company. One is the bank model, sized down: offering a broad range of services pushed to market by large numbers of employees. The other approach: a trim, tightly focused group that offers a small menu of services. The former, we can infer, was Dewan's stated intention, for it was this that Davidson began to reject last summer.
The ground started to shift under Dennis Dewan's feet in July. Davidson announced the hiring of Terry Shaunessy from Gryphon Investment Counsel Inc. Shaunessy has a 20-year history on Bay Street, including years as an analyst at Merrill Lynch and portfolio management at Gryphon. He moved to Gordon to run the firm's research department and had a clear idea of what needed to be done. "It has to be research that gives the firm its cachet," he says, explaining that offering a bank-like slate of services is a mug's game, and trying to build a firm on trading expertise is yesterday's game. The objective became producing the best information on the street in six sectors - traditional areas such as mining, and growth sectors such as health sciences. Research would now lead the firm - a radical departure, says Shaunessy.
In early October, in what now appears a last-ditch effort, Dewan tabled a 30-point action plan that championed a tighter focus and seemed to reflect Davidson's latest thinking, which in turn reflected Shaunessy's thinking. It was too late. Davidson had already hosted a dinner at the Tom Jones steakhouse in downtown Toronto, a "closing dinner," as Shaunessy calls it, featuring Cameronet al. Davidson had his new team, and he could sum up the challenge they faced succinctly: "Costs too high. Quality too low." On November 3, Dennis Dewan introduced himself to Brad Cameron. The next day, he was gone.
In his days at Dominion Securities, Brad Cameron worked with Chris Burley and Rod Baker. "We move each other's minds," he says. "This industry is all about moving peoples' minds." The opportunity presented by Davidson - to work with this same group - was similar to a start-up, leveraging off of what still is a franchise: the Gordon name. "I did not want to come back and be just another special interest group in this firm," he says. "I wanted to come back in the context of a management team that could make decisions." Davidson swears the power has been pushed down to this new generation. It extends to Bob Barootes in sales and Gerry Gravina in trading. Add John Warwick, who has been at Gordon for eight years, and Davidson will say he has put together the best of the brightest. Gordon is still being run by committee, just a bigger one.
The new generation says that, at least thus far, the power has been theirs; now they have to prove they know what to do with it. "We need to get back in the business of being a strong competitive edge to get this firm back into the limelight," says Cameron. And what might that competitive edge be? "The honest advice business," he says.
It works like this: Gordon develops tight relationships with smart entrepreneurs. The smart entrepreneurs seek successful transactions, priced right, fully subscribed, a success going forward. Underlying the corporate analysis is insightful, independent research, they say. Then, the institutional equity clients, the "buy" side of the street, are meant to look to this same research in helping them make their investment decisions. "It's principal thinking," says Cameron. "Our clients are our principals, be they corporate issuers and entrepreneurs trying to make moneymaking decisions or institutional equity clients trying to make money in the marketplace." In trying to increase deal flow, says Cameron, other firms have stopped thinking this way.
And no wonder. Trading now draws a mere three to five cents a share to any brokerage's revenues. And there are no longer any trading tricks that are proprietary: The bought deal has long been a Bay Street standard. The margins are in corporate finance - underwriting share issues, for example. In this, a brokerage can reap as much as 5% of the face value of the deal. Gordon will be selective in this line of work, says Cameron. "We have a relationship right now with Ian Delaney and Rai Sahi [Russel Metals] that the rest of the street doesn't have," he says. That seems a stunning statement in light of what happened to Sherritt. When Davidson ordered that Gordon would not close that deal, Jeff Green handed the file over to Griffiths McBurney. The incident made Gordon look like a firm of, well, bankers. Delaney declined to be interviewed. Green left Gordon in December. "This business is still a relationship business," says one fund manager who relied on Green's corporate intelligence. "Jeff Green was the glue at the place." In February, yet another Sherritt deal went to market, led by Griffiths McBurney. Five other underwriters participated. Gordon was not among them.
Terry Shaunessy is sitting window-side at Canoe, a cigarette and a Scotch at the ready, playfully reliving the past horrors of his days as an analyst. Like the time he got behind Pagurian Corp. and its sister company, International Pagurian, merchant bank creations of Christopher Ondaatje. Shaunessy got way ahead of the party on the Pagurians, a believer, a young acolyte. He can't exactly recall the price that his buy recommendations went out at before the stocks went south. After the wipe-out, he remembers what it was like to face the choice of telling clients either that he had deceived them or that he was naive. He chose to tell them he was merely stupid. He recalls how convinced he was that Dome Petroleum would never, ever fail. There are many on Bay Street who remember the Dome Pete days, of mustering the courage to change their buy recommendations to sells, the grief they took from the sales desk for that, and from the clients who bought shares on their say-so. "The analyst is now wearing this thing, and it's a pig, and all of a sudden the reception from institutional clients is frosty," says Shaunessy. That, he adds, is the other side of making money. In a hot market particularly, the temptation is huge to get behind any old thing. Instead, Shaunessy proposes a motto, like a Boy Scout: "We will do corporate finance only when it is in the interest of institutional clients." It sounds very high-minded, very moral. It doesn't sound like Gordon. That is the point. This is not an exercise in public relations. It is time, says Shaunessy, to say, "I'm going to tell you the real story. I'm not the mouthpiece for the company."
Shaunessy says he told Ken Davidson that this iteration is "your last chance to set this thing straight." He figures Team Gordon will know in 12 months if it's working.
Ken Davidson is holding onto his keys. He does not have the smooth, glossy pelt of the men who have made it to the top of what is, let's face it, a business of high self image people who massively exaggerate their value. For someone whose intellectual arrogance and elliptical style have been known to drive workers to drink, Davidson is surprisingly likable. Down-to-earth. He describes his time at the CIBC: "They wanted to make changes in risk and they said, `How'd you like to go to risk?' And I said, `How'd you like to leave me alone?' And I ended up going to risk."
Davidson describes himself as Gordon's "transition person." And anyone who wants to interview him had better get it right. "The worst thing that could happen to me would be if this story came out as some sort of command-and-control historical enterprise. That's incorrect and of no value to me at all." He is, he says, a representative of Richard Li's equity: "My arrangement with the Lis is very simple. I told them, `I will get you the future. I will not be the future.' "
It seems to have taken a long time. "It has taken me 20 months," he says. "I thought it would take 10." Now, he suggests, Gordon is ready for battle, and its competitive advantage, he says, is its people. But that's what any of the non-bank-owned brokerages would claim. And the chief complaint about Davidson is that he offered assurances to the previous people, too, people like Stephen Jakob, who would walk through that open door of Davidson's during the bull market of 97, when employment offers were in the ether. Should I stay or should I go, he would ask. Davidson, says Jakob, encouraged him to stay. "The assumption in all of this is you're faultless in making the changes you have to make," says Davidson. "You're never faultless."
More changes are on the way. Gordon has a large back-office staff that occupies much of the space directly below its trading floor, where Jimmy Connacher would stand at 7:30 a.m. and get everyone revved for another frenetic day. The task of reshaping the back office has been taken up by Rod Baker, who hopes to spin it into a stand-alone entity. The structure of this is not yet clear. Baker knows that nerves are frayed. "Change is always difficult," says Baker, 32. "We are sensitive to the people side of the business."
Brad Cameron offers a quick Gordon tour, past the windowed board room where the morning meetings are held, round the corner to the corporate finance clearing house, where the first snapshot is of empty desks, then the core group that remains. A little further on is Jimmy Connacher's office, and there he sits, sucking on a thin, tipped cigar, talking on the telephone. One thing has not changed at Gordon: Jimmy Connacher is not for interviewing.
At the other end of Connacher's office sits Bob Fung, a man who single-handedly landed big corporate finance business and who personifies the old Gordon as much as Connacher himself. He is casually dressed, as is Connacher. Cameron says Fung does not really work here. He's just tidying up some old business. Connacher, too, has some files to clean up, though it's not entirely clear what they are. They say Connacher would love to have Richard Li buy out the shares he holds in the firm, estimated at between 10% and 14%. Davidson denies that Connacher is handcuffed in any way. There is talk about a big, swish farewell fete for Connacher in the spring, something high profile enough that the celebration would martyr Jimmy, and he would be gone once and for all. No one will elaborate. This is a sensitive issue.
When it happens, the power will not just have passed down, but will be seen to be passed to this new generation, whose aim is to run Gordon as a collegial collective. This is not some titular transfer of power, not "one of those sham things," says Davidson. Will it work? Davidson knows there are those on the street who bet that it won't. "I know there are many people in this industry who categorically disagree with me," he says. "Perhaps the single command and control is right for this company, in time. My experience is a good team will kill a single individual any time."
Interesting turn of phrase. On January 30, Scott Riddell, Steve McDaniel, Andrew Lees and John Lloyd-Price, survivors of the November purge and virtually Gordon's entire corporate finance team in Calgary, walked out the door. Calgary is, of course, Gordon's base for its coverage of the oil-and-gas industry, a sector that consistently pulls in more corporate finance revenue than any other. The four escapees headed over to Midland Walwyn. Brad Cameron said he was unconcerned - Chris Burley was to take over in Calgary. That was the plan all along. "He's the future," says Cameron. "We've made a big bet on him."
Ken Davidson has made a big bet, too. Curiously, at the end of an interview, he turns the tables. "What," he asks, "do you think of the plan?" |
