Companies that overpromise and underdeliver are often severely punished by shareholders. For TP Icap (TCAP), downgrading expected synergies from its 2016 acquisition of Icap’s voice broking and information business from an annualised £100m to £75m by 2020 wiped more than a third off the group’s market value in just one day.
Focusing too much on achieving those savings – which had been set at an annualised £60m at the outset of the deal – has also come at the expense of sufficient investment in the rest of the business. Increased regulatory and technology-related costs and growth initiatives have forced the world’s largest interdealer broker to cut earnings per share expectations to “slightly below” the bottom-end of the market consensus range of 34.9p to 39p. Chief executive John Phizackerley has been fired and will leave the board with immediate effect, to be replaced in the top job by global broking chief Nicolas Breteau, subject to Financial Conduct Authority approval. Interim chief financial officer Robin Stewart has also been made permanent.
Preparations for Brexit, Mifid II compliance and IT security will incur an additional £10m in costs this year, rising to £25m in 2019. Additional regulatory capital requirements and the refinancing of the revolving credit facility should also increase finance costs to £35m and £40m over those two years. Meanwhile, around £15m will be invested in the global broking, energy and commodities and the data analytics divisions to kick-start growth, which could include making bolt-on acquisitions.
Signs that integrating the Icap acquisition was not going as smoothly as expected initially emerged in March, when management revealed that costs associated with delivering the then-£100m synergies were £79m, almost double what had been anticipated. That was in addition to £32m incurred via a cost improvement programme, which together led to a 44 per cent decline in group operating profits. Most of last year’s savings came via integrating back-office functions including finance, compliance and HR, and rationalising management teams. This year, focus has switched to slimming property and infrastructure platforms.
