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Low tax, huge fees, corner cutting and the sharpest boys in Australian business have turned Macquarie Bank into the millionaire factory that leaves competitors gasping with amazement.

We sat apart and were seemingly unassociated as I got up 5 times and he got up 3 times to stretch the meeting out to 80 minutes – the longest of the four AGMs Macquarie has had since listing in 1997.

After the meeting we unveiled Australia’s newest shareholder activist to a few Macquarie directors such as Helen Nugent, Barry Martin and John Allpass, chairman David Clarke and my old mate Laurie Cox, who seems to have forgotten that I dumped on him on Four Corners back in 1997 for giving Jeff Kennett $20,000 worth of Arthur Yates shares on the quiet back in 1993.

The two-pronged approach worked well because it is hard to get up and ask successive questions uninterrupted. The Lowys, Packers and Murdochs of the world might be experiencing this same tactic when the AGM season kicks in come October and November.

THE TOLLROAD RIP OFF

Chairman David Clarke mentioned that the first quarter profit will be up thanks to the $69 million performance fee that Macquarie Bank has just ripped out of the world’s biggest tollroad company, the Macquarie Infrastructure Group, which has 10 per cent of Transurban and controls every Sydney tollroad along with tollroads in Canada, the UK and Portual.

I asked him to clarify the fees from MIG and what protection the bank had if someone came along – Crikey is toying about trying this one – and put up a resolution at a MIG meeting to reduce the fees or remove the manager.

Clarkey said the base fee was $25 million last year and will be $35 million this year. Performance fees of $69 million will be paid for the next three years and he said the only thing protecting the management contract was the ongoing good performance.

Crikey reckons that operating tollroads are dead easy to manage and even the PM’s brother Stan Howard hasn’t managed to stuff up the Hills Motorway trust. Macquarie have proved exceptionally adept at out-smarting governments, existing tollroad owners and construction companies in their various tollroad investments and this is why the MIG shares were originally floated at $1 and are now above $3. This is good performance, but if Macquarie Bank wasn’t ripping out these amazing fees the MIG share price would be closer to $4.

Clarkey admitted that 50.1 per cent of voting shares could give them the boot and with Macquarie only owning $60 million worth of shares in a $3 billion fund, the big institutions on the register could quite easily do this. But these very same institutions are notoriously passive and Macquarie’s influence across the business community would surely head such a move off at the pass.

MACQUARIE’S TAX PLAY

Our new shareholder activist, whose name will be withheld until he finishes up in his job, sounded very croaky after the Green Park drinks but his first offering quizzed the board about the ongoing tax audit that is noted in the accounts. Chairman David Clarke said this has been going for about 10 years and the number of items on the list is down to only four. Interestingly, the Tax Office can only pursue companies for stuff over four years old when fraud or evasion is involved but Mr Clarke, who is worth an estimated $40 million after 35 years earning big bucks for Macquarie and its predecessor Hill Samuel Australia, was playing down the significant of the audit. I asked a supplementary to this a bit later quizzing why Macquarie’s pre-tax profit was up 7.9 per cent to a record $325.3 million for the year to March 31, but the annual tax provision had plummeted 32.5 per cent from $79 million to just $53.3 million – a rate of only 16.4 per cent.

Mr Clarke said this reflected the increasing percentage of profits coming from offshore and Macquarie’s entirely legitimate use of the new Offshore Banking Unit legislation. No doubt the many non-banking export income earners must be wishing they had the same special treatment that Aussie banks have received from the Howard Government.

Crikey has long been of the view that if there is a tax lurk to be had then the sharp boys at Macquarie will be all over it. The annual report notes that a bunch of R&D synidcates are being closed since Costello shut this lurk down. The report notes that some litigation could flow over the 7 syndicates that Macquarie were involved with but the outcome will not be material.

The use of infastructure bonds was also shut down by Treasury after Macquarie issued more than $1 billion of them to get the Transurban deal up. These bonds were so tax effective that both dividends and capital gains for the original investors in Transurban were tax free for the first few years. This ended up costing Treasury at least $200 million in lost tax revenue.

Macquarie also led the way on dividend streaming which was also knocked back by Treasury. You can’t hold it against Macquarie because they are smart and punch holes in the Tax Act whenever a chance presents itself.

POLITICAL CONNECTIONS

Our fellow Crikey activist got the ball rolling on political donations and connections with his second question. He mentioned Alan Stockdale’s employment at the bank and the joint venture originating mortgages with Paul Keating in China. The complete roll call also includes former federal Sports Minister Warwick Smith who heads up corporate affairs and is one of Australia’s esteemed millionaire Parliamentary pensioners. Macquarie have also fed hundreds of thousands of dollars to Hawker Britten over the past 5 years and these door-openers Bruce Hawker and David Britten were once Bob Carr’s chief of staff and media director. Then you have the Macquarie PM sibling strategy which has Paul’s sister Anne Keating on the Macquarie Leisure Trust board whose trophy asset in Sydney is the Cruising Yacht Club facilities where the Sydney to Hobart starts. Just to be even-handed good old Stan Howard is chairman of Macquarie’s Hills Motorway Trust and always mentions its outstanding performance when Crikey calls him the worst performed Australian professional director (Yates, National Textiles, GIO) at various AGMs.

Macquarie have directly pumped more than $1 million into the Labor and Liberal coffers over the past 10 years and specialise in the political boardroom lunch. Steve Bracks has been a regular in the Macquarie boardroom. Macquarie’s top Melbourne dealmaker Alistair Lucas, the man who did the PBL takeover of Crown for Packer, got to sit with Bracks and James Packer at the famous $1000 a head dinner in December 1999 when we nicked the 800-strong guest list. They also do things like sponsor the Mick Young Foundation which gets all the Labor heavyweights along to Randwick for a day of punting in honor of the late Labor larrikin each year.

David Clarke’s answer to the question was pretty good and frank. He trotted out the usual line that Macquarie likes to “support the political process” but went on to admit that these political connections can be “helpful from time to time”. However, he also pointed out that political connections “quickly dated” over time and that all these political heavies are employed primarily to create revenue for the bank rather than just to open doors. But some times it is important to open a door to create that revenue and we all remember that SMH photo a few weeks back of Macquarie CEO Allan Moss and Warwick Smith leaving Kirribilli house after meeting the PM.

David Clarke himself was Ron Walker’s predecessor as Treasurer of the Liberal Party and we all remember that Dr John Hewson came out of Macquarie. This is what makes the Labor connections interesting because Australia’s biggest and most successful investment bank would ordinarily to aligned with the party supporting free enterprise and business. But we all know that many of the NSW Labor bruvvas are available to help for a pretty penny and blokes like former NSW Labor Council boss Michael Easson (an MIG director), the Keating family and the Hawker Britten boys are happy to take the Macquarie cash to give them a hand. One of Labor’s most famous bruvvas is Aristocrat chairman John Ducker and it was Macquarie that took these pokies pushers public back in 1996. Macquarie have probably made more from gambling than any other investment bank thanks to all their Crown casino deals over the years.

THE HIGHEST PAID OPERATORS IN THE LAND

Time is getting tight but we can’t finish this update without some reference to executive pay at Macquarie. The back of my envelope would suggest that Macquarie has created at least 500 millionaires among its staff over the past 35 years. I invented the “millionaire factory” label for them in 1997 and it is now widely used in the press.

It takes a lot to get Age columnist Stephen Bartholomeusz openly sledging a company but he recently penned a column headed “Guarding the trough” which pointed out that Macquarie’s top 8 executives pocketed $26 million last year and they should better disclose the new profit-sharing formula that has been introduced without reference to shareholders for a vote.

Clarkey anticipated this one was coming and dealt with it in his chairman’s address saying the new formula would only have increased staff costs by 3 per cent last year. That sounds like a small slice of the pie but let’s just run the numbers on this.

Macquarie’s total staff costs were $774 million last year and on an average head count of 4200 that comes to $184,000 each. I told the meeting this and was offered no resistance when suggesting Macquarie is already the highest paying major employer in Australia. Three per cent of $774 million is a lazy $21 million which is almost 10 per cent of last year’s net profit of $242 million.

David Clarke responded by saying that Macquarie was at the lower end of the scale of staff costs as a proportion of total revenue when compared with its global peers on Wall Street and it needed the big incentives to hang on to key staff.

With the share price continuing to go through the roof it is hard to argue with this although the fact that half the current eight member board are participants in the bonus pool would suggest we need another couple of independent non-executive directors keeping an eye on the management trough.

CAN THE SHARES KEEP RISING?
Crikey was silly enough to sell his Macquarie shares at about $24 last year but we still made a profit of about $3000. And I don’t feel as silly as AMP which sold a 10 per cent stake just as Macquarie was floating at about $7 a share. However, the stock plunged almost $2 to $36 after the AGM with fears that the earnings momentum is slowing and the tollroad bonanza is now too important. Still, Macquarie is now Australia’s 20th biggest list company and their reach is unparalleled in Australia. Afterall, Macquarie even led a syndicate that bought Australia’s biggest funeral business, they own most of the Commonwealth car fleet, are huge on computer leasing and financed much of Victoria’s tram network. David Clarke stressed that the company will be increasingly focusing on its investment funds meaning Macquarie plans to become Australia’s leading venture capitalist. If you’ve got a bright idea that needs financing, ask Macquarie but expect to lost a large slice of the pie as these boys are voracious money makers without peer in Australia.

IN CONCLUSION

You might think that Crikey doesn’t like Macquarie Bank based on all this. It is fair to say that some of their practices are questionable but at the end of the day Australia needs more Macquarie Banks. They are competing successfully on a global stage and creating billions of dollars of wealth of its staff and shareholders. That shouldn’t stop us putting them under the microscope and keeping them on their toes but please don’t think that it is anything personal.

If you have a story about Macquarie we’d love to hear about it. For instance, I tried being a stockbroking client of theirs for a couple of years but did not get offered a single float in that time. I’m still bleating about their policy which allows staff to scoop up shares in hot floats they have. David Clarke said they require all staff to deal through Macquarie and it would be unfair to ban them from participating in house floats. He would say that because he’s been one of the worst offenders. He admitted to buying $500,000 worth of Hills Motorway shares back when it had a compliance listing at $1 a pop in 1995. The stock is now $5.10 and David was lamenting having sold out too early. If I was a client of Macquarie’s back in 1995 I’d be asking why these 500,000 shares weren’t offered to their clients. The worst example of this practice happened during the Transurban float in 1996. David Clarke tried to defend this practise saying that some Macquarie executive participated through the institutional offer. This is just as bad, although it was Macquarie’s institutional clients missing out on the bonanza rather than the retail clients.

That’s all for now but we are planning a more indepth piece on Macquarie and would love your feedback to [email protected]

Peter Fray

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